INTRODUCTION

From The Rational Edge: The first in a new series of articles on

portfolio management, this introduction expresses IBM’s viewpoint

about the foundations and essentials of portfolio management, and

discusses ideas and assets that support and enable effective portfolio

management practices.

A good way to begin understanding what portfolio management is

(and is not) may be to define the term portfolio. In a business context,

we can look to the mutual fund industry to explain the term's origins.

Morgan Stanley's Dictionary of Financial Terms offers the following

explanation:

If you own more than one security, you have an investment portfolio.

You build the portfolio by buying additional stocks, bonds, mutual

funds, or other investments. Your goal is to increase the portfolio's

value by selecting investments that you believe will go up in price.

According to modern portfolio theory, you can reduce your investment

risk by creating a diversified portfolio that includes enough different

types, or classes, of securities so that at 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.

Over time, other industry sectors have adapted and applied these

ideas to other types of "investments," including the following:

Application portfolio management: This refers to the practice of

managing an entire group or major subset of software applications

within a portfolio. Organizations regard these applications as

investments because they require development (or acquisition) costs

and incur continuing maintenance costs. Also, organizations must

constantly make financial decisions about new and existing software

applications, including whether 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 develop and sell into (logical) portfolios, organized by major

line-of-business or business segment. Such portfolios require

ongoing management decisions about what new products to develop

(to diversify investments and investment risk) and what existing

products to transform or retire (i.e., spin off or divest). Project or

initiative portfolio management, an initiative, in the simplest sense, is

a body of work with:

A specific (and limited) collection of needed results or 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 business segment, product, or product line. These efforts

are goal-driven; that is, they support major goals and/or components

of the enterprise's business strategy. Managers must continually

choose among competing initiatives (i.e., manage the organization's

investments), selecting those that best support and enable diverse

business goals (i.e., they diversify investment risk). They must also

manage their investments by providing continuing oversight and

decision-making about which initiatives to undertake, which to

continue, and which to reject or discontinue.

INTRODUCTION TO INDIAN BANK

A premier bank owned by the Government of India Established on 15th August 1907 as part of

the Swadeshi movement Serving the nation with a team of over 22000

dedicated staff Total Business crossed Rs. 76000 Crores as

on 31.03.2007 Operating Profit increased to Rs.1358.59

Crores as on 31.03.2007 Net Profit increased to Rs.759.77 Crores as

on 31.03.2007 Net worth improved to Rs.3621 Crores as on 31.03.2007 1476 Branches spread all over India

International Presence Overseas branches in Singapore and Colombo including a

Foreign Currency Banking Unit at Colombo 229 Overseas Correspondent banks in 69 countries

Diversified banking activities - 3 Subsidiary companies Indbank Merchant Banking Services Ltd IndBank Housing Ltd. IndFund Management Ltd

A front runner in specialized banking 88 Forex Authorized branches inclusive of 3 Specialized

Overseas Branches at Chennai , Bangalore and Mumbai exclusively for handling forex transactions arising out of Export, Import, Remittances and Non Resident Indian business

5 specialized NRI Branches exclusively for servicing Non-Resident Indians

1 Small Scale Industries Branch extending finance exclusively to SSI units

Leadership in Rural Development

Loan products like Artisan Card, Kisan Card, Kisan Bike Scheme, Yuva Kisan Vidya Nidhi Yojana to meet diverse credit needs of farmers.

Provision of technical assistance and project reports in Agriculture to entrepreneurs through Agricultural Consultancy & Technical Services (ACTS)

2 Specialised Agricultural Finance branches to finance High Tech Agricultural Projects.

A pioneer in introducing the latest technology in Banking 100% Business Computerisation 168 Centres throughout the country covered under 'Anywhere

Banking' Core Banking Solution(CBS) in 1204 branches and 77

extension counters. 429 connected Automated Teller Machines(ATM) in 99

cities/towns 24 x 7 Service through 8500 ATMs under shared network Internet and Tele Banking services to all Core Banking

customers e-payment facility for Corporate customers Cash Management Services Depository Services Reuter Screen, Telerate, Reuter Monitors, Dealing System

provided at all Overseas Branches I B Credit Card Launched I B Gold Coin

Indian Bank enters into a Strategic Alliance with Pnb Principal

Chennai, 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 optimizing the 3 Ps, People, Process and Products to give maximum advantage to its customers and to face the market competition by exploiting the emerging opportunities.

Indian Bank today announced a strategic alliance with Pnb Principal Insurance Advisory Co., Pvt. Ltd. in the insurance advisory business and Pnb Principal Financial Planners Pvt. Ltd. in the financial planning business. As the alliance will enable access to the Financial products of 30 Insurance companies both life and non-life and an equal number of Investment solutions to the Bank’s Customers under one roof, the Bank’s emphasis 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 deliver risk management solutions to Indian Bank customers through the Insurance advisory route. The solutions offered will include risk assessment, insurance portfolio analysis & placement, insurance portfolio 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 Financial Planners through its extensive branch network. Pnb Principal Financial Planners will provide support in the area of financial planning, investment advisory, research, systems and business development to Indian Bank. The strategic

alliance will enable customers of Indian Bank to access a wide range of superior investment solutions.

Announcing the partnership with Indian Bank, Sanjay Sachdev, Country Manager-India, Principal International said, “Banks have currently emerged as the largest distribution channel for financial investment options. We are pleased to associate ourselves with Indian Bank. This partnership with Indian Bank will make a range of investment solutions more accessible to retail investors of Indian Bank.”

Dr. K.C. Chakrabarty, Chairman and Managing Director, Indian Bank said,” The alliance with Pnb Principal in the areas of Risk Management, Insurance and Investment will help in providing a One-stop solution to the 15 million strong customers of Indian Bank throughout the country. The Tie-up will help realize our cherished goal of making our Bank, “the best people to bank with”.

Elaborating, Mr. B Sambamurthy, Executive Director has said that this is a part of Bank’s mission to provide all financial products under one roof. This tie-up brings a paradigm shift from being an agent of Insurance Company to one of being a customer agent.

METHODOLOGY

Portfolio Management is used to select a portfolio of new product

development projects to achieve the following goals:

Maximize the profitability or value of the portfolio

Provide balance

Support the strategy of the enterprise

Portfolio Management is the responsibility of the senior management team

of an organization or business unit. This team, which might be called the

Product Committee, meets regularly to manage the product pipeline and

make decisions about the product portfolio. Often, this is the same group

that conducts the stage-gate reviews in the organization.

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

products, strategy approach, competitive emphasis, etc. The second step is to

understand the budget or resources available to balance the portfolio against.

Third, each project must be assessed for profitability (rewards), investment

requirements (resources), risks, and other 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

management process:

Heuristic models

Scoring techniques

Visual or mapping techniques

The earliest Portfolio Management techniques optimized projects'

profitability or financial returns using heuristic or mathematical models.

However, this approach paid little attention to balance or aligning the

portfolio to the organization's strategy. Scoring techniques weight and score

criteria to take into account investment requirements, profitability, risk and

strategic alignment. The shortcoming with this approach can be an over

emphasis on financial measures and an inability to optimize the mix of

projects. Mapping techniques use graphical presentation to visualize a

portfolio's balance. These are typically presented in the form of a two-

dimensional graph that shows the trade-off's or balance between two factors

such as risks vs. profitability, marketplace fit vs. product line coverage,

financial return vs. probability of success, etc.

The chart shown above provides a graphical view of the project portfolio

risk-reward balance. It is used to assure balance in the portfolio of projects -

neither too risky nor conservative and appropriate levels of reward for the

risk involved. The horizontal axis is Net Present Value; the vertical axis is

Probability of Success. The size of the bubble is proportional to the total

revenue generated over the lifetime sales of the product.

While this visual presentation is useful, it can't prioritize projects.

Therefore, some mix of these techniques is appropriate to support the

Portfolio Management Process. This mix is often dependent upon the

priority of the goals.

The recommended approach is to start with the overall business plan that

should define the planned level of R&:D investment, resources (e.g.,

headcount, etc.), and related sales expected from new products. With

multiple business units, product lines or types of development, we

recommend a strategic allocation process based on the business plan. This

strategic allocation should apportion the planned R&D investment into

business units, product lines, markets, geographic areas, etc. It may also

breakdown the R&D investment into types of development, e.g., technology

development, platform development, new products, and

upgrades/enhancements/line extensions, etc.

Once this is done, then a portfolio listing can be developed including the

relevant portfolio data. We favor use of the development productivity index

(DPI) or scores from the scoring method. The development productivity

index is calculated as follows: (Net Present Value x Probability of Success) /

Development Cost Remaining. It factors the NPV by the probability of both

technical and commercial success. By dividing this result by the

development cost remaining, it places more weight on projects nearer

completion and with lower uncommitted costs. The scoring method uses a

set of criteria (potentially different for each stage of the project) as a basis

for scoring or evaluating each project. An example of this scoring method is

shown with the worksheet below.

Weighting factors can be set for each criterion. The evaluators on a Product

Committee score projects (1 to 10, where 10 are best). The worksheet

computes the average scores and applies the weighting factors to compute

the overall score. The maximum weighted score for a project is 100.

This portfolio list can then be ranked by either the development

priority index or the score. An example of the portfolio list is shown

below and the second illustration shows the category summary for

the scoring method.

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

determine where the cutoff is based on the business plan and the planned

level of investment of the resources avaialable. This subset of the high

priority projects then needs to be further analyzed and checked. The first

step is to check that the prioritized list reflects the planned 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-reward balance is commonly checked using the bubble chart

shown earlier. A final check is to analyze product and technology

roadmaps for project relationships. For example, if a lower priority

platform project was omitted from the protfolio priority list, the

subsequent higher priority projects that depend on that platform or

platform technology would be impossible to execute unless that

platform project were included in the portfolio priority list.

Finally, this balanced portfolio that has been developed is checked

against the business plan as shown below to see if the plan goals

have been achieved - projects within the planned R&D investment

and resource levels and sales that have met the goals.

With the significant investments required to develop new products

and the risks involved, Portfolio Management is becoming an

increasingly important tool to make strategic decisions about product

development and the investment of company resources. In many

companies, current year revenues are increasingly based on new

products developed in the last one to three years.

MEANING OF PORTFOLIO MANAGEMENT

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 to suit 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.

Portfolio management can be having institutional, for

example, Unit Trust, Mutual Funds, Pension Provident

and Insurance Funds, Investment Companies and non-

Investment Companies.

Institutional e.g. individual, Hindu undivided families, Non-

investment Company’s etc.

The large institutional investors avail services of

professionals.

A professional, who manages other people’s or

institution’s investment portfolio with the object of

profitability, growth and risk minimization, is known as a

portfolio manager.

The portfolio manager performs the job of security

analyst.

In case of medium and large sized organization, job

function of portfolio manager and security analyst are

separate.

Portfolios are built to suit the return expectations and the

risk appetite of the investor.

INVESTMENT PORTFOLIO MANAGEMENT AND

PORTFOLIO THEORY

Portfolio theory is an investment approach developed by University of

Chicago economist 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, as measured

statistically, for their investment portfolios.

Markowitz described how to combine assets into efficiently diversified

portfolios. It was his position that a portfolio's risk could be reduced

and the expected rate of return could be improved if investments

having dissimilar price movements were combined. In other words,

Markowitz explained how to best assemble a diversified portfolio and

proved that such a portfolio would likely do well.

There are two types of Portfolio Strategies:

A. Passive Portfolio Strategy

A strategy that involves minimal expectation input, and instead relies

on diversification to match the performance of some market index.

B. Active Portfolio Strategy

A strategy that uses available information and forecasting techniques

to seek a better performance than a portfolio that is simply diversified

broadly

BASIC CONCEPTS AND COMPONENTS FOR

PORTFOLIO MANAGEMENT

Now that we understand some of the basic dynamics and inherent

challenges organizations face in executing a business strategy via

supporting initiatives, let's look at some basic concepts and

components of portfolio management practices.

1.The Portfolio

First, we can now introduce a definition of portfolio that relates more

directly to the context of our preceding discussion. In the IBM view, a

portfolio is: One of a number of mechanisms, constructed to actualize

significant elements in the Enterprise Business Strategy.

It contains a selected, approved, and continuously evolving, collection

of Initiatives which are aligned with the organizing element of the

Portfolio, and, which contribute to the achievement of goals or goal

components identified in the Enterprise Business Strategy. The basis

for constructing a portfolio should reflect the enterprise's particular

needs. For example, you might choose to build a portfolio around

initiatives for a specific product, business segment, or separate

business unit within a multinational organization.

2.The Portfolio Structure

As 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 results boundaries, and with

business components. If you have a product-oriented portfolio

structure, for example, then you would have a separate portfolio for

each major product or product group. Each portfolio would contain all

the initiatives that help that particular product or product group

contribute to the success of the enterprise business strategy.

3.The Portfolio Manager

This is a new role for organizations that embrace a portfolio

management approach. A portfolio manager is responsible for

continuing oversight of the contents within a portfolio. If you have

several portfolios within your portfolio structure, then you will likely

need a portfolio manager for each one. The exact range of

responsibilities (and authority) will vary from one organization to

another,1 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 Making

As 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 reviews

should be multi-dimensional, including both tactical elements (e.g.,

adherence to plan, budget, and resource allocation) and strategic

elements (e.g., support for business strategy goals and delivery of

expected organizational benefits).

A significant aspect of oversight is setting multiple decision points for

each initiative, so that managers can periodically evaluate data and

decide whether to continue the work. These

"continue/change/discontinue" decisions should be driven by an

understanding (developed via the periodic reviews) of a given

initiative's continuing value, expected benefits, and strategic

contribution, Making these decisions at multiple points in the

initiative's lifecycle helps to ensure that managers will continually

examine and assess changing internal and external circumstances,

needs, and performance.

5. Governance

Implementing portfolio management practices in an organization is a

transformation effort 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), and

delineating boundaries among work efforts and collections.

Implementing portfolio management also requires creating a structure

to provide planning, continuing direction, and oversight and control for

all portfolios and the initiatives they encompass. That is where 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 which actions and activities are legitimately and

properly executed; together with the definition of the functions, the

roles, and the responsibilities of those who exercise this oversight

and decision-making.

Portfolio management governance involves multiple dimensions,

including:

Defining and maintaining an enterprise business strategy.

Defining and maintaining a portfolio structure containing all of

the organization's 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.

Each of these dimensions requires an owner -- either an individual or

a collective -- to develop and approve plans, continuously adjust

direction, and exercise control through periodic assessment and

review of conformance to expectations.

A good governance structure decomposes both the types of work and

the authority to plan and oversee work. It defines individual and

collective roles, and links them to an authority scheme. Policies that

are collectively developed and agreed upon provide a framework for

the exercise of governance. The complexities of governance

structures extend well beyond the scope of this article. Many

organizations turn to experts for help in this area because it is so

critical to the success of any business transformation effort that

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

is worth investing time and effort to create a sound and flexible

governance structure before you attempt to implement portfolio

management practices.

6.Portfolio management essentials

Every practical discipline is based on a collection of fundamental

concepts that people have identified and proven (and sometimes

refined or discarded) through continuous application. These concepts

are useful until they become obsolete, supplanted by newer and more

effective ideas.

For example, in Roman times, engineers discovered that if the

upstream supports of a bridge were shaped to offer little resistance to

the current of a stream or river, they would last longer. They applied

this principle all across the Roman Empire. Then, in the Middle Ages,

engineers discovered that such supports would last even longer if

their downstream side was also shaped to offer little resistance to the

current. So that became the new standard for bridge construction.

Portfolio management, like bridge-building, is a discipline, and a

number of authors and practitioners have documented fundamental

ideas about its exercise. Recently, based on our experiences with

clients who have implemented portfolio management practices and

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

view of fundamental ideas around portfolio management. We are

beginning to express this view as a collection of "essentials" that are,

in turn, grouped around a small collection of portfolio management

themes.

For example, one of these themes is initiative value contribution. It

suggests that the value of an initiative (i.e., a program or project)

should be estimated and approved in order to start work, and then

assessed periodically on the basis of the initiative's contribution to the

goals and goal components in the enterprise business strategy.

These assessments determine (in part) whether the initiative warrants

continued support.

OBJECTIVES OF PORTFOLIO MANAGEMENT

The basic objective of Portfolio Management is to maximize 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 industry trends is

necessary. In other words, errors in portfolio are

unavoidable and it requires extensive diversification.

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 aligned

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

With multiple business units, product lines or types of development, we

recommend a strategic allocation process based on the business plan. The

Master Project Schedule provides a summary of all-active as well as

proposed projects and classifies them by status (active, proposed, on-hold)

and by business unit/product line to align projects with the strategic

allocation. The Master Project Schedule also provides additional portfolio

information to prioritize projects using either a scorecard method or the

development productivity index (DPI *). In addition to this prioritization,

PD-Trek provides a Risk-Reward Bubble Chart and a Project Type Pie Chart

to assure balance. A Product or Technology Roadmap template is provided

to help visualize platform and technology relationships to assure critical

project relationships are not overlooked with this prioritization. This will

allow management to develop a balanced approach to selecting and

continuing with the appropriate mix of projects to satisfy the three goals.

FUNCTIONS OF PORTFOLIO MANAGEMENT

The 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 various securities 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 an investment 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.

STEPS IN PORTFOLIO MANAGEMENT

STEPS

Identification Of

Objectives

Portfolio Strategy

Selection of Asset Mix

PortfolioExecution

Portfolio Revision

Performance Evaluation

1) IDENTIFICATION OF THE OBJECTIVES

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.

All the personal investing is designed in order to

achieve certain objectives.

These objectives may be tangible such as buying a car,

house etc. and intangible objectives such as social status,

security etc.

Similarly, these objectives may be classified as financial

or personal objectives.

Financial objectives are safety, profitability and liquidity.

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 STRATEGY

The aspect of Portfolio Management is the most important

element of proper portfolio investment and speculation.

While planning, a careful review should be conducted

about the financial situation and current capital market

conditions.

This will suggest a set of investment and speculation

policies to be followed.

The statement of investment policies includes the portfolio

objectives, strategies and constraints.

Portfolio strategy means plan or policy to be followed while

investing in different types of assets.

There are different investment strategies.

They require changes as time passes, investor’s wealth

changes, security price change, investor’s knowledge

expands.

Therefore, the optional strategic asset allocation also

changes.

The strategic asset allocation policy would call for broad

diversification through an indexed holding of virtually all

securities in the asset class.

3) SELECTION OF ASSET MIX

The most important decision in portfolio management is

selection of asset mix.

It means spreading out portfolio investment into different

asset classes like bonds, stocks, mutual funds etc.

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.

Selection of asset mix refers to the percentage to the

invested in various security classes.

The security classes are simply the type of securities as

under:

»money market instrument

» fixed income security

»equity shares

» real estate investment

» international securities

Once the objective of the portfolio is determined the

securities to be included in the portfolio must be selected.

Normally the portfolio is selected from a list of high-quality

bonds that the portfolio manager has at hand.

The portfolio manager has to decide the goals before

selecting the common stock.

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.

4) PORTFOLIO EXECUTION:

The process of portfolio management involves a logical

set of steps common to any decision, plan,

implementation and monitor.

Applying this process to actual portfolios can be complex.

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.

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.

However, many portfolio managers engage in the

speculative transactions in the belief that such

transactions will generate excess risk-adjusted returns.

Such speculative transactions are usually classified as

timing or selection decisions.

Timing decisions over or under weight various asset

classes, industries or economic sectors from the strategic

asset allocation.

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.

The investor has to begin with periodically adjusting the

asset mix to the desired mix, which is known as strategic

asset allocation.

Then the investor or portfolio manager can make any

tactical asset allocation or security selection decision.

5) PORTFOLIO REVISION Portfolio management would be an incomplete exercise

without periodic review. 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. Thus, portfolio revision means changing the asset

allocation of a portfolio.

Investment portfolio management involves maintaining

proper combination of securities, which comprise the

investor’s portfolio in a manner that they give maximum

return with minimum risk. For this purpose, investor should have continuous review

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

the securities, which are not worth. 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. The review should include a careful examination of

investment objectives, targets for portfolio performance,

actual results obtained and analysis of reason for

variations. The review should be followed by suitable and timely

action. There are techniques of portfolio revision. Investors buy stock according to their objectives and

return-risk framework. These fluctuations may be related to economic activity or

due to other factors. Ideally investors should buy when prices are low and sell

when prices rise to levels higher than their normal

fluctuations. The investor should decide how often the portfolio should

be revised.

If revision occurs to often, transaction and analysis costs

may be high. If revision is attempted too infrequently the benefits of

timing may be foregone. The important factor to take into consideration is, thus,

timing for revision of portfolio.

6) PORTFOLIO PERFORMANCE EVALUATION:

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.The investor should have continues review and scrutiny of his

investment portfolio.These rates of return should be based on the market value of

the assets of the fund.Complete evaluation of the portfolio performance must include

examining a measure of the degree of risk taken by the

fund.

A portfolio manager, by evaluating his own performance

can identify sources of strength or weakness.

It can be viewed as a feedback and control mechanism

that can make the investment management process more

effective.

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.

On the other hand, poor performance in the past might

have been result of bad luck.

Therefore, the first task in performance evaluation is to

determine whether past performance was good or poor.

Then the second task is to determine whether such

performance was due to skill or luck.

Good performance in the past may have resulted from the

actions of a highly skilled portfolio manager.

The performance of portfolio should be measured

periodically, preferably once in a month or a quarter.

The performance of an individual stock should be

compared with the overall performance of the market.

TYPES OF PORTFOLIO MANAGEMENT:

The two types of portfolio management services are available o the

investors:

1. The 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.

Discretionary portfolioManagement

Non-discretionary portfolio Management

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 stock market instruments

with a portfolio tailor made to the risk taking ability of the

investor.

EQUITY PORTFOLIO MANAGEMENT

It is logical that the expected return of a portfolio should

depend on the expected return of the security contained in it.

There are two approaches to the selection of equity portfolio.

One is technical analysis and the other is fundamental

analysis.

Technical analysis assumes that the price of a stock

depends on supply and demand in the stock market.

All financial and market information of given security is

already reflected in the market price.

Charts are drawn to identify price movements of a given

security over a period of time.

These charts enable the investors to predict the future

movement of the price of security.

Equity portfolio is a risky portfolio, but at the same time the

return is also higher.

Equity portfolio provides highest returns.

An efficient portfolio manager can obviously give more

weight age to fundamental analysis than the technical

analysis.

The fundamental analysis includes the study of ratio

analysis, past and present track record of the company,

quality of management, government policies etc.

There may be several combinations of investment portfolio.

Allocation of funds for equity portfolio is a question of top

most importance to any portfolio manager.

Among all risky investments, selection of the best possible

combination and allocation of funds among these selected

investment groups are of great importance.

BONDS PORTFOLIO MANAGEMENT

The individual investors can invest in bond portfolio.

The portfolio can be spared over variety of securities.

Investment in bond is less risky and safe as compared to

equity investment.

However, the return on bond is very low.

There are no much fluctuations in bond prices.

Therefore, there is no capital appreciation in this case.

Some bonds are tax saving which help the investor to reduce

his tax liability.

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.

However, it is suitable for normal investors for getting average

return over their investment.

Bond portfolio includes different types of bond, tax free bonds

and taxable bonds.

Tax free bonds are issued by public sector undertaking or

Government on which interest s compounded half yearly

and payable accordingly.

They have a maturity of 7 to 10 years with the facility for

buyback.

The tax free bonds means the interest income on these bonds

is not taxable.

Therefore, the interest rates on these bonds are very low.

However, taxable bonds yield higher interest compounded half

yearly and also payable half yearly.

They also have buy back facilities similar to taxable bonds.

ADVANTAGES OF PORTFOLIO MANAGEMENT

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

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 and indirect costs of errors or shortfalls in

meeting portfolio objectives- increased competition and

greater scrutiny by investors.

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.

The analyst can know the strengths, weakness,

opportunities of the economy, industry and the company.

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.

CODE OF CONDUCT- PORTFOLIO MANAGERS:

1. A portfolio manager shall, in the conduct of his business,

observe high standards of integrity and fairness in all his

dealings with his clients and other portfolio managers.

2. The money received by a portfolio manager from a client for an

investment purpose should be deployed by the portfolio

manager as soon as possible for that purpose and money

due and payable to a client should be paid forthwith.

3. A portfolio manager shall render at all time high standards of

services exercise due diligence, ensure proper care and

exercise independent professional judgment. The portfolio

manager shall either avoid any conflict of interest in his

investment or disinvestments decision, or where any conflict

of interest arises; ensure fair treatment to all his customers.

He shall disclose to the clients, possible sources of conflict

of duties and interest, while providing unbiased services. A

portfolio manager shall not place his interest above those of

his clients.

4. A portfolio manager shall not make any statement or become

privy to any act, practice or unfair competition, which is likely

to be harmful to the interests of other portfolio managers or it

likely to place such other portfolio managers in a

disadvantageous position in relation to the portfolio manager

himself, while competing for or executing any assignment.

5. A portfolio manager shall not make any exaggerated statement,

whether oral or written, to the client either about the

qualification or the capability to render certain services or his

achievements in regard to services rendered to other clients.

6. At the time of entering into a contract, the portfolio manager

shall obtain in writing from the client, his interest in various

corporate bodies, which enables him to obtain unpublished

price-sensitive information of the body corporate.

7. A portfolio manager shall not disclose to any clients or press

any confidential information about his clients, which has

come to his knowledge.

8. The portfolio manager shall where necessary and in the interest

of the client take adequate steps for registration of the

transfer of the client’s securities and for claiming and

receiving dividend, interest payment and other rights

accruing to the client. He shall also take necessary action for

conversion of securities and subscription of/or rights in

accordance with the client’s instruction.

9. Portfolio manager shall ensure that the investors are provided

with true and adequate information without making any

misguiding or exaggerated claims and are made aware of

attendant risks before they take any investment decision.

10. He should render the best possible advice to the client having

regard to the client’s needs and the environment, and his own

professional skills.

11. Ensure that all professional dealings are affected in a prompt,

efficient and cost effective manner.

FACTORS AFFECTING THE INVESTOR

There 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 the requirements 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 the utility 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.

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

they want.

This forces portfolio manager to increase the weight of

liquid investments in the asset mix.

Due to this, the amounts available for investment in the

fixed income or growth securities that actually help in

achieving the goal of the investor get reduced.

That is, the money taken out today from the portfolio

means that the amount and the return that would have

been earned on it are no longer available for achievement

of the investor’s goals.

4. Changes in Taxes

It is said that there are only two things certain in this

world- death and taxes.

The only uncertainties regarding them relate to the date,

time, place and mode.

Portfolio manager have to constantly look out for

changes in the tax structure and make suitable changes

in the portfolio composition.

The rate of tax under long- term capital gains is usually

lower than the rate applicable for income. If there is a

change in the minimum holding period for long-term

capital gains, it may lead to revision. The specifics of the

planning depend on the nature of the investments.

5. Others

There can be many of other reasons for which clients may

ask for a change in the asset mix in the portfolio.

For example, there may be change in the return available

on the investments that have to be compulsorily made

with the government say, in the form of provident fund.

This may call for a change in the return required from the

other investments.

PORTFOLIO MANAGEMENT SCHEMES (PMS) PRESENT

SCENARIO

“The regulatory environment has totally changed now and with

SEBI fixing strict norms for companies launching PMS, only

the serious players are going to enter his business.”

The PMS members today have full transparency: managers are

required to maintain individual accounts showing all dealings

in a client’s portfolio.

They must also advise him on all transactions.

Secondly, all PMS Managers have to send their clients at least

a quarterly report giving the status of their portfolio and the

transactions that have taken place.

The client-PMS manager contract is as per SEBI ground rules.

It has several checks to protect investor’s interest like laying the

custodial responsibility on the manager and preventing any

alterations in the scheme without the client’s consent.

Finally, managers have to send half-yearly reports to SEBI on

their portfolio management activities.

Experienced handling of cash and money power apart, PMS

also takes care of a number of the headaches endemic with

investing in the markets.

The biggest one is custodial services.

All PMS Managers act as custodians of shares and are

responsible for the load of paper work related to the share

transfer, documentation work, postal work and even ensuring

that dividends are credited to clients account.

SEBI directives also put the onus on the PMS promoters to take

follow-up action in case shares are lost or damaged.

Difficulties such as late transfer and postal theft are reduced in

case of brokers, because they not only have direct access to

registrars but also have branch offices to ensure quicker

transfers.

All these services come for a fee, of course.

While the actual PMS charges vary from a high of 7% of the

amount invested to a low of around 3.5%, follow-up services

charges extra.

As in all schemes, there is a downside to putting cash into

portfolio management as well.

The most important is the fact that despite all the SEBI checks.

PMS Managers are not allowed to assured any fixed returns.

This really discharges the managers for any responsibility if the

scheme does badly.

So investors have to be very careful in choosing the promoters.

Problem inherent in most schemes on offer will be

misused of investor’s funds to some extent.

Funds collected from investors will aid the brokers

concerned in their own games in the market.

PROSPECTS OF POTFOLIO MANAGEMENT

At present, 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.

.

SECURITIES AND EXCHANGE BOARD OF INDIA RULES,

1993 REGARDING PORTFOLIO MANAGERS

No person to act as portfolio manager without certificate.

» No person shall carry on any activity as a portfolio

manager unless he holds a certificate granted by the

Board under this regulation.

» Provided that such person, who was engaged as portfolio

manager prior to the coming into force of the Act, may

continue to carry on activity as portfolio manager, if he

has made an application for such registration, till the

disposal of such application.

» Provided further that nothing contained in this rule shall

apply in case of merchant banker holding a certificate

granted by the board of India Regulations, 1992 as

category I or category II merchant banker, as the case

may be.

» Provided also that a merchant banker acting as a portfolio

manager under the second provision to this rule shall also

be bound by the rules and regulations applicable to a

portfolio manager.

Conditions for grant or renewal of certificate to portfolio

manager.

» The board may grant or renew certificate to portfolio

manager subject to the following conditions namely:

a) The portfolio manager in case of any change in its status

and constitution, shall obtain prior permission of the board

to carry on its activities;

b) He shall pay the amount of fees for registration or

renewal, as the case may be, in the manner provided in

the regulations;

c) He shall make adequate steps for redressed of

grievances of the clients within one month of the date of

receipt of the complaint and keep the board informed

about the number, nature and other particulars of the

complaints received;

d) He shall abide by the rules and regulations made under

the Act in respect of the activities carried on by the

portfolio manager.

Period of validity of the certificate.

» The certificate of registration on its renewal, as the case

may be, shall be valid for a period of here years from the

date of its issue to the portfolio manager.

SECURITIES AND EXCHANGE BOARD OF INDIA

REGULATIONS, 1993

Registration of Portfolio Managers:

1. Application for grant of certificate

An application by a portfolio manager for grant of a

certificate shall be made to the board on Form A.

Notwithstanding anything contained in sub regulation

(1), any application made by a portfolio manager prior to

coming into force of these regulations containing such

particulars or as near thereto as mentioned in form A shall

be treated as an application made in pursuance of sub-

regulation and dealt with accordingly.

2. Application of confirm to the requirements

Subject to the provisions of sub-regulation (2) of

regulation 3, any application, which is not complete in all

respects and does not confirm to the instructions

specified in the form, shall be rejected:

Provided that, before rejecting any such application, the

applicant shall be given an opportunity to remove within

the time specified such objections as may be indicated by

the board.

3. Furnishing of further information, clarification and personal

representation.

The Board may require the applicant to furnish further

information or clarification regarding matters relevant to

his activity of a portfolio manager for the purposes of

disposal of the application.

The applicant or, its principal officer shall, if so required,

appear before the Board for personal representation.

4. Consideration of application.

The Board shall take into account for

considering the grant of certificate, all matters which are

relevant to the activities relating to portfolio manager and

in particular whether the applicant complies with the

following requirements namely:

The applicant has the necessary infrastructure like to

adequate office space, equipments and manpower to

effectively discharge his activities;

The applicant has his employment minimum of two

persons who have the experience to conduct the

business of portfolio manager;

A person, directly or indirectly connected with the

applicant has not been granted registration by the Board

in case of the applicant being a body corporate;

The applicant, fulfils the capital adequacy

requirements specified in regulation 7

The applicant, his partner, director or principal officer

is not involved in any litigation connected with the

securities market and which has an adverse bearing on

the business of the applicant;

The applicant, his director, partner or principal officer

has not at any time been convinced for any offence

involving moral turpitude or has been found guilty of any

economic offences;

The applicant has the professional qualification from

an institution recognized by the government in finance,

law, and accountancy or business management.

PRIMARY SURVEY

Purpose of the study:

To ascertain investor awareness about services provided by

portfolio management institutions and the interest shown by

investor to invest in portfolio management services.

To know whether they are interested to hire such services in

future and if not, why?

SPECIMEN QUESTIONNAIRE

Survey on investor’s views about Portfolio Management

Name:

Age:

Occupation:

» Are you aware of services offered by portfolio manager?

Yes No

» If yes, what types of services you are aware of ?

Management of Mutual fund investment

Management of Equities

Management of Money market investment

Advisory or consultancy services

Others

(If other please specify)

» Would you want to hire a portfolio manager at present or in

future?

Yes No

» If yes, for what type of services?

Investments in Mutual Funds Investments in Equities

Investments in Money market Investments in other[s]

(If other please specify)

Advisory or consultancy service

» If No, why?

__________________________________________________

__________________________________________________

» What is the Percentage of commission that you are ready to

pay to portfolio manager for services provided by him in ?

Equities Money market investment

Mutual fund investment Advisory or consultancy

services

Other investment

(If other please specify)

» Do you think there will be growth in portfolio management in

future?

If Yes why?

If No, why?

» What type of services would you want from portfolio manager in

future?

__________________________________________________

__________________________________________________

» Suggestions if any:

__________________________________________________

__________________________________________________

__________________________________________________

____________

Signature

FINDINGS

This case study has been conducted on various age groups of

individual investors on portfolio management. These consist of age

group ranging from 18-30, 30-45, 45-60 and 60 & above. Following

interpretation has been made on the basis of the information

collected from individual investor’s of various age groups through

questionnaire:

Age group of 18-30 is more aware about services offered by

portfolio manager whereas age group of 60 & above is less

aware of such services.

Management of mutual fund investment, management of

equities, management of money market investment, advisory

and consultancy services are the services provided by the

portfolio management institution. Amongst these, advisory and

consultancy services are the services that the individual

investors are more aware of.

Due to lack of experience and market knowledge, the age

group of 45-60 is more interested to hire portfolio manager at

present in order to manage their portfolio. The age group

ranging from 18-30 is more interested in making investment in

equities whereas group ranging from 60 & above are more

interested in making investment in mutual fund. On the other

hand, age group of 30-45 and 45-60 are least interested in any

of the services provided by portfolio management institution.

Reasons specified for the presence of disinterest in any of

these services were that the investors are having good hold on

their investment. Also they possess good knowledge with

regards to market fluctuations, investment portfolio’s and other

factors relating to portfolio management.

All the age groups of individual investors in portfolio

management believe that there is a better scope for portfolio

management in future. Investors would prefer the introduction

of services like advisory and consultancy services, investment

in mutual funds in the near future.

CONCLUSION

With the help of given project I got an in-depth knowledge about the

working of portfolio management. Also I got an insight as too how to

invest in portfolio management, which scheme provide better return

as compared to other and who are the portfolio management players

in the Indian market.

It can be concluded from the project that future of portfolio

management is bright provided proper regulations prevail and

investor’s needs are satisfied by providing variety of schemes. The

interest of investors is protected by SEBI. Portfolio management is

governed by SEBI Act.

Due to the benefits available to the individual’s such as reduction in

risk, expert professional management, diversified portfolios, tax

benefits etc. young generation (i.e. age group bet. 18-30) is willing to

invest in different investment avenues through portfolio manager or

through mutual funds which are again managed by portfolio

managers. On the other hand, age group of 60 & above are least

interested in making investment in different avenues through portfolio

managers. They believe in investing and managing their portfolio on

their own.

However, it can be said that the future of portfolio management is

bright in years to come.