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A project report on overview of portfolio management in india

1.1. Projectsformba.blogspot.com UNIVERSITY OF MUMBAI PROJECT ON OVERVIEW

OF PORTFOLIO MANAGEMENT IN INDIA. Submitted In Partial Fulfillment of therequirements For the Award of the Degree of Bachelor of Management By PROJECT

GUIDE BACHELOR OF MANAGEMENT STUDIES SEMESTER V (2010-2011)

K.V.PENDHARKAR COLLEGE OF ARTS, SCIENCE&COMMERCE 1

2.2. Projectsformba.blogspot.com DeclarationI ……………………… student of BMS –

Semester V (2010-2011) herebyDeclare that I have completed this project on

“OVERVIEW OFPORTFOLIO MANAGEMENT IN INDIAThe information submitted is true

& original to the best of myknowledge.The conclusions and recommendations written in

this project arebased onThe data collected by me while preparing this report. Signature 2

3.3. Projectsformba.blogspot.com ACKNOWLEDGEMENTIt gives me great pleasure to

submit this project to the University ofMumbai as a part of curriculum of my BMS course.I take this opportunitywith great pleasure to present before you this project on

“OVERVIEW OFPORTFOLIO MANAGEMENT IN INDIA" which is a result of co-

operation,hard work and good wishes of many people. The most pleasant part of

anyproject is to express the gratitude towards all those who have contributedto the

success of the project.I would like to thank …………………….. who has been my mentor

for thisproject. It was only through her excellence assistance and goodsuggestions that I

have been able to complete this project.Library Staff:For giving valuable information

about the various books related to thisproject.With all the heartiest thanks; I hope my final

project report will be a greatsuccess and a good source of learning and information. 3

4.4. Projectsformba.blogspot.com INDEXCHAPTER TABLE OF CONTENTS PAGENO.CHATER-1 Introduction to Portfolio Management 8 Introduction to kotak securities ltd.

10CHAPTER-2 Meaning of portfolio management 14CHAPTER-3

MethodologyCHAPTER-4 18 Basic concepts & components for portfolio

managementCHAPTER-5 23 Types of portfolio managementCHAPTER-6 37 Persons

involved in portfolio managementCHAPTER-7 42 Risk –Return analysisCHAPTER-8 49

Assest allocationCHAPTER-9 53 Primary surveyCHAPTER-10 58 FindingsCHAPTER-11

62 ConclusionCHAPTER-12 63 Bibliography/WebliographyCHAPTER-13 64 4

5.5. Projectsformba.blogspot.com NEED FOR SELECTING THE PROJECT♣ To get the

overall knowledge of securities and investment.♣ To know how the investment made in

different securities minimizes the risk and maximizes the returns.♣ To get the knowledgeof different factors that affects the investment decision of investors.♣ To know how

different companies are managing their portfolio i.e. when and in which sectors they are

investing.♣ To know what is the need of appointing a Portfolio Manager and how does

he meets the needs of the various investors.♣ To get the knowledge about the role

(played) and functions of portfolio manager.♣ To get the knowledge of investment

decision and asset allocation. 5

6.6. Projectsformba.blogspot.com EXECUTIVE SUMMARY Investing in equities requires

time, knowledge and constant monitoring of the market.For those who need an expert to

help to manage their investments, portfoliomanagement service (PMS) comes as an

answer. The business of portfolio management has never been an easy one. Juggling

thelimited choices at hand with the twin requirements of adequate safety and

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sizeablereturns is a task fraught with complexities. Given the unpredictable nature of the

market it requires solid experience and strongresearch to make the right decision. In the

end it boils down to make the right move inthe right direction at the right time. That’s

where the expert comes in. The term portfolio management in common practice refers to

selection of securitiesand their continuous shifting in a way that the holder gets maximum

returns at minimumpossible risk. Portfolio management services are merchant banking

activities recognizedby SEBI and these activities can be rendered by SEBI authorized

portfolio managers ordiscretionary portfolio managers. A portfolio manager by the virtue

of his knowledge, background and experience helpshis clients to make investment in

profitable avenues. A portfolio manager has to complywith the provisions of the SEBI

(portfolio managers) rules and regulations, 1993. This project also includes the different

services rendered by the portfolio manager. Itincludes the functions to be performed by

the portfolio manager. What is the difference between the value of time and money? In

other words, learn toseparate time from money. 6

7.7. Projectsformba.blogspot.com When it comes to the importance of time, how many of

us believe that time is money.We all know that the work done by us is calculated by units

of time. Have you everconsidered the difference between an employee who is working on

an hourly rate andthe other who is working on salary basis? The only difference between

them is of the unitof time. No matter whether you get your pay by the hour, bi-weekly, or

annually; onething common in all is that the amount is paid to you according to amount of

time youspent on working. In other words, time is precious and holds much more

importance than money. Thatis the reason the time is considered as an important factor

in wealth creation. The project also shows the factors that one considers for making an

investmentdecision and briefs about the information related to asset allocation. 7

8.8. Projectsformba.blogspot.com CHAPTER: 1 PORTFOLIOMANAGEMENTINTRODUCTION Stock exchange operations are peculiar in nature and

most of the Investors feelinsecure in managing their investment on the stock market

because it is difficult for anindividual to identify companies which have growth prospects

for investment. Furtherdue to volatile nature of the markets, it requires constant

reshuffling of portfolios tocapitalize on the growth opportunities. Even after identifying the

growth orientedcompanies and their securities, the trading practices are also

complicated, making it adifficult task for investors to trade in all the exchange and follow

up on post tradingformalities. Investors choose to hold groups of securities rather than

single security that offer thegreater expected returns. They believe that a combination of

securities held together willgive a beneficial result if they are grouped in a manner tosecure higher return aftertaking into consideration the risk element. That is why

professional investment advicethrough portfolio management service can help the

investors to make an intelligent and 8

9.9. Projectsformba.blogspot.cominformed choice between alternative investments

opportunities without the worry of posttrading hassles. From The Rational Edge: The first

in a new series of articles on portfoliomanagement, this introduction expresses IBM’s

viewpoint about the foundations andessentials of portfolio management, and discusses

ideas and assets that support andenable effective portfolio management practices.A

good way to begin understanding what portfolio management is (and is not) may be

todefine the term portfolio. In a business context, we can look to the mutual fundindustryto explain the terms origins. Morgan Stanleys Dictionary of Financial Terms offers

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thefollowing explanation: If you own more than one security, you have an investment

portfolio. You build theportfolio by buying additional stocks, bonds, mutual funds, or other

investments. Yourgoal is to increase the portfolios value by selecting investments that you

believe will goup in priceAccording to modern portfolio theory, you can reduce your

investment risk by creating adiversified portfolio that includes enough different types, or

classes, of securities so thatat least some of them may produce strong returns in any

economic climate.Note that this explanation contains a number of important ideas: • A

portfolio contains many investment vehicles. • Owning a portfolio involves making choices

-- that is, deciding what additional stocks, bonds, or other financial instruments to buy;

when to buy; what and when to sell; and so forth. Making such decisions is a form of

management. • The management of a portfolio is goal-driven. For an investment portfolio,

the specific goal is to increase the value. • Managing a portfolio involves inherent risks. 9

10.10. Projectsformba.blogspot.com CHAPTER2 INTRODUCTON TO KOTAK SECURITIES

LTD.The Kotak Mahindra Group was born in 1985 as Kotak Capital ManagementFinance

Limited. Uday Kotak, Sidney A. A. Pinto and Kotak & Companypromoted this company.

Industrialists Harish Mahindra and Mahindra took astake in 1986, and thats when the

company changed its name to KotakMahindra Finance Limited. Since then its been a

steady and confident journey togrowth and success.Kotak Securities Ltd. is one of Indias

largest brokerage and securitiesdistribution house in India. Over the years Kotak

Securities has been one ofthe leading investment broking houses catering to the needs

of bothinstitutional and non-institutional investor categories with presence all over

thecountry through franchisees and co-ordinates. Kotak Securities Ltd. offers onlineand

offline services based on well-researched expertise and financial products tothe non-

institutional investors.Kotak Securities Limited is t he world of Capital Markets where

everythingnewsworthy exists only in the present moment and where knowingtheimportance of timing, sentiments and strategic forecasting makes the

differencebetween profit and loss.Kotak Securities Limited, a strategic joint venture

between Kotak Mahindra Bankand Goldman Sachs (holding 25% one of the world’s

leading investment banksand brokerage firms) is India’s leading stock broking house with

a market shareof 7 - 8 %.Kotak Securities Limited is one of the larger players in

distribution of IPOs - itwas ranked number One in 2003-04 as Book Running Lead

Manager in publicequity offerings by PRIME Database. It has also won the “Best Equity

House”Award from Finance Asia -April 2004.The Company has a full-fledged Research

division involved in macroeconomicstudies, Sectoral research and Company specific

equity research combined witha strong and well networked sales force which helpsdeliver current and up-to-date market information and news. 10

11.11. Projectsformba.blogspot.comKotak Securities Limited is also a depository participant

with National SecuritiesDepository Limited (NSDL) and Central Depository Services

Limited (CDSL)providing dual benefit services wherein the investors can use the

brokerageservices of the Company for executing the transactions and the

depositoryservices for settling them.Kotak Securities has 122 branches servicing more

than 1, 70,000 customer andCoverage of 18 cities. Kotaksecurities.com, the online

division of KotakSecurities Limited offers Internet Broking services and also online IPO

andMutual Fund Investments. Kotak Securities Limited manages assets over 2500cores

of Assets under Management (AUM).Kotak securities provide portfolio ManagementServices, catering to the high endof the market. Portfolio Management from Kotak

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Securities comes as an answerto those who would like to grow exponentially on the crest

of the stock market,with the backing of an expert.Kotak Securities Limited manages

assets over Rs. 1700crores through itsPortfolio Management Services (PMS) servicing

high net worth clients with alarge investible surplus through its preferred client services in

the mass affluentand wealth management segments.The company has a full-fledged

research division involved in Macro Economicstudies, Sectoral research and Company

Specific Equity Research combinedwith a strong and well networked sales force which

helps deliver current and upto date market information and news. 11

12.12. Projectsformba.blogspot.com KOTAK SECURITIES RESEARCH CENTER Kotak

Securities Research Center is a special research cell where some of Indias finest

financial analysts bring you intensive research reports on how the stock market is faring,

when is the right time to invest, when to execute your order and more. KSL provides both

type of research reports. Fundamental Research reports a. Intraday calls b. Special

Reports c. Market Mornings d. Daily Market Brief e. Sectoral Report f. Stock Ideas g.

Derivatives Reports h. Portfolio Advices Technical Research reports a. WeeklyTechnical AnalysisDepending on what kind of investor you are, Kotak Securities Ltd.

(KSL) bringscustomers from fundamental or basic research and technical research. As

aninvestor with Kotak Securities, Customers get access to these research

reportsexclusively. Customers get access to the following reports. Research process

isgiven below. 12

13.13. Projectsformba.blogspot.com PRODUCTS OFFERED BY KOTAK SECURITIES

LIMITED 1. Portfolio Management Services [PMS]: KOTAK Securities is among the

Largest private client asset managers in the Country today with an equity asset base of

around 1700crores (US$ 400 million). Kotak clients include some of the most affluent

families and high net worth individuals in the Country and customer assets undermanagement rival some of the larger mutual funds in India. 2) Margin Trading Facility 3)

Demat Account Facility 4) IPOs 5) Mutual FundsAWARDS GRAB BY KOTAK

SECURITIES LTD.ϖ Prime Ranking Award (2003-04) - Largest Distributor of IPOsϖ

Finance Asia Award (2004)- Indias best Equity Houseϖ Finance Asia Award (2005)-Best

Broker in Indiaϖ Euromoney Award (2005)-Best Equities House in Indiaϖ Finance Asia

Award (2006) - Best Broker in Indiaϖ Euromoney Award (2006) - Best Provider of

Portfolio Management in Equities 13

14.14. Projectsformba.blogspot.com CHAPTER3 MEANING OF PORTFOLIO

MANAGEMENT Portfolio management in common parlance refers to the selection of

securities andtheir continuous shifting in the portfolio to optimize returns to suit theobjectives of aninvestor. This however requires financial expertise in selecting the right

mix of securitiesin changing market conditions to get the best out of the stock market. In

India, as wellas in a number of western countries, portfolio management service has

assumed therole of a specialized service now a days and a number of professional

merchantbankers compete aggressively to provide the best to high net worth clients, who

havelittle time to manage their investments. The idea is catching on with the boom in

thecapital market and an increasing number of people are inclined to make profits out

oftheir hard-earned savings. Portfolio management service is one of the merchant

banking activities recognizedby Securities and Exchange Board of India (SEBI). The

service can be rendered eitherby merchant bankers or portfolio managers ordiscretionary portfolio manager as definein clause (e) and (f) of Rule 2 of Securities and



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Exchange Board of India(PortfolioManagers)Rules, 1993 and their functioning are guided

by the SEBI. According to the definitions as contained in the above clauses, a portfolio

managermeans any person who is pursuant to contract or arrangement with a client,

advises ordirects or undertakes on behalf of the client (whether as a discretionary

portfoliomanager or otherwise) the management or administration of a portfolio of

securities orthe funds of the client, as the case may be. A merchant banker acting as a

PortfolioManager shall also be bound by the rules and regulations as applicable to the

portfoliomanager. 14

15.15. Projectsformba.blogspot.com Realizing the importance of portfolio management

services, the SEBI has laid downcertain guidelines for the proper and professional

conduct of portfolio managementservices. As per guidelines only recognized merchant

bankers registered with SEBI areauthorized to offer these services. Portfolio

management or investment helps investors in effective and efficientmanagement of their

investment to achieve this goal. The rapid growth of capitalmarkets in India has opened

up new investment avenues for investors. The stock markets have become attractive

investment options for the common man.But the need is to be able to effectively and

efficiently manage investments in order tokeep maximum returns with minimum risk.¬

Portfolio is a collection of asset.¬ The asset may be physical or financial like Shares

Bonds, Debentures, and Preference Shares etc.¬ The individual investor or a fund

manager would not like to put all his money in the shares of one company, for that would

amount to great risk.¬ Main objective is to maximize portfolio return and at the same

time minimizing the portfolio risk by diversification.¬ Portfolio management is the

management of various financial assets, which comprise the portfolio.¬ According to

Securities and Exchange Board of India (Portfolio manager) Rules, 1993; “ portfolio”

means the total holding of securities belonging to any person;¬ Designing portfolios tosuit investor requirement often involves making several projections regarding the future,

based on the current information.¬ When the actual situation is at variance from the

projections portfolio composition needs to be changed.¬ One of the key inputs in

portfolio building is the risk bearing ability of the investor. 15

16.16. Projectsformba.blogspot.com¬ Portfolio management can be having institutional, for

example, Unit Trust, Mutual Funds, Pension Provident and Insurance Funds, Investment

Companies and non-Investment Companies.Over time, other industry sectors have

adapted and applied these ideas toother types of "investments," including the

following:Application portfolio management: This refers to the practice of managing an

entiregroup or major subset of software applications within a portfolio. Organizationsregardthese applications as investments because they require development (or

acquisition)costs and incur continuing maintenance costs. Also, organizations must

constantlymake financial decisions about new and existing software applications,

includingwhether to invest in modifying them, whether to buy additional applications, and

when to"sell" -- that is, retire -- an obsolete software application.Product portfolio

management: Businesses group major products that they developand sell into (logical)

portfolios, organized by major line-of-business or businesssegment. Such portfolios

require ongoing management decisions about what newproducts to develop (to diversify

investments and investment risk) and what existingproducts to transform or retire (i.e.,

spin off or divest). Project or initiative portfoliomanagement, an initiative, in the simplestsense, is a body of work with: • A specific (and limited) collection of needed results or



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work products. • A group of people who are responsible for executing the initiative and

use resources, such as funding. • A defined beginning and end.Managers can group a

number of initiatives into a portfolio that supports a businesssegment, product, or product

line. These efforts are goal-driven; that is, they supportmajor goals and/or components of

the enterprises business strategy. Managers mustcontinually choose among competing

initiatives (i.e., manage the organizationsinvestments), selecting those that best support

and enable diverse business goals (i.e., 16

17.17. Projectsformba.blogspot.comthey diversify investment risk). They must also manage

their investments by providingcontinuing oversight and decision-making about which

initiatives to undertake, which tocontinue, and which to reject or discontinue.Indian Bank

enters into a Strategic Alliance with PnbPrincipalChennai, January 25, 2006: Indian Bank

is enlarging its activities to deliver value-added services to its customers. The Bank is

presently selling the Insurance products,both Life and Non-life as a Corporate Agent. The

Bank is concentrating on optimizingthe 3 Ps, People, Process and Products to give

maximum advantage to its customersand to face the market competition by exploiting the

emerging opportunities.Indian Bank today announced a strategic alliance with Pnb

Principal Insurance AdvisoryCo., Pvt. Ltd. in the insurance advisory business and Pnb

Principal Financial PlannersPvt. Ltd. in the financial planning business. As the alliance

will enable access to thefinancial products of 30 Insurance companies both life and non-

life and an equalnumber of Investment solutions to the Bank’s Customers under one roof,

the Bank’semphasis would be to serve as an “agent to its customers”.As per the scope of

the alliance with Pnb Principal Insurance Advisory Co., Pvt. Ltd.,Indian Bank has taken

an equity stake in the Company. This partnership will also deliverrisk management

solutions to Indian Bank customers through the Insurance advisoryroute. The solutions

offered will include risk assessment, insurance portfolio analysis &placement, insuranceportfolio administration, and claims management.As per Indian Bank’s strategic alliance

with Pnb Principal Financial Planners Pvt. Ltd.,the Bank will distribute the investment

solutions offered by Pnb Principal FinancialPlanners through its extensive branch

network. Pnb Principal Financial Planners willprovide support in the area of financial

planning, investment advisory, research,systems and business development to Indian

Bank. The strategic alliance will enablecustomers of Indian Bank to access a wide range

of superior investment solutions.Announcing the partnership with Indian Bank, Sanjay

Sachdev, Country Manager-India,and Principal International said, “Banks have currently

emerged as the largestdistribution channel for financial investment options. We are

pleased to associateourselves with Indian Bank. This partnership with Indian Bank willmake a range ofinvestment solutions more accessible to retail investors of Indian

Bank.”Dr. K.C. Chakrabarty, Chairman and Managing Director, Indian Bank said,” The

alliancewith Pnb Principal in the areas of Risk Management, Insurance and Investment

will helpin providing a One-stop solution to the 15 million strong customers of Indian Bank

17

18.18. Projectsformba.blogspot.comthroughout the country. The Tie-up will help realize our

cherished goal of making ourBank, “the best people to bank with”. CHPTER4

METHODOLOGYPortfolio Management is used to select a portfolio of new product

development projectsto achieve the following goals: • Maximize the profitability or value of

the portfolio • Provide balance • Support the strategy of the enterprisePortfolioManagement is the responsibility of the senior management team of anorganization or



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business unit. This team, which might be called the Product Committee,meets regularly

to manage the product pipeline and make decisions about the productportfolio. Often,

this is the same group that conducts the stage-gate reviews in theorganization.A logical

starting point is to create a product strategy - markets, customers, products,strategy

approach, competitive emphasis, etc. The second step is to understand thebudget or

resources available to balance the portfolio against. Third, each project mustbe assessed

for profitability (rewards), investment requirements (resources), risks, andother

appropriate factors.The weighting of the goals in making decisions about products varies

from company.But organizations must balance these goals: risk vs. profitability, new

products vs.improvements, strategy fit vs. reward, market vs. product line, long-term vs.

short-term.Several types of techniques have been used to support the portfolio

managementprocess: 18

19.19. Projectsformba.blogspot.com • Heuristic models • Scoring techniques • Visual or

mapping techniquesThe earliest Portfolio Management techniques optimized projects

profitability orfinancial returns using heuristic or mathematical models. However, this

approach paidlittle attention to balance or aligning the portfolio to the organizations

strategy. Scoringtechniques weight and score criteria to take into account investment

requirements,profitability, risk and strategic alignment. The shortcoming with this

approach can be anover emphasis on financial measures and an inability to optimize the

mix of projects.Mapping techniques use graphical presentation to visualize a portfolios

balance. Theseare typically presented in the form of a two-dimensional graph that shows

the trade-offsor balance between two factors such as risks vs. profitability, marketplace fit

vs. productline coverage, financial return vs. probability of success, etcThe recommended

approach is to start with the overall business plan that should definethe planned level of

R&D investment, resources (e.g., headcount, etc.), and relatedsales expected from newproducts. With multiple business units, product lines or typesof development, we

recommend a strategic allocation process based on the businessplan. This strategic

allocation should apportion the planned R&D investment intobusiness units, product

lines, markets, geographic areas, etc. It may also breakdownthe R&D investment into

types of development, e.g., technology development, platformdevelopment, new

products, and upgrades/enhancements/line extensions, etc.Once this is done, then a

portfolio listing can be developed including the relevantportfolio data. We favor use of the

development productivity index (DPI) or scores fromthe scoring method. The

development productivity index is calculated as follows: (NetPresent Value x Probability

of Success) / Development Cost Remaining. It factors theNPV by the probability of bothtechnical and commercial success. By dividing this resultby the development cost

remaining, it places more weight on projects nearer completionand with lower

uncommitted costs. The scoring method uses a set of criteria (potentiallydifferent for each

stage of the project) as a basis for scoring or evaluating each project. 19

20.20. Projectsformba.blogspot.comAn example of this scoring method is shown with the

worksheet below. Weightingfactors can be set for each criterion. The evaluators on a

Product Committee scoreprojects (1 to 10, where 10 are best). The worksheet computes

the average scores andapplies the weighting factors to compute the overall score. The

maximum weightedscore for a project is 100.This portfolio list can then be ranked by

either thedevelopment priority index or the score. An example of the portfolio list is shownbelowand the second illustration shows the category summary for the scoring



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method.Once the organization has its prioritized list of projects, it then needs to

determinewhere the cutoff is based on the business plan and the planned level of

investment ofthe resources available. This subset of the high priority projects then needs

to be further 20

21.21. Projectsformba.blogspot.comanalyzed and checked. The first step is to check that the

prioritized list reflects theplanned breakdown of projects based on the strategic allocation

of the business plan.Pie charts such as the one below can be used for this purpose.Other

factors can also be checked using bubble charts. For example, the risk-rewardbalance is

commonly checked using the bubble chart shown earlier. A final check is toanalyze

product and technology roadmaps for project relationships. For example, if alower priority

platform project was omitted from the protfolio priority list, the subsequenthigher priority

projects that depend on that platform or platform technology would beimpossible to

execute unless that platform project were included in the portfolio prioritylist.Finally, this

balanced portfolio that has been developed is checked against the businessplan as

shown below to see if the plan goals have been achieved - projects within theplanned

R&D investment and resource levels and sales that have met the goals. 21

22.22. Projectsformba.blogspot.comWith the significant investments required to develop new

products and the risksinvolved, Portfolio Management is becoming an increasingly

important tool to makestrategic decisions about product development and the investment

of companyresources. In many companies, current year revenues are increasingly based

on newproducts developed in the last one to three years.INVESTMENT PORTFOLIO

MANAGEMENT AND PORTFOLIO THEORYPortfolio theory is an investment approach

developed by University of Chicagoeconomist Harry M. Markowitz (1927 - ), who won a

Nobel Prize in economics in 1990.Portfolio theory allows investors to estimate both the

expected risks and returns, asmeasured statistically, for their investmentportfolios.Markowitz described how to combine assets into efficiently diversified

portfolios. It washis position that a portfolios risk could be reduced and the expected rate

of return couldbe improved if investments having dissimilar price movements were

combined. In otherwords, Markowitz explained how to best assemble a diversified

portfolio and proved thatsuch a portfolio would likely do well.There are two types of

Portfolio Strategies:A. Passive Portfolio StrategyA strategy that involves minimal

expectation input, and instead relies on diversificationto match the performance of some

market index.B. Active Portfolio StrategyA strategy that uses available information and

forecasting techniques to seek a betterperformance than a portfolio that is simply

diversified broadly 2223.23. Projectsformba.blogspot.com CHAPTER5 BASIC CONCEPTS AND COMPONENTS

FOR PORTFOLIO MANAGEMENTNow that we understand some of the basic dynamics

and inherent challengesorganizations face in executing a business strategy via

supporting initiatives, lets lookat some basic concepts and components of portfolio

management practices.1. The PortfolioFirst, we can now introduce a definition of portfolio

that relates more directly to thecontext of our preceding discussion. In the IBM view, a

portfolio is: One of a number ofmechanisms, constructed to actualize significant elements

in the Enterprise BusinessStrategy.It contains a selected, approved, and continuously

evolving, collection of Initiativeswhich are aligned with the organizing element of the

Portfolio, and, which contribute tothe achievement of goals or goal components identifiedin the Enterprise BusinessStrategy. The basis for constructing a portfolio should reflect



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the enterprises particularneeds. For example, you might choose to build a portfolio

around initiatives for aspecific product, business segment, or separate business unit

within a multinationalorganization.2. The Portfolio StructureAs we noted earlier, a portfolio

structure identifies and contains a number of portfolios.This structure, like the portfolios

within it, should align with significant planning and 23

24.24. Projectsformba.blogspot.comresults boundaries, and with business components. If

you have a product-orientedportfolio structure, for example, then you would have a

separate portfolio for each majorproduct or product group. Each portfolio would contain

all the initiatives that help thatparticular product or product group contribute to the

success of the enterprise business3. The Portfolio ManagerThis is a new role for

organizations that embrace a portfolio management approach. Aportfolio manager is

responsible for continuing oversight of the contents within aportfolio. If you have several

portfolios within your portfolio structure, then you will likelyneed a portfolio manager for

each one. The exact range of responsibilities (andauthority) will vary from one

organization to another, but the basics are as follows: • One portfolio manager oversees

one portfolio. • The portfolio manager provides day-to-day oversight. • The portfolio

manager periodically reviews the performance of, and conformance to expectations for,

initiatives within the portfolio. • The portfolio manager ensures that data is collected and

analyzed about each of the initiatives in the portfolio. • The portfolio manager enables

periodic decision making about the future direction of individual initiatives.4. Portfolio

Reviews and Decision MakingAs initiatives are executed, the organization should conduct

periodic reviews of actual(versus planned) performance and conformance to original

expectations. Typically,organization managers specify the frequency and contents for

these periodic reviews,and individual portfolio managers oversee their planning and

execution. The reviewsshould be multi-dimensional, including both tactical elements (e.g.,adherence to plan,budget, and resource allocation) and strategic elements (e.g., support

for businessstrategy goals and delivery of expected organizational benefits).A significant

aspect of oversight is setting multiple decision points for each initiative, sothat managers

can periodically evaluate data and decide whether to continue the work. 24

25.25. Projectsformba.blogspot.comThese "continue/change/discontinue" decisions should

be driven by an understanding(developed via the periodic reviews) of a given initiatives

continuing value, expectedbenefits, and strategic contribution, Making these decisions at

multiple points in theinitiatives lifecycle helps to ensure that managers will continually

examine and assesschanging internal and external circumstances, needs, and

performance.5. GovernanceImplementing portfolio management practices in anorganization is a transformationeffort that typically involves developing new capabilities to

address new work efforts,defining (and filling) new roles to identify portfolios (collections

of work to be done), anddelineating boundaries among work efforts and collections.

Implementing portfoliomanagement also requires creating a structure to provide planning,

continuing direction,and oversight and control for all portfolios and the initiatives they

encompass. That iswhere the notion of governance comes into play. The IBM view of

governance is:An abstract, collective term that defines and contains a framework for

organization,exercise of control and oversight, and decision-making authority, and within

whichactions and activities are legitimately and properly executed; together with the

definitionof the functions, the roles, and the responsibilities of those who exercise thisoversightand decision-making.Portfolio management governance involves multiple



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dimensions, including: • Defining and maintaining an enterprise business strategy. •

Defining and maintaining a portfolio structure containing all of the organizations initiatives

(programs, projects, etc.). • Reviewing and approving business cases that propose the

creation of new initiatives. • Providing oversight, control, and decision-making for all

ongoing initiatives. • Ownership of portfolios and their contents. 25

26.26. Projectsformba.blogspot.comEach of these dimensions requires an owner -- either an

individual or a collective -- todevelop and approve plans, continuously adjust direction,

and exercise control throughperiodic assessment and review of conformance to

expectations.A good governance structure decomposes both the types of work and the

authority toplan and oversee work. It defines individual and collective roles, and links

them to anauthority scheme. Policies that are collectively developed and agreed upon

provide aframework for the exercise of governance. The complexities of governance

structuresextend well beyond the scope of this article. Many organizations turn to experts

for helpin this area because it is so critical to the success of any business transformation

effortthat encompasses portfolio management. For now, suffice it to say that it is

worthinvesting time and effort to create a sound and flexible governance structure before

youattempt to implement portfolio management practices.6. Portfolio management

essentialsEvery practical discipline is based on a collection of fundamental concepts that

peoplehave identified and proven (and sometimes refined or discarded) through

continuousapplication. These concepts are useful until they become obsolete, supplanted

bynewer and more effective ideas.For example, in Roman times, engineers discovered

that if the upstream supports of abridge were shaped to offer little resistance to the

current of a stream or river, theywould last longer. They applied this principle all across

the Roman Empire. Then, in themiddle Ages, engineers discovered that such supports

would last even longer if theirdownstream side was also shaped to offer little resistance tothe current. So thatbecame the new standard for bridge construction.Portfolio

management, like bridge-building, is a discipline, and a number of authors

andpractitioners have documented fundamental ideas about its exercise. Recently,

basedon our experiences with clients who have implemented portfolio management

practicesand on our research into the discipline, we have started to shape an IBM view

offundamental ideas around portfolio management. We are beginning to express this

view 26

27.27. Projectsformba.blogspot.comas a collection of "essentials" that are, in turn, grouped

around a small collection ofportfolio management themes. OBJECTIVES OF

PORTFOLIO MANAGEMENT The basic objective of Portfolio Management is tomaximize yield and minimize risk. The other objectives are as follows: a) Stability of

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

the stability of purchasing power of income. b) Capital Growth: Capital appreciation has

become an important investment principle. Investors seek growth stocks which provide a

very large capital appreciation by way of rights, bonus and appreciation in the market

price of a share. c) Liquidity: An investment is a liquid asset. It can be converted into cash

with the help of a stock exchange. Investment should be liquid as well as marketable. The

portfolio should contain a planned proportion of high-grade and readily salable

investment. d) Safety: safety means protection for investment against loss under

reasonably variations. In order to provide safety, a careful review of economic and

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industry trends is necessary. In other words, errors in portfolio are unavoidable and it

requires extensive diversification. 27

28.28. Projectsformba.blogspot.com e) Tax Incentives: Investors try to minimize their tax

liabilities from the investments. The portfolio manager has to keep a list of such

investment avenues along with the return risk, profile, tax implications, yields and other

returns There are three goals of portfolio management: 1. Maximize the value of the

portfolio 2. Seek balance in the portfolio 3. Keep portfolio projects strategically alignedIt

provides a set of portfolio management tools to help achieve these goals. Withmultiple

business units, product lines or types of development, we recommend astrategic

allocation process based on the business plan. The Master ProjectSchedule provides a

summary of all-active as well as proposed projects andclassifies them by status (active,

proposed, on-hold) and by businessunit/product line to align projects with the strategic

allocation. The Master ProjectSchedule also provides additional portfolio information to

prioritize projects usingeither a scorecard method or the development productivity index

(DPI *). Inaddition to this prioritization, PD-Trek provides a Risk-Reward Bubble Chart

anda Project Type Pie Chart to assure balance. A Product or Technology Roadmap 28

29.29. Projectsformba.blogspot.comtemplate is provided to help visualize platform and

technology relationships toassure critical project relationships are not overlooked with this

prioritization. Thiswill allow management to develop a balanced approach to selecting

andcontinuing with the appropriate mix of projects to satisfy the three goals. 29

30.30. Projectsformba.blogspot.com FUNCTIONS OF PORTFOLIO MANAGEMENTThe

basic purpose of portfolio management is to maximize yield and minimize risk.Every

investor is risk averse. In order to diversify the risk by investing into varioussecurities

following functions are required to be performed.The functions undertaken by the

portfolio management are as follows: 1. To frame the investment strategy and select aninvestment mix to achieve the desired investment objective; 2. To provide a balanced

portfolio which not only can hedge against the inflation but can also optimize returns with

the associated degree of risk; 3. To make timely buying and selling of securities; 4. To

maximize the after-tax return by investing in various taxes saving investment instruments.

ELEMENTS OF PORTFOLIO MANAGEMENT:Portfolio management is on-going process

involving the following basictasks:¬ Identification of the investor’s objectives, constraints

and preferences.¬ ¬ Strategies are to be developed and implemented in tune with

investment policy formulated.¬ Review and monitoring of the performance of the

portfolio.¬ Finally the evaluation of the portfolio. 30

31.31. Projectsformba.blogspot.com PROSPECTS OF POTFOLIO MANAGEMENT⇒ Atpresent, there are a very few agencies which render this type of services in an organized

and professional way.⇒ However, their share in the total volume is very small.⇒ There is

no constraint on the demand for this type of financial service as every entity would be

saving and investing and interested in optimizing the rate of return.⇒ The size of capital

market is increasing.⇒ There is an increase in the number of stock exchanges.⇒ New

instruments are being introduced in the capital market.⇒ The equity cult is spreading in

the interiors and rural areas.⇒ The percentage of investment of the household savings is

bound to go up.⇒ It is conservatively estimated that during the eighth plan resources to

the tune of over Rs.50000crore will be mobilized through the stock market.⇒ India today

has 20 million investors, as compared to 2 million in 1980. . 31

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32.32. Projectsformba.blogspot.com STEPS IN PORTFOLIO MANAGEMENT Performance

Portfolio Evaluation Revision Portfolio Execution STEPS Selection of Asset Mix

Identification Portfolio Of Strategy Objectives 1) IDENTIFICATION OF THE OBJECTIVES

Ξ The starting point in this process is to determine the characteristics of the various

investments and then matching them with the individuals need and preferences.Ξ All the

personal investing is designed in order to achieve certain objectives. 32

33.33. Projectsformba.blogspot.comΞ These objectives may be tangible such as buying a

car, house etc. and intangible objectives such as social status, security etc.Ξ Similarly,

these objectives may be classified as financial or personal objectives.Ξ Financial

objectives are safety, profitability and liquidity.Ξ Personal or individual objectives may be

related to personal characteristics of individuals such as family commitments, status,

depends, educational requirements, income, consumption and provision for retirement

etc. 2) FORMULATION OF PORTFOLIO STRATEGYΞ The aspect of Portfolio

Management is the most important element of proper portfolio investment and

speculation.Ξ While planning, a careful review should be conducted about the financial

situation and current capital market conditions.Ξ This will suggest a set of investment

and speculation policies to be followed.Ξ The statement of investment policies includes

the portfolio objectives, strategies and constraints.Ξ Portfolio strategy means plan or

policy to be followed while investing in different types of assets.Ξ There are different

investment strategies.Ξ They require changes as time passes, investor’s wealth

changes, security price change, investor’s knowledge expands.Ξ Therefore, the optional

strategic asset allocation also changes.Ξ The strategic asset allocation policy would call

for broad diversification through an indexed holding of virtually all securities in the asset

class. 33

34.34. Projectsformba.blogspot.com 3) SELECTION OF ASSET MIXΞ The most importantdecision in portfolio management is selection of asset mix.Ξ It means spreading out

portfolio investment into different asset classes like bonds, stocks, mutual funds etc.Ξ In

other words selection of asset mix means investing in different kinds of assets and

reduces risk and volatility and maximizes returns in investment portfolio.Ξ Selection of

asset mix refers to the percentage to the invested in various security classes.Ξ The

security classes are simply the type of securities as under: » money market instrument »

fixed income security » equity shares » real estate investment » international securitiesΞ

Once the objective of the portfolio is determined the securities to be included in the

portfolio must be selected.Ξ Normally the portfolio is selected from a list of high-quality

bonds that the portfolio manager has at hand.Ξ The portfolio manager has to decide thegoals before selecting the common stock.Ξ The goal may be to achieve pure growth,

growth with some income or income only. Once the goal has been selected, the portfolio

manager can select the common stocks. 34

35.35. Projectsformba.blogspot.com 3) PORTFOLIO EXECUTION:Ξ The process of

portfolio management involves a logical set of steps common to any decision, plan,

implementation and monitor.Ξ Applying this process to actual portfolios can be complex.

Ξ Therefore, in the execution stage, three decisions need to be made, if the percentage

holdings of various asset classes are currently different from desired holdings.Ξ The

portfolio than, should be rebalanced. If the statement of investment policy requires pure

investment strategy, this is only thing, which is done in the execution stage.Ξ However,

many portfolio managers engage in the speculative transactions in the belief that such

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transactions will generate excess risk-adjusted returns.Ξ Such speculative transactions

are usually classified as timing or selection decisions.Ξ Timing decisions over or under

weight various asset classes, industries or economic sectors from the strategic asset

allocation.Ξ Such timing decisions are known as tactical asset allocation and selection

decision deals with securities within a given asset class, industry group or economic

sector.Ξ The investor has to begin with periodically adjusting the asset mix to the desired

mix, which is known as strategic asset allocation.Ξ Then the investor or portfolio

manager can make any tactical asset allocation or security selection decision.5)

PORTFOLIO REVISION 35

36.36. Projectsformba.blogspot.comΞ Portfolio management would be an incomplete

exercise without periodic review.Ξ The portfolio, which is once selected, has to be

continuously reviewed over a period of time and if necessary revised depending on the

objectives of investor.Ξ Thus, portfolio revision means changing the asset allocation of a

portfolio.Ξ Investment portfolio management involves maintaining proper combination of

securities, which comprise the investor’s portfolio in a manner that they give maximumreturn with minimum risk.Ξ For this purpose, investor should have continuous review and

scrutiny of his investment portfolio.Ξ Whenever adverse conditions develop, he can

dispose of the securities, which are not worth.Ξ However, the frequency of review

depends upon the size of the portfolio, the sum involved, the kind of securities held and

the time available to the investor.Ξ The review should include a careful examination of

investment objectives, targets for portfolio performance, actual results obtained and

analysis of reason for variations.Ξ The review should be followed by suitable and timely

action.Ξ There are techniques of portfolio revision.Ξ Investors buy stock according to

their objectives and return-risk framework.Ξ These fluctuations may be related to

economic activity or due to other factors.Ξ Ideally investors should buy when prices arelow and sell when prices rise to levels higher than their normal fluctuations.Ξ The

investor should decide how often the portfolio should be revised.Ξ If revision occurs to

often, transaction and analysis costs may be high.6) PORTFOLIO PERFORMANCE

EVALUATION: 36

37.37. Projectsformba.blogspot.comΞ Portfolio management involves maintaining a proper

combination of securities, which comprise the investor’s portfolio in a manner that they

give maximum return with minimum risk.Ξ The investor should have continues review

and scrutiny of his investment portfolio.Ξ These rates of return should be based on the

market value of the assets of the fund.Ξ Complete evaluation of the portfolio

performance must include examining a measure of the degree of risk taken by the fund.ΞA portfolio manager, by evaluating his own performance can identify sources of strength

or weakness.Ξ It can be viewed as a feedback and control mechanism that can make

the investment management process more effective.Ξ Good performance in the past

might have resulted from good luck, in which case such performance may not be

expected to continue in the future.Ξ On the other hand, poor performance in the past

might have been result of bad luck.Ξ Therefore, the first task in performance evaluation

is to determine whether past performance was good or poor.Ξ Then the second task is to

determine whether such performance was due to skill or luck.Ξ Good performance in the

past may have resulted from the actions of a highly skilled portfolio manager.Ξ The

performance of portfolio should be measured periodically, preferably once in a month or a



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quarter.Ξ The performance of an individual stock should be compared with the overall

performance of the market. CHAPTER6 37

38.38. Projectsformba.blogspot.com TYPES OF PORTFOLIO MANAGEMENT:The two

types of portfolio management services are available o the investors: Discretionary

portfolio Non-discretionary Management portfolio ManagementThe Discretionary portfolio

management services (DPMS):¬ In this type of services, the client parts with his money

in favor of manager, who in return, handles all the paper work, makes all the decisions

and gives a good return on the investment and for this he charges a certain fees.¬ In this

discretionary PMS, to maximize the yield, almost all portfolio managers parks the funds in

the money market securities such as overnight market, 182 days treasury bills and 90

days commercial bills.¬ Normally, return on such investment varies from 14 to 18 per

cent, depending on the call money rates prevailing at the time of investment. 2. The Non-

discretionary portfolio management services:¬ The manager function as a counselor,

but the investor is free to accept or reject the manager’s advice; the manager for a

services charge also undertakes the paper work. The manager concentrates on stockmarket instruments with a portfolio tailor made to the risk taking ability of the

investor.EQUITY PORTFOLIO MANAGEMENT. 38

39.39. Projectsformba.blogspot.comΦ It is logical that the expected return of a portfolio

should depend on the expected return of the security contained in it.Φ There are two

approaches to the selection of equity portfolio.Φ One is technical analysis and the other

is fundamental analysis.Φ Technical analysis assumes that the price of a stock depends

on supply and demand in the stock market.Φ All financial and market information of

given security is already reflected in the market price.Φ Charts are drawn to identify price

movements of a given security over a period of time.Φ These charts enable the investors

to predict the future movement of the price of security.Φ Equity portfolio is a riskyportfolio, but at the same time the return is also higher.Φ Equity portfolio provides

highest returns.Φ An efficient portfolio manager can obviously give more weight age to

fundamental analysis than the technical analysis.Φ The fundamental analysis includes

the study of ratio analysis, past and present track record of the company, quality of

management, government policies etc.Φ There may be several combinations of

investment portfolio. BONDS PORTFOLIO MANAGEMENT 39

40.40. Projectsformba.blogspot.comΦ The individual investors can invest in bond portfolio.

Φ The portfolio can be spared over variety of securities.Φ Investment in bond is less

risky and safe as compared to equity investment.Φ However, the return on bond is very

low.Φ There are no much fluctuations in bond prices.Φ Therefore, there is no capitalappreciation in this case.Φ Some bonds are tax saving which help the investor to reduce

his tax liability.Φ There is no much liquidity in bonds, investment in bond portfolio is less

risky and safe but, return is reasonable, low liquidity and tax saving are some of the more

important features of bond portfolio investment.Φ However, it is suitable for normal

investors for getting average return over their investment.Φ Bond portfolio includes

different types of bond, tax free bonds and taxable bonds.Φ Tax free bonds are issued by

public sector undertaking or Government on which interest s compounded half yearly and

payable accordingly.Φ They have a maturity of 7 to 10 years with the facility for buyback.

Φ The tax free bonds means the interest income on these bonds is notΦ Therefore, the

interest rates on these bonds are very low. ADVANTAGES OF PORTFOLIO

MANAGEMENT 40



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41.41. Projectsformba.blogspot.com Individuals will benefits immensely by taking portfolio

management services for the following reason: - a) Whatever may be the status of the

capital market; over the long period capital markets have given an excellent return when

compared to other forms of investment. The return from bank deposits, units etc., is much

less than from stock market. b) The Indian stock markets are very complicated. Though

there are thousands of companies that are listed only a few hundred, which have the

necessary liquidity. It is impossible for any individual whishing to invest and sit down and

analyses all these intricacies of the market unless he does nothing else. c) Even if an

investor is able to visualize the market, it is difficult to investor to trade in all the major

exchanges of India, look after his deliveries and payments. This is further complicated by

the volatile nature of our markets, which demands constant reshuffling of port 41

42.42. Projectsformba.blogspot.com IMPORTANCE OF PORTFOLIO MANAGEMENT⇒ In

the past one-decade, significant changes have taken place in the investment climate in

India.⇒ Portfolio management is becoming a rapidly growing area serving a broad array

of investors- both individual and institutional-with investment portfolios ranging in asset

size from thousands to cores of rupees.⇒ It is becoming important because of: i.

Emergence of institutional investing on behalf of individuals. A number of financial

institutions, mutual funds, and other agencies are undertaking the task of investing

money of small investors, on their behalf. ii. Growth in the number and the size of

invisible funds–a large part of household savings is being directed towards financial

assets. iii. Increased market volatility- risk and return parameters of financial assets are

continuously changing because of frequent changes in governments industrial and fiscal

policies, economic uncertainty and instability. iv. Greater use of computers for processing

mass of data. v. Professionalization of the field and increase use of analytical methods

(e.g. quantitative techniques) in the investment decision-making, and vi. Larger direct andindirect costs of errors or shortfalls in meeting portfolio objectives- increased competition

and greater scrutiny by investors. 42

43.43. Projectsformba.blogspot.com CHAPTER7PERSONS INVOLVED IN PORTFOLIO

MANAGEMENT 1) INVESTOR: Are the people who are interested in investing their

funds? 2) PORTFOLIO MANAGERS: Is a person who is in the wake of a contract

agreement with a client, advices ordirects or undertakes on behalf of the clients, the

management or distribution ormanagement of the funds of the client as the case may be.

3) DISCRETIONARY PORTFOLIO MANAGER: Means a manager who exercise under a

contract relating to a portfoliomanagement exercise any degree of discretion as to the

investment ormanagement of portfolio or securities or funds of clients as the case maybe. Therelationship between an investor and portfolio manager is of a highly

interactivenature. The portfolio manager carries out all the transactions pertaining to

theinvestor under the power of attorney during the last two decades, and

increasingcomplexity was witnessed in the capital market and its trading procedures

inthis context a key (uninformed) investor formed ) investor found himself in atricky

situation , to keep track of market movement ,update his knowledge, yetstay in the capital

market and make money , therefore in looked forward toresuming help from portfolio

manager to do the job for him . The portfoliomanagement seeks to strike a balance

between risk’s and return. The generally rule in that greater risk more of the profits but

S.E.B.I. in itsguidelines prohibits portfolio managers to promise any return to investor. 43



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44.44. Projectsformba.blogspot.comPortfolio management is not a substitute to the inherent

risks associated withequity investment. QUALITIES OF PORTFOLIO MANAGER 1.

Sound general knowledge:¬ Portfolio management is an existing and challenging job.¬

He has to work in an extremely uncertain and conflicting environment.¬ In the stock

market every new piece of information affects the value of the securities of different

industries in a different way.¬ He must be able to judge and predict the effects of the

information he gets.¬ He must have sharp memory, alertness, fast intuition and self-

confidence to arrive at quick decisions. 2. Analytical Ability:¬ He must have his own

theory to arrive at the value of the security.¬ An analysis of the security’s values,

company, etc. is continues job of the portfolio manager.¬ A good analyst makes a good

financial consultant. 44

45.45. Projectsformba.blogspot.com¬ The analyst can know the strengths, weakness,

opportunities of the economy, industry and the company. 45

46.46. Projectsformba.blogspot.com 3. Marketing skills:¬ He must be good salesman.¬ He

has to convince the clients about the particular security.¬ He has to compete with the

Stock brokers in the stock market.¬ In this Marketing skills help him a lot. 4. Experience:

¬ In the cyclical behavior of the stock market history is often repeated, therefore the

experience of the different phases helps to make rational decisions.¬ The experience of

different types of securities, clients, markets trends etc. makes a perfect professional

manager. 46

47.47. Projectsformba.blogspot.com FACTORS AFFECTING THE INVESTORThere may be

many reasons why the portfolio of an investor may have to be changed.The portfolio

manager always remains alert and sensitive to the changes in therequirements of the

investor. The following are the some factors affecting the investor,which make it

necessary to change the portfolio composition. 1) Change in Wealth¬ According to theutility theory, the risk taking ability of the investor increases with increase in wealth.¬ It

says that people can afford to take more risk as they grow rich and benefit from its

reward.¬ But, in practice, while they can afford, they may not be willing.¬ As people get

rich, they become more concerned about losing the newly got riches than getting richer.

¬ So they may become conservative and vary risk- averse.¬ The fund manager should

observe the changes in the attitude of the investor towards risk and try to understand

them in proper perspective.¬ If the investor turns to be conservative after making huge

gains, the portfolio manager should modify the portfolio accordingly. 47

48.48. Projectsformba.blogspot.com 2) Change in the Time Horizon¬ As time passes, some

events take place that may have an impact on the time horizon of the investor.¬ Births,deaths, marriages, and divorces – all have their own impact on the investment horizon.¬

There are, of course, many other important events in the person’s life that may force a

change in the investment horizon.¬ The happening or the non-happening of the events

will naturally have its effect.¬ For example, a person may have planned for an early

retirement, considering his delicate health.¬ But, after turning 55 years of age, if his

health improves, he may not take retirement. 3) Change in Liquidity Needs¬ Investors

very often ask the portfolio manager to keep enough scope in the portfolio to get some

cash as and the

corporate financa

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