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MAHATAMA EDUCATION SOCIETYS PILLAIS COLLEGE OF ARTS, COMMERCE &SCIENCE NEW PANVEL
MAHATAMA EDUCATION SOCIETYS PILLAIS COLLEGE OF ARTS, COMMERCE, SCIENCE NEW PANVEL
Date: __________
DECLARATION
Signature
ACKNOWLEDGEMENT
I would like to thank my college that is Pillais College of Arts, Commerce and Science, New Panvel where I have gained plenty of knowledge which helped me in turning this project a success. Apart from my efforts, the success of any project depends largely on the encouragement and guidelines of many others. I take this opportunity to express my gratitude to the people who have been instrumental in the successful completion of this project. I would especially thank my Professor Prof. Jennie. Prajith and the T.Y.B.Com F/M Coordinator Prof. Jennie Prajith for giving her valuable guidance in the design and the changes that were required to be made for the proper implementation of the project. Without those efforts this project would not have been successful. I would also extend my thanks to our Vice Principal Mr. A.N.Kutty for his support and facilities provided to me for the same. Lastly, I would like to thank all those who directly and indirectly helped me in completion of this project.
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Content
EXECUTIVE SUMMARY INTRODUCTION Introduction Objectives of the project Research methodology PROFILE Company profile Work structure of share khan Product and Services offered by share khan Reason to choose share khan limited Share khan portfolio management services CONCEPTUAL FRAMEWORK Introduction to stock exchange Portfolio management services Need of portfolio management services Portfolio Construction Risk and Risk Aversion Risk versus Return Portfolio Diversification Techniques of Portfolio management service Types of portfolios DATA ANALYSIS INTERPRETATION OF THE DATA CONCLUSION SUGGESTION AND RECOMMENDATION APPENDICES BIBLIOGRAPHY
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EXECUTIVE SUMMARY
Investing is both Arts and Science. Every Individual has their own specific financial need and expectation based on their risk taking capabilities, whereas some needs and expectation are universal. Therefore, we find that the scenario of the Stock Market is changing day by day hours by hours and minute by minute. In order to keep the Investor safe from market fluctuation and make them profitable, Portfolio Management Services (PMS) is fast gaining Investment Option for the High Networth Individual (HNI). In order to identify the effectiveness of Sharekhan PMS services this Research is carried throughout specified area. At the time of investing money everyone look for the Risk factor involve in the Investment option. The Report is prepared on the basis of Research work done through the different Research Mythology the data is collected from both the source Primary sources which consist of Questionnaire and secondary data is collected from different sources such as Company website, Magazine and other sources. As the PMS services of Sharekhan Limited have the best result in its field .It has given 43.50% return in Trailing stops, 94.30%return in Nifty and 38.10% in Beta Portfolio which is the result when the Market was not doing well from last one year. In this project I have shown the details of financial planning as well as wealth management so as to understand about the customers needs and wants with respect to market and how a clients portfolio can be designed and what factors a portfolio manager must consider for designing a portfolio. This project includes primary and secondary data.
INTRODUCTION
The field of investment traditionally divided into security analysis and portfolio management. The heart of security analysis is valuation of financial assets. Value in turn is the function of risk and return. These two concepts are in the study of investment .Investment can be defined the commitment of funds to one or more assets that will be held over for some future time period. In today fast growing world many opportunities are available, so in order to move with changes and grab the best opportunities in the field of investments a professional fund manager is necessary. Therefore, in the present scenario the Portfolio Management Services (PMS) is fast gaining importance as an investment alternative for the High Networth Investors. Portfolio Management Services (PMS) is an investment portfolio in stocks, fixed income, debt, cash, structured products and other individual securities, managed by a professional money manager that can potentially be tailored to meet specific investment objectives. When you invest in PMS, you own individual securities unlike a mutual fund investor, who owns units of the entire fund. You have the freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of portfolio, your account may be unique. Investment Management Solution in PMS can be provided in the following ways: i. ii. iii. Discretionary Non Discretionary Advisory
Discretionary: Under these services, the choice as well as the timings of the investment decisions rest solely with the Portfolio Manager.
Non Discretionary: Under these services, the portfolio manager only suggests the investment ideas. The choice as well as the timings of the investment decisions rest solely with the Investor. However the execution of trade is done by the portfolio manager. Advisory: Under these services, the portfolio manager only suggests the investment ideas. The choice as well as the execution of the investment decisions rest solely with the Investor. Rule 2, clause (d) of the SEBI (portfolio managers) Rules, 1993 defines the term Portfolio as total holding of securities belonging to any person. As a matter of fact, portfolio is combination of assets the outcomes of which cannot be defined with certainty new assets could be physical assets, real estates, land, building, gold etc. or financial assets like stocks, equity, debenture, deposits etc. Portfolio management refers to managing efficiently the investment in the securities held by professional for others. Merchant banker and the portfolio management with a view to ensure maximum return by such investment with minimum risk of loss of return on the money invested in securities held by them for their clients. The aim Portfolio management is to achieve the maximum return from a portfolio, which has been delegated to be managed by manger or financial institution. There are lots of organization in the market on the lookout for the people like you who need their portfolios managed for them .They have trained and skilled talent will work on your money to make it do more for you. Therefore, if any investors still insist on managing their own portfolio, then ensure you build discipline into their investment. Work out their strategy and stand by it.
Secondary data:
Secondary data is the data collected by someone other than the user. Secondary data includes newspapers, books, etc. There are various sources by which we can collect secondary data. Secondary data includes information in detail. Along with it includes many features, functions, concept & other relative information. In this project secondary data have collected by books, websites & newspaper.
Research methodology
www. wikicfo.com
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CH-2 PROFILE
2.1 COMPANY PROFILE
Sharekhan is one of the leading retail brokerage of Citi Venture which is running successfully since 1922 in the country. Earlier it was the retail broking arm of the Mumbai-based SSKI Group, which has over eight decades of experience in the stock broking business. Share khan offers its customers a wide range of equity related services including trade execution on BSE, NSE, Derivatives, depository services, online trading, investment advice etc. Earlier with a legacy of more than 80 years in the stock markets, the SSKI group ventured into institutional broking and corporate finance 18 years ago. SSKI is one of the leading players in institutional broking and corporate finance activities. SSKI holds a sizeable portion of the market in each of these segments. SSKIs institutional broking arm accounts for 7% of the market for Foreign Institutional portfolio investment and 5% of all Domestic Institutional portfolio investment in the country. It has 60 institutional clients spread over India, Far East, UK and US. Foreign Institutional Investors generate about 65% of the organizations revenue, with a daily turnover of over US$ 2 million. The content-rich and research oriented portal has stood out among its contemporaries because of its steadfast dedication to offering customers best-of-breed technology and superior market information. The objective has been to let customers make informed decisions and to simplify the process of investing in stocks
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To educate and empower the individual investor to make better investment decisions through QUALITY ADVICE INNOVATIVE PRODUCTS and SUPERIOR SERVICE.
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2.3 PRODUCT AND SERVICES OFFERD BY SHAREKHAN 1- Equity Trading Platform (Online/Offline). 2- Commodities Trading Platform (Online/Offline). 3- Portfolio Management Service. 4- Mutual Fund Advisory and Distribution. 5- Insurance Distribution.
6-Forex
6. Forex.
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Technology
With their online trading account one can buy and sell shares in an instant from any PC with an internet connection. Customers get access to the powerful online trading tools that will help them to take complete control over their investment in shares.
Accessibility
Sharekhan provides ADVICE, EDUCATION, TOOLS AND EXECUTION services for investors. These services are accessible through many centers across the country (Over 650 locations in 150 cities), over the Internet (through the website www.sharekhan.com) as well as over the Voice Tool.
Knowledge
In a business where the right information at the right time can translate into direct profits, investors get access to a wide range of information on the content-rich portal,. Investors will also get a useful set of knowledge-based tools that will empower them to take informed decisions.
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Convenience
One can call Sharekhans Dial-N-Trade number to get investment advice and execute his/her transactions. They have a dedicated call-center to provide this service via a Toll Free Number 1800 22-7500 & 39707500 from anywhere in India.
Customer Service
Its customer service team assist their customer for any help that they need relating to transactions, billing, demat and other queries. Their customer service can be contacted via a toll-free number, email or live chat on www.sharekhan.com.
Investment Advice
Sharekhan has dedicated research teams of more than 30 people for fundamental and technical research. Their analysts constantly track the pulse of the market and provide timely investment advice to customer in the form of daily research emails, online chat, printed reports etc.
Benefits
Free Depository A/c Instant Cash Transfer Multiple Bank Option. Secure Order by Voice Tool Dial-n-Trade. Automated Portfolio to keep track of the value of your actual purchases. 24x7 Voice Tool access to your trading account. Personalized Price and Account Alerts delivered instantly to your Mobile Phone & E-mail address. Live Chat facility with Relationship Manager on Yahoo Messenger Special Personal Inbox for order and trade confirmations. On-line Customer Service via Web Chat. Enjoy Automated Portfolio. Buy or sell even single share Anytime Ordering.
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Features
Online trading account for investing in Equity and Derivatives Live Terminal and Single terminal for NSE Cash, NSE F&O & BSE. Integration of On-line trading, Saving Bank and Demat Account. Instant cash transfer facility against purchase & sale of shares. Competitive transaction charges. Instant order and trade confirmation by E-mail. Streaming Quotes (Cash & Derivatives). Personalized market watch. Single screen interface for Cash and derivatives and more. Provision to enter price trigger and view the same online in market watch.
SPEEDTRADE
SPEEDTRADE is an internet-based software application that enables you to buy and sell in an instant. It is ideal for active traders and jobbers who transact frequently during days session to capitalize on intra-day price movement.
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PRO TECH
PRO PRIME
PRO ARBITRAGE
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Product offering
Pro Prime is the ideal for investors looking at steady and superior with low and medium risk appetite. The portfolio consists of a blend of quality blue chip and growth stocks ensuring a balanced portfolio with relatively medium risk profile. The portfolio constitutes of relatively large capitalization stocks, based on sector and themes which have medium to long term growth potential.
Product Characteristics
Bottom up stock selection In depth ,independent fundamental research High quality companies with relatively large capitalization Disciplined valuation approach applying multiple valuation measure. Medium to long term vision, resulting in low portfolio turnover.
How to invest? Minimum Investment : 10 Lacs Lock in : 6 months Reporting: Access to website showing clients holding .Monthly reporting of portfolio holding /transaction. Charges: 2.5% pa AMC (Annual Maintenances Charges) fees charged every quarter ,0.5% brokerage ,20% profit sharing after 15% hurdle is crossed chargeable at the end of fiscal year.
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Product Characteristics Low Risk: This is relatively low risk product which can be compared with liquid
funds issued by mutual funds.
High return: Compared with other low risk products, this products offers an
indicative post tax return of 8 to 10% plus.
Product Details Minimum Investment:Rs.1 Crore Lock in :6 months Reporting: Fortnightly for portfolio Net worth, Monthly reporting pf portfolio Holding /transaction. Charges: 0.035% brokerage for future ,0.07% for delivery
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Pro Tech
Protech using the knowledge of technique analysis and the power of depravities markets to identify trading opportunities in the market .The protech line of the product is designed around various risk /reward /volatility profiles for the different kind of investment needs.
Product Approach
Better performance is possible from superior market timing and from picking stocks before inflation points in their trading cycles .Linear return are possible from having hedged/ sell market positions in downtrends .Absolute return are targeted by focusing on finding trading opportunities & not out performance of an index.
2. Beta Portfolio :
Positional trading opportunities are identified in the future segment based on technical analysis .Inflection points in the momentum cycles are identified to go long /short on stock/index futures with 1-2 months time horizon .The idea is to generate the best possible return in the medium term irrespective of the direction of the market without really leveraging beyond the portfolio value. Risk protection is done based on stop losses on daily closing prices.
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3. Star Nifty:
Swing trading technique and Dow theory is used to identify short term reversal levels for Nifty futures and ride with trend both on the long and short side .This return can be earned in bull and bear market .Stop and reverse means to reverse ones position from long to short or vice a versa at the reversal levels simultaneously .The exposure never exceeds value of portfolio i.e. there is no leveraging.
4. Trailing Stops.
Momentum trading techniques are used to spot short term momentum of 510 days in stocks and stocks /index futures .Trailing stop loss method of risk management or profit protection is used to lower the portfolio volatility and maximize return .Trading opportunities are exposed both on the long side and the short side as the market demands to get the best of both upward and downward trends.
Product Characteristics Using swing based index trading systems stop and reverse .trend following and
momentum trading technique.
Nifty based products for low impact cost and low product volatility Both long and short strategies to earn returns even in falling market. Trading in future market to allow for active risk protection using trailing stop
losses
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How to invest?
Minimum : Rs.10 Lacs
Lock in : 6 months Reporting: Fortnightly reporting of portfolio Net Worth, monthly reporting of portfolio Holding /Transaction. Charges: 0% AMC (Annual Maintenance Charges), 0.05% brokerage for derivatives, 20% profit sharing on booked profit quarterly basis
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As a meeting held in the broker Hall on the 5th day of February, 1887, it was resolved to execute a formal deal of association and to constitute the first managing committee and to appoint the first trustees. Accordingly, the Articles of Association of the Exchange and the Stock Exchange was formally established in Bombay on 3rd day of December, 1887. The Association is now known as The Stock Exchange. The entrance fee for new member was Re.1 and there were 318 members on the list, when the exchange was constituted. The numbers of members increased to 333 in 1896, 362 in 1916and 478 in 1920 and the entrance fee was raised to Rs.5 in 1877, Rs.1000 in 1896, Rs.2500 in 1916 and Rs. 48,000 in 1920. At present there are 23 recognized stock exchanges with about 6000 stock brokers. Organization structure of stock exchange varies. 14 stock exchanges are organized as public limited companies, 6 as companies limited by guarantee and 3 are non-profit voluntary organization. Of the total of 23, only 9 stock exchanges have been permanent recognition. Others have to seek recognition on annual basis. These exchange do not work of its own, rather, these are run by some persons and with the help of some persons and institution. All these are down as functionaries on stock exchange. These are: i. ii. iii. iv. Stockbrokers Sub-broker Market makers Portfolio consultants etc.
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1. Stockbrokers:
Stock brokers are the members of stock exchanges. These are the persons who buy, sell or deal in securities. A certificate of registration from SEBI is mandatory to act as a broker. SEBI can impose certain conditions while granting the certificate of registrations. It is obligatory for the person to abide by the rules, regulations and the buy-law. Stock brokers are commission broker, floor broker, arbitrageur etc.
2. Sub-broker:
A sub-broker acts as agent of stock broker. He is not a member of a stock exchange. He assists the investors in buying, selling or dealing in securities through stockbroker. The broker and sub-broker should enter into an agreement in which obligations of both should be specified. Sub-broker must be registered SEBI for a dealing in securities. For getting registered with SEBI, he must fulfill certain rules and regulation.
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3. Market Makers:
Market maker is a designated specialist in the specified securities. They make both bid and offer at the same time. A market maker has to abide by bye-laws, rules regulations of the concerned stock exchange. He is exempt from the margin requirements. As per the listing requirements, a company where the paid-up capital is Rs. 3 Crore but not more than Rs. 5 core and having a commercial operation for less than 2 years should appoint a market maker at the time of issue of securities.
4. Portfolio Consultants:
A combination of securities such as stocks, bonds and money market instruments is collectively called as portfolio. Whereas the portfolio consultants are the persons, firms or companies who advise, direct or undertake the management or administration of securities or funds on behalf of their clients. Traditionally stock trading is done through stock brokers, personally or through telephones. As number of people trading in stock market increase enormously in last few years, some issues like location constrains, busy phone lines, miss communication etc start growing in stock broker offices. Information technology (Stock Market Software) helps stock brokers in solving these problems with Online Stock Trading. Online Stock Market Trading is an internet based stock trading facility. Investor can trade shares through a website without any manual intervention from Stock Broker. There are two different type of trading environments available for online equity trading.
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1. Installable software based Stock Trading Terminals This trading environment requires software to be installed on investors computer. This software is provided by the stock broker. This software requires high speed internet connection. These kind of trading terminals are used by high volume intraday equity traders. 2.Web (Internet) based trading application This kind of trading environment doesn't require any additional software installation. They are like other internet websites which investor can access from around the world through normal internet connection. Stock exchanges are like market places, where stockbrokers buy and sell securities for individuals or institutions. As per the SCRA (Securities Contracts Regulation Act) 1956, the definition of securities includes shares, bonds, stocks, debentures, government securities, derivatives of securities, units of collective investment scheme (CIS) etc. The securities market has two interdependent segments: the primary and secondary market. The primary market is the channel for creation of new securities issued by public limited companies or by government agencies. New securities issued in the primary market are traded in the secondary market. The secondary market operates through the over-the-counter (OTC) market and the exchange trade market.
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2. Huge Choice There are thousands of stocks listed on markets around the world. There is always a stock whose price is moving - its just a matter of finding them. 3. Familiarity The most traded stocks are in the largest companies that most of us have heard of and understand - Microsoft, IBM, and Cisco etc
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5. Costs Although online trading costs for stock trading are low they still add considerably to the costs of day trading. Online futures trading are about 1/4 of the cost for the equivalent value. In the UK 0.5% stamp duty is also levied on all share purchases making trading virtually impossible, hence the popularity of spread betting.
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The provision of 'investment management services' includes elements of financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Outside of the financial industry, the term "investment management" is often applied to investments other than financial instruments. Investments are often meant to include projects, brands, patents and many things other than stocks and bonds. Even in this case, the term implies that rigorous financial and economic analysis methods are used.
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Objective of PMS
There are the following objective which is full filled by Portfolio Management Services. 1. Safety Of Fund: The investment should be preserved, not be lost, and should remain in the returnable position in cash or kind. 2. Marketability: The investment made in securities should be marketable that means, the securities must be listed and traded in stock exchange so as to avoid difficulty in their encashment. 3. Liquidity: The portfolio must consist of such securities, which could be en-cashed without any difficulty or involvement of time to meet urgent need for funds. Marketability ensures liquidity to the portfolio. 4. Reasonable return: The investment should earn a reasonable return to upkeep the declining value of money and be compatible with opportunity cost of the money in terms of current income in the form of interest or dividend. 5. Appreciation in Capital: The money invested in portfolio should grow and result into capital gains. 6. Tax planning: Efficient portfolio management is concerned with composite tax planning covering income tax, capital gain tax, wealth tax and gift tax.
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7. Minimize risk: Risk avoidance and minimization of risk are important objective of portfolio management. Portfolio managers achieve these objectives by effective investment planning and periodical review of market, situation and economic environment affecting the financial market.
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2. Defining Policy.
Once the objectives have been set, a suitable investment policy must be established. The standard procedure is for the money manager to ask clients to select their preferred mix of assets, for example equities and bonds, to provide an idea of the normal mix desired. Clients are then asked to specify limits or maximum and minimum amounts they will allow to be invested in the different assets available. The main asset classes are cash, equities, gilts/bonds and other debt instruments, derivatives, property and overseas assets. Alternative investments, such as private equity, are also growing in popularity, and will be discussed in a later chapter. Attaining the optimal asset mix over time is one of the key factors of successful investing.
At either end of the portfolio management spectrum of strategies are active and passive strategies. An active strategy involves predicting trends and changing expectations about the likely future performance of the various asset classes and actively dealing in and out of investments to seek a better performance. For example, if the manager expects interest rates to rise, bond prices are likely to fall and so bonds should be sold, unless this expectation is already factored into bond prices. At this stage, the active fund manager should also determine the style of the portfolio. For example, will the fund invest primarily in companies with large market capitalizations, in shares of companies expected to generate high growth rates, or in companies whose valuations are low? A passive strategy usually involves buying securities to match a preselected market index. Alternatively, a portfolio can be set up to match the investors choice of tailor-made index. Passive strategies rely on diversification to reduce risk. Outperformance versus the chosen index is not expected. This strategy requires minimum input from the portfolio manager. In practice, many
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active funds are managed somewhere between the active and passive extremes, the core holdings of the fund being passively managed and the balance being actively managed.
4. Asset selections.
Once the strategy is decided, the fund manager must select individual assets in which to invest. Usually a systematic procedure known as an investment process is established, which sets guidelines or criteria for asset selection. Active strategies require that the fund managers apply analytical skills and judgment for asset selection in order to identify undervalued assets and to try to generate superior performance.
5. Performance assessments.
In order to assess the success of the fund manager, the performance of the fund is periodically measured against a pre-agreed benchmark perhaps a suitable stock exchange index or against a group of similar portfolios (peer group comparison). The portfolio construction process is continuously iterative, reflecting changes internally and externally. For example, expected movements in exchange rates may make overseas investment more attractive, leading to changes in asset allocation. Or, if many large-scale investors simultaneously decide to switch from passive to more active strategies, pressure will be put on the fund managers to offer more active funds. Poor performance of a fund may lead to modifications in individual asset holdings or, as an extreme measure; the manager of the fund may be changed altogether.
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Types of assets
The structure of a portfolio will depend ultimately on the investors objectives and on the asset selection decision reached. The portfolio structure takes into account a range of factors, including the investors time horizon, attitude to risk, liquidity requirements, tax position and availability of investments. The main asset classes are cash, bonds and other fixed income securities, equities, derivatives, property and overseas assets.
Bonds
Bonds are debt instruments on which the issuer (the borrower) agrees to make interest payments at periodic intervals over the life of the bond this can be for two to thirty years or, sometimes, in perpetuity. Interest payments can be fixed or variable, the latter being linked to prevailing levels of interest rates. Bond markets are international and have grown rapidly over recent years. The bond markets are highly liquid, with many issuers of similar standing, including governments (sovereigns) and state-guaranteed
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organizations. Corporate bonds are bonds that are issued by companies. To assist investors and to help in the efficient pricing of bond issues, many bond issues are given ratings by specialist agencies such as Standard & Poors and Moodys. The highest investment grade is AAA, going all the way down to D, which is graded as in default. Depending on expected movements in future interest rates, the capital values of bonds fluctuate daily, providing investors with the potential for capital gains or losses. Future interest rates are driven by the likely demand/ supply of money in an economy, future inflation rates, political events and interest rates elsewhere in world markets. Investors with short-term horizons and liquidity requirements may choose to invest in bonds because of their relatively higher return than cash and their prospects for possible capital appreciation. Long-term investors, such as pension funds, may acquire bonds for the higher income and may hold them until redemption for perhaps seven or fifteen years. Because of the greater risk, long bonds (over ten years to maturity) tend to be more volatile in price than medium- and short-term bonds, and have a higher yield.
Equities
Equity consists of shares in a company representing the capital originally provided by shareholders. An ordinary shareholder owns a proportional share of the company and an ordinary share carries the residual risk and rewards after all liabilities and costs have been paid. Ordinary shares carry the right to receive income in the form of dividends (once declared out of distributable profits) and any residual claim on the companys assets once its liabilities have been paid in full. Preference shares are another type of share capital. They differ from ordinary shares in that the dividend on a preference share is usually fixed at some amount and does not change. Also, preference shares usually do not carry voting rights and, in the event of firm failure, preference shareholders are paid before ordinary shareholders. Returns from investing in equities are generated in the form of dividend income and capital gain arising from the ultimate sale of the shares. The level of dividends may vary from year to year, reflecting the changing profitability of a company. Similarly, the market price of a share will change from day to day to reflect all relevant available information. Although not guaranteed, equity prices generally rise over time,
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reflecting general economic growth, and have been found over the long term to generate growing levels of income in excess of the rate of inflation. Granted, there may be periods of time, even years, when equity prices trend downwards usually during recessionary times. The overall long-term prospect, however, for capital appreciation makes equities an attractive investment proposition for major institutional investors.
Derivatives
Derivative instruments are financial assets that are derived from existing primary assets as opposed to being issued by a company or government entity. The two most popular derivatives are futures and options. The extent to which a fund may incorporate derivatives products in the fund will be specified in the fund rules and, depending on the type of fund established for the client and depending on the client, may not be allowable at all. A futures contract is an agreement in the form of a standardized contract between two counterparties to exchange an asset at a fixed price and date in the future. The underlying asset of the futures contract can be a commodity or a financial security. Each contract specifies the type and amount of the asset to be exchanged, and where it is to be delivered (usually one of a few approved locations for that particular asset). Futures contracts can be set up for the delivery of cocoa, steel, oil or coffee. Likewise, financial futures contracts can specify the delivery of foreign currency or a range of government bonds. The buyer of a futures contract takes a long position, and will make a profit if the value of the contract rises after the purchase. The seller of the futures contract takes a short position and will, in turn, make a profit if the price of the futures contract falls. When the futures contract expires, the seller of the contract is required to deliver the underlying asset to the buyer of the contract. Regarding financial futures contracts, however, in the vast majority of cases no physical delivery of the underlying asset takes place as many contracts are cash settled or closed out with the offsetting position before the expiry date.
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An option contract is an agreement that gives the owner the right, but not obligation, to buy or sell (depending on the type of option) a certain asset for a specified period of time. A call option gives the holder the right to buy the asset. A put option gives the holder the right to sell the asset. European options can be exercised only on the options expiry date. US options can be exercised at any time before the contracts maturity date. Option contracts on stocks or stock indices are particularly popular. Buying an option involves paying a premium; selling an option involves receiving the premium. Options have the potential for large gains or losses, and are considered to be high-risk instruments. Sometimes, however, option contracts are used to reduce risk. For example, fund managers can use a call option to reduce risk when they own an asset. Only very specific funds are allowed to hold options.
Property
Property investment can be made either directly by buying properties, or indirectly by buying shares in listed property companies. Only major institutional investors with longterm time horizons and no liquidity pressures tend to make direct property investments. These institutions purchase freehold and leasehold properties as part of a property portfolio held for the long term, perhaps twenty or more years. Property sectors of interest would include prime, quality, well-located commercial office and shop properties, modern industrial warehouses and estates, hotels, farmland and woodland. Returns are generated from annual rents and any capital gains on realization. These investments are often highly illiquid.
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Definition of Risk
Although there is a difference in the specific definitions of risk and uncertainty, for our purpose and in most financial literature the two terms are used interchangeably. In fact, one way to define risk is the uncertainty of future outcomes. An alternative definition might be the probability of an adverse outcome.
(1). Interest rate risk: It occurs due to variability cause in return by changes in level of interest rate. In long runs all interest rate move up or downwards. These changes affect the value of security. RBI, in India, is the monitoring authority which effectalises the change in interest rate.
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Any upward revision in interest rate affects fixed income security, which carry old lower rate of interest and thus declining market value. Thus it establishes an inverse relationship in the prize of security.
TYPES
Cash equivalent Long term Bond
RISK EXTENT
Less vulnerable to interest rate risk More vulnerable to interest rate risk.
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in depression brings downfall in the prizes of all types of securities. Flexible income securities are nearly affected than fix rate securities during depression due to decline n the market prize.
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Circumstance
I II III IV It is possible to calculate: 1. The expected (or average) return
Return(x)
10% 12% 15% 19%
Probability(p)
0.2 0.3 0.4 0.1
Circumstan ce
Return(x)
Probability(p)
px
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I II III IV
The standard deviation is a measure of risk, whereby the greater the standard deviation, the greater the spread, and the greater the spread, the greater the risk.
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If the above exercise were to be performed using another investment that offered the same expected return, but a different standard deviation, then the following result might occur: If the above exercise were to be performed using another investment that offered the same expected return, but a different standard deviation, then the following result might occur: Plan Investment A Investment B Expected Return 9% 9% Risk(standard deviation) 2.5% 4.0%
Since both investments have the same expected return, the best selection of investment would be Investment A, which provides the lower risk. Similarly, if there are two investments presenting the same risk, but one has a higher return than the other, that investment would be chosen over the investment with the lower return for the same risk. In the real world, there are all types of investors. Some investors are completely risk averse and others are willing to take some risk, but expect a higher return for that risk. Different investors will also have different tolerances or threshold levels for riskreturn trade-offs i.e. for a given level of risk, one investor may demand a higher rate of return than another investor.
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INDIFFERNCE CURVE
Suppose the following situation exists
The question to ask here is, does the extra 10% return compensate for the extra risk? There is no right answer, as the decision would depend on the particular investors attitude to risk. A particular investors indifference curve can be ascertained by plotting what rate of return the investor would require for each level of risk to be indifferent amongst all of the investments. For example, there may be an investor who can obtain a return of 50% with zero risk and a return of 55 %with a risk or standard deviation of 5% who will be indifferent between the two investments. If further investments were considered, each with a higher degree of risk, the investor would require still higher returns to make all of the investments equally attractive. The investor being discussed could present the following as the indifference curve shown in Figure.
Indifference Curve
Expected Return 50% 55% 70% 100% 120% Risk 0% 5% 10% 15% 18%
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230%
25%
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where:
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U = utility value
A = an index of the investors aversion, (the factor of .005 is a scaling convention that allows expression of the expected return and standard deviation in the equation as a percentage rather than a decimal). Utility is enhanced by high expected returns and diminished by high risk. Investors choosing amongst competing investment portfolios will select the one providing the highest utility value. Thus, in the example above, the investor will select the investment (portfolio) with the higher utility value of 18.
Expected Return(EV)
10% 20%
Standard deviation( )
5% 10%
Utility=EV-.005A
10 .005 4 25 = 9.5 20 .005 4 100 = 18
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One way to control portfolio risk is via diversification, whereby investments are made in a wide variety of assets so that the exposure to the risk of any particular security is limited. This concept is based on the old adage do not put all your eggs in one basket. If an investor owns shares in only one company, that investment will fluctuate depending on the factors influencing that company. If that company goes bankrupt, the investor might lose 100 per cent of the investment. If, however, the investor owns shares in several companies in different sectors, then the likelihood of all of those companies going bankrupt simultaneously is greatly diminished. Thus, diversification reduces risk. Although bankruptcy risk has been considered here, the same principle applies to other forms of risk
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Covariance
Covariance is an absolute measure, and covariances cannot be compared with one another. To obtain a relative measure, the formula for correlation coefficient [r] is used.
Circumstance
Probability
x-x
y-y
p(x-x) (y-y)
I II III IV
+1.0 0 +1.5 -4
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For data regarding (y y), see earlier example. Assume that a similar exercise has been run for data regarding (x x). Assume the variance or variance or
2 2
-2.0
= -0.481
2.45
*7.056
If, the same example is run again, but using a different set of numbers for y, a different correlation coefficient might result of say, 0.988. It can be concluded that a large negative correlation confirms the strong tendency of the two investments to move inversely.
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or may not move at all. As a result, the combination of these two securities in a portfolio may or may not create a diversification effect. However, it is still better to be in this position than in a perfect positive correlation situation.
Systematic risk = the potential variability in the returns offered by a security or asset
caused by general market factors, such as interest rate changes, inflation rate movements, tax rates, state of the economy.
As the number of assets in a portfolio increases, the total risk may decline as a result of the decline in the unsystematic risk in that portfolio. The relationship amongst these risks can be quantified as follows
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2 s +
2 u
s = the u
The correlation coefficient between two investment opportunities can be expressed as:
s
i CORim
Where,
s= i
CORim = the correlation coefficient between the return of the investment and those of the market.
If an investment were perfectly correlated to the market so that all its movements could be fully explained by movements in market, then all of the risk would be systematic &
i
s If
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(A) Trend of earning: A higher price-earnings ratio discount expected profit growth. Conversely, a downward trend in earning results in a low price-earnings ratio to discount anticipated decrease in profits, price and dividend. Rising EPS causes appreciation in price of shares, which
benefits investors in lower tax brackets? Such investors have not pay tax or to give lower rate tax on capital gains. Many institutional investor like stability and growth and support high EPS. Growth of EPS is diluted when a company finances internally its expansion program and offers new stock. EPS increase rapidly and result in higher P/E ratio when a company finances its expansion program from internal sources and borrowings without offering new stock.
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(B) Quality of reported earning: Quality of reported earnings affects P/E ratio. The factors that affect the quality of reported earnings are as under: Depreciation allowances: Larger (Non Cash) deduction for depreciation provides more funds to company to finance profitable expansion schemes internally. This builds up future earning power of company. Research and development outlets: There is higher P/E ratio for a company, which carries R&D programs. R&D enhances profit earning strength of the company through increased future sales.
Inventory and other non-recurring type of profit: Low cost inventory may be sold at higher price due to inflationary conditions among profit but such profit may not always occur and hence low P/E ratio.
(C) Dividend policy: Dividend policy is significant in affecting P/E ratio. With higher dividend ratio, equity price goes up and thus raises P/E ratio. Dividend rates are raised to push in share prices up. Dividend cover is calculated to find out the time the dividend is protected, In terms of earnings. It is calculated as under:
(D) Investors demand: Demand from institutional investors for equity also enhances the P/E ratio.
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(3) Quality of management: Investors decide about the ability and caliber of management and hold and dispose of equity academy. P/E ratio is more where a company is managed by reputed entrepreneurs with good past records of management performance.
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Aggressive Portfolio:
Objective: Growth. This strategy might be appropriate for investors who seek High growth and who can tolerate wide fluctuations in market values, over the short term.
Growth Portfolio: Objective: Growth. This strategy might be appropriate for investors who have a preference for growth and who can withstand significant fluctuations in market value.
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Balanced Portfolio: Objective: Capital appreciation and income. This strategy might be appropriate for investors who want the potential for capital appreciation and some growth, and who can withstand moderate fluctuations in market values
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Conservative Portfolio: Objective: Income and capital appreciation. This strategy may be appropriate for investors who want to preserve their capital and minimize fluctuations in market value.
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100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
YES NO
COMMENT As the above table shows the knowledge of Investor out of 100 respondent carried throughout the Hyderabad Area is only 85%. The remaining 15% take his/her residential property as an investment. According to law purpose this is not an investment because of it is not create any profit for the owner.
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