“AN INSIGHT INTO PORTFOLIO MANAGEMENT WITH RELEVANCE TO CUSTOMER EXPECTATIONS

8/9/2019 AN INSIGHT INTO PORTFOLIO MANAGEMENT WITH RELEVANCE TO CUSTOMER EXPECTATIONS

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PROJECT REPORT

ON

AN INSIGHT INTO PORTFOLIO MANAGEMENT WITH

RELEVANCE TO CUSTOMER EXPECTATIONS

AT

INDIA INFOLINE LTD

Submitted to Siva Sivani Institute of Management

In the partial fulfillment for the Award of the Degree of

POST GRADUATION DIPLOMA IN MANAGEMENT

(Banking Insurance and Finance)

Submitted byB. NITHIN

(Roll No: B2-34)

SIVA SIVANI INSTITUTE OF MANAGEMENT

Kompally, Hyderabad.

(2008-2010).


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T ABLE OF CONTENTS

Chapter 1

Introduction

Introduction about portfolio management

Objectives of the study

Research Methodology

Limitations of the study

Chapter 2

Industry Profile Company profile

Department details

Chapter 3

Review of articles

Chapter 4

Portfolio Management & Investment Decision

Introduction to Portfolio Management

Objectives of Portfolio Management

Need for Portfolio Management

Elements of Portfolio Management

Return on Portfolio Management

Portfolio Risk

Risk-Return analysis

Investment Decision

Investment objectives

Guidelines for better Investment


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Chapter 5

Analysis on few securities

Calculated Average and Standard Deviation

Analysis on the performance of the securities

Calculation of Correlation Co-efficient

Chapter 6

Case lets

Chapter 7

Conclusions & Suggestions

Findings

Suggestions

Chapter 8

Annexure

Chapter 9

Bibliography.


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DECLARATION

I hereby declare that the project work entitled AN INSIGHT

INTO PORTFOLIO MANAGEMENT WITH RELEVANCE TO

CUSTOMER EXPECTATION at INDIA INFOLINE LTD, HYDERABAD.

This dissertation is being submitted to SIVA SIVANI INSTITUTE OF

MANAGEMENT for the partial fulfillment of POST GRADUATION

DIPLOMA IN MANAGEMENT (Banking Insurance and Finance) during theyear 2009.

B.NITHIN


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ACKNOWLEDGEMENT

I take this opportunity to express my deep and sincere gratitude to the management

of INDIA INFOLINE LTD for their gesture of allowing me to undertake this

project and its various employees who lent their hand towards the completion of this

study.

I thankMr. MURALIDHAR PRASAD, Assistant Professor (Finance) for his

valuable guidance at every stage.

I am particularly indebted to Mr. VENKATESHWAR RAO, (Executive Vice

President) for allowing me to carry out my project work in the organization and

Mr.B.NAGESHWAR RAO guide for this project and Mr.VISHWANATH for

helping me to complete this project work.

(B. NITHIN).


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CHAPTER 1


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INTRODUCTION OF THE STUDY

Very broadly, the investment process consists of two tasks. The

first task is security analysis which focuses on seeking the risk and return

characteristics of the available investment alternatives. The second task is

portfolio selection which involves choosing the best possible portfolio from the

set of feasible portfolio.

Portfolio theory originally was proposed by Harry Markowitz in

1950s, was the first formal attempt to quantify the risk of a portfolio and

develop a methodology for determining the optimal portfolio. Prior to the

development of the theory, investors dealt with the concepts of risk and return

somewhat loosely. Intuitively smart investors knew the benefit of diversification

which is reflected in the traditional adage Do not put all your eggs in one

basket. Henry Markowitz was the first person to show quantitatively why and

how diversification reduces risk. In recognition of his seminal contributions in

this field he was awarded the Nobel Prize in Economics in 1990.

This present study focuses how investors can construct the best

possible portfolio with the help of efficient diversification.

OBJECTIVES OF THE STUDY:

Focused study on Portfolio Management.

To clearly identify the objective of the portfolio and constraints ofthe client.

To help the client to design effective portfolio.

To clearly define the construction of portfolio process.

To take decision regarding risk and return of the portfolio

constructed.


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To verify whether the objectives of the client are met.

RESEARCH METHODOLOGY:

PRIMARY DATA

Data collected from brokers and members of India Infoline Ltd.

Data collected through questionnaires.

Data collected through telephonic conversation.

SECONDARY DATA

Data collected from various books.

Data collected from newspapers and internet.

LIMITATIONS OF THE STUDY:

Portfolio management being a vast subject, detailed study about the topic

was not possible because of the limited size of the project.

In the present study amount invested to be diversified is minimal.

As market is too volatile, predictions may not be perfect.


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CHAPTER 2


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INDUSTRY PROFILE

The Indian broking industry is one of the oldest trading industries that havebeen around even before the establishment of the BSE in 1875. Despite passing

through a number of changes in the post liberalisation period, the industry has

found its way towards sustainable growth.

The product offerings of brokerage firms today go much beyond the traditional

trading of equities. A typical brokerage firm today offers trading in equities and

derivatives online, most probably commodities futures, exchange traded funds,

distributes mutual funds and insurance and also offers personal loans for

housing, consumptions and other related loans, offers portfolio management

services, and some even go to the extent of creating niche services such as a

brokerage firm offering art advisory services. In the background of growing

opportunities for Investors to invest in India as also abroad, the range of

products and services will widen further. In the offing will be interesting

opportunities that might arise in the exchange enabled corporate bond trading,

soon after its commencement and futures trading that might be introduced in the

near future in the areas of interest rates and Indian currency.

Indian brokerage industry is highly fragmented. Numerous small firms operate

in this space. Given the growing importance of technology in operations and

increasing emphasis on regulatory compliance, smaller firms might find it

constrained to make right type of investments that will help in business growth

and promotion of investor interests.

The way the brokerage industry is run and the manner in which several of them

pursued growth and development attracted foreign financial institutions and

investment banks to buy stakes in domestic brokerage firms, paving the way for


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stronger brokerage entities and possible scope for consolidation in the future.

Foreign firms picked up stake in some of the leading brokerage firms, which

might lead to creating of greater interest in investing in brokerage firms by

entities in India and abroad.

COMPANY PROFILE

India info line was founded in 1995 by group of professionals with impeccable

educational qualification and professional credentials. Its intuitional investors

include Intel capital (worlds leading technology company), CDC (promoted by

UK govt), ICICI, TDA and Reeshanar.

INDIA INFOLINE group offers the in tire gamut of investment products

including stock broking, Commodities broking, Mutual Funds, Fixed Deposits,

GOI Relief Bonds, Post office saving and life insurance. India Infoline is the

leading corporate agent of ICICI Prudential Life Insurance Company, which is

Indias No.1 private sector life insurance company.

www.indiainfoline.com has been the only Indian website to have been listed bynone other Forbes in its Best of the Web survey of global website, not just

once but three times in a row and counting. A must read for investors in south

Asia is how they choose to describe India Infoline. It has been rated as No.1 in

the category of Business News in Asia by Alexia rating.

Stock and commodities broking is offered under the trade name 5paisa. India

Infoline Commodities Pvt. Ltd. A wholly owned subsidiary of India InfolineLtd., holds member ship of MCX. Com The Company has a network of 976

business locations (branches and sub-brokers) spread across 365 cities and

towns. It has more than 800,000 customers.


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COMPETETORS OF TARNAKA BRANCH

Share khan

Religare

Karvy

India bulls

Appollo sindhoori

Customers of tarnaka branch

HNIS whose investment ranging from Rs. 100000 to Rs. 400000.

Number of customers increased to 1500.

Different classes of customers are at present utilizing the services

of the company.

Products offered by India Infoline Ltd

The India Info line Pvt ltd offers the following products.

E-broking

Distribution

Insurance

E-broking:

Equities

Derivatives

Commodities.


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Distribution:

Mutual funds

Govt of India Bonds

Fixed Deposits.

Insurance:

Life insurance policies.

Corporate sector of ICICI.

DEPARTMENT DETAILS

India Infoline is structured into three departments to provide services to its

customers.

Sales team.

Operations team

Customer care team.

SALES TEAM:


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OPERATIONS TEAM

Operations team includes:

Demat Activation. Dealers. Advisors. Team leaders under whom dealers work.

CUSTOMER CARE TEAM

Customer care team resolves the queries of the customers.


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CHAPTER 3


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Brief outline of review of literature

As a part of my study, I referred the following articles:

S. P. Bansal, Portfolio Management Approach The EPG

Approach, Finance India.

This article states the method of preparing portfolio in most efficient securitiesto be included in the portfolio by determining the weights or proportion of each

security. The article mainly based on beta value of each security and portfolio.

Marker Kramer, How to Control Excess Volatility in your

Portfolio.

Another article written by Mark Kramer, states the qualities needed to maintainportfolio like patience, stepping aside to avoid the destructive storms, proper

asset allocation.


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CHAPTER 4


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PORTFOLIO MANAGEMENT

INTRODUCTION

Portfolio is a combination of assets such as stocks, bonds and money

market instruments. The process of blending together the broad asset classes so

as to obtain optimum return with minimum risk is called portfolio construction.Diversification of investments helps to spread risk over many assets. A

diversified portfolio, some securities may not perform as expected, but others

may exceed the expectation and making the actual return of the portfolio

reasonably close to the anticipated one. Keeping a portfolio of single security

may lead to a greater likelihood of the actual return somewhat different from

that of the expected return. Hence, it is a common practice to diversify

securities in the portfolio.

Portfolio may or may not take on the aggregate characteristics of their

individual parts. Portfolio is the collection of financial or real assets such as

equity shares, debentures, bonds, treasury bills and property etc. Portfolio is a

combination of assets or it consists of collection of securities. These holdings

are the result of individual preferences, decisions of the holders regarding risk,return and a host of other considerations.

Portfolio management concerns the construction & maintenance of a

collection of investment. It is investment of funds in different securities in

which the total risk of the portfolio is minimized, while expecting maximum

return from it. It primarily involves reducing risks rather that increasing return.

Return is obviously important though, and the ultimate objective of portfolio


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manager is to achieve a chosen level of return by incurring the least possible

risk.


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OBJECTIVES OF PORTFOLIO MANAGEMENT

1. Basic objectives

The basic objective of Investment/portfolio management can be

classified into two categories as follows:

(a) To maximize yield

(b)To minimize risk.

2. Secondary objectives

(a) Regular return

(b)Stable income

(c) Appreciation of capital

(d)More liquidity

(e) Tax benefits

(f) Safety of the investment

(g)Marketability

(h)Liquidity


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NEED FOR PORTFOLIO MANAGEMENT

Portfolio management is a process encompassing many activities ofinvestment in assets and Securities. It is a dynamic and flexible concept and

involves regular and systematic analysis, judgment and actions. The objective of

this service is to help the unknown and investors with the expertise of

professionals in Investment portfolio management. It involves construction of a

portfolio based upon the investors objectives, Constraints, preferences for risk

and returns and tax liability. The portfolio is reviewed and adjusted from time totime in tune with the market conditions. The evaluation of portfolio is to be

done in terms of targets set for risk and return. The changes in the portfolio are

to be effected to meet the changing conditions.

Portfolio construction refers to the allocation of surplus funds in hand

among a variety of financial assets open for investment. Portfolio theory

concerns itself with the principles governing such allocation. The modern view

of investments is oriented more towards the assembly of proper combinations of

individual securities to form investment portfolios. A combination of securities

hold together will give a beneficial result if they are grouped in a manner to

secure higher return after taking into consideration the risk element.

The modern theory is of the view that by diversification, risk can be

reduced. Diversification can be made by the investor either by having a large

number of shares of companies in different regions, in different industries or

those producing different types of product lines. Modern theory believes in the

perspective of combination of securities under constraints of risk and return.


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ELEMENTS OF PORTFOLIO MANAGEMENT

Investment management is also known as Portfolio Management, is a complexprocess or activity that may be divided into seven broad phases: -

1. Specification of Investment Objectives and Constraints.

2. Choice of Asset Mix.

3. Formulation of Portfolio Strategy.

4. Selection of Securities.

5. Portfolio Execution.6. Portfolio Rebalancing.

7. Performance Evaluation.

Specification of Investment Objectives and Constraints

The first step in the portfolio management process is to specify one's

investment objectives and constraints. The commonly stated investment

goals are:

Income: - To provide a steady stream of income through regular

interest/dividend payment.

Growth: - To increase the value of the principal amount through capital

appreciation.

Stability: - To protect the principal amount invested from the risk of

loss.

Choice of asset mix

Based on the objectives and constraints, you have to specify your asset

allocation, that is, you have to decide how much of your portfolio has to

be invested in each of the following asset categories:

Cash


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Bonds

Stocks

Real estate

Precious metals

Others.

Empirical studies have shown that nearly 90 percent of the variance of the

portfolio return is explained by its asset mix. Put differently, only about 10

percent of the variance of the portfolio return is explained by other

elements like sector rotation or security selection.

Formulation of portfolio strategy

After you have chosen a certain asset mix, you have to formulate an

appropriate portfolio strategy. Two broad choices are available in this

respect, an active portfolio and passive portfolio.

Active portfolio strategy is followed by most investment professionals

and aggressive investors who strive to earn superior returns, after

adjustment for risk. The 4 principal vectors of an active strategy are:

Market timing

Sector rotation

Security selection

Use of a specialized concept

Passive strategy rests on the tenet that the capital market is fairly efficient

with respect to the available information. Hence, the search for superior

returns through an active strategy is considered futile.


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Selection of securities

This involves selecting an asset which best suits the portfolio. An asset

should be selected based on certain study viz. fundamental analysis,

technical analysis or random selection of assets. Some of the factors such

as yield to maturity, risk of default, tax shield, and liquidity should be

properly evaluated.


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Portfolio execution

The next step is to implement the portfolio plan by buying and/or sellingspecified securities to be included in the portfolio have been identified. It

is an important practical step that has a significant bearing on investment

results. For effectively handling the portfolio execution phase you should

understand the trading game, what motivates trade, nature of key players

in this game, who are the likely winners and losers in this game and what

guidelines should be borne in mind while trading.

Portfolio rebalancing

Portfolio rebalancing involves reviewing and revising the portfolio

composition. The initial portfolio is left undisturbed. It is essentially a

buy and hold policy. Irrespective of what happens to relative values, no

rebalancing is done. Then after a specific time, the constant mix policy

calls for maintaining the portfolio in line with their target value.

Performance evaluation

The key dimensions of portfolio performance evaluation are rate of return

and risk. The performance attribution is to determine the contribution

made by the decisions in the areas of asset allocation, sector choice and

security selection.


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RETURN ON PORTFOLIO:

Each security in a portfolio contributes returns in the proportion of its

investment in security. Thus the portfolio expected return is the weighted

average of the expected returns, from each of the Securities, with weights

representing the proportionate share of the security in the total investment. Why

does an investor have so many securities in his portfolio? If the security ABC

gives the maximum return why not he invests in that security all his funds and

thus maximize return? The answer to this question lies in the investors

perception of risk attached to investments, his objectives of income, safety ,

appreciation, liquidity and hedge against loss of value of money etc. this pattern

of investment in different asset categories, security categories, types of

investments, etc, would all be described under the caption of diversification,

which aims at the reduction or even elimination of non-systematic or company

related risks and achieve the specific objectives of the investors.


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PORTFOLIO RISK:

Risk on a portfolio is different from the risk on individual securities. This

risk is reflected in the variability of the returns from zero to infinity. The

expected return depends on the probability of the returns and their weighted

contribution to the risk of the portfolio. There are two measures of risk in this

context-one is the absolute deviation and the other standard deviation.

Most investors invest in a portfolio of assets, as they dont want to pull all

their eggs in one basket. Hence, what really matters to them is not the risk and

return of the stocks in isolation, but the risk and the return of the portfolio as a

whole.


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RISK-RETURN ANALYSIS:

All investments have some risks. Investments in shares of companies

have its own risks or uncertainty. These risks arise out of variability of returns

on yields and uncertainty of appreciation or depreciation of share prices, loss of

liquidity, etc, and the risk over time can be represented by the variance of the

returns, while the return over time is capital appreciation plus payout divided by

the purchase price of the share.

Normally, the higher the risk that the investors takes, the higher is the

return. There is, however, a risk less return on capital of about 12%, which is

the bank rate charged by the RBI or long-term, yielded on govt. securities at

around 13% to 14%. This risk less returns refers to lack of variability of return

and no uncertainty in the repayment of the capital. But other risks such as loss

of liquidity due to parting with money etc, may, however, remain but are

rewarded by the total return on the capital. Risk-return is subject to variation

and the objective of the portfolio manager is to reduce that variability and thus

reduce the risk by choosing an appropriate portfolio.


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There are two types of risks, namely:

Market risk or Systematic risk, and

Company risk or Unsystematic risk.

SEBI NORMS:

SEBI has prohibited the Portfolio Manager to assume any risk on behalf

of the client. Portfolio Manager cannot also assure any fixed return to the client.

The investments made or advised by him are subject to risk, which the client

has to bear. The investment consultancy and management has to be charged at

rates, which are fixed at the beginning and transparent as per the contract. No

sharing of profits or discounts or cash incentives to clients is permitted.

The Portfolio Manager is prohibited to do lending, badla financing and

bills discounting as per SEBI norms. He cannot put the clients funds in any

investment, not permitted by the contract, entered into with the client. Normally

investments can be made in both capital market and money market instruments.

Clients money has to be kept in a separate account with the public sector

bank and cannot be mixed up with his own funds or investments. All the deals

done for a clients account are to be entered in his name and Contract Notes,

Bills and etc., are all passed by his name. A separate ledger account is

maintained for all purchases/sales on clients behalf, which should be done at

the market price. Final settlement and termination of contract is as per thecontract. During the period of contract, Portfolio Manager is only acting on a

contractual basis and on a fiduciary basis. No contract for less than a year is

permitted by the SEBI.


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CRITERIA FOR INVESTMENT DECISION:

Firstly, the investment decision depends on the mood of the market. As

per the empirical studies, share prices depends on the fundaments of the

company only to the extent of 50% and the rest is decided the mood of the

market and the expectations of the companys performance and its share price.

These expectations depend on the analysts ability to foresee and forecast the

future performance of the company. For price paid for a share at present

depends on the flow of returns in future, expected from the company.

Secondly and following from the above, decision to invest will be based

on the past performance, present working and the future expectations of the

companys performance, both operationally and financially. These in turn will

influence the share prices.

Thirdly, investment decision depends on the investors perception on

whether the present share price is fair, overvalued or undervalued. If the share

price is fair he will hold it (Hold Decision) if it is overvalued, he will sell it (Sell

Decision) and if it is undervalued, he will buy it (Buy Decision). These are

general rule, but exceptions may be there. Thus even when prices are rising,

some investors may buy as their expectations of further rise may outweigh their

conception of overvaluation. That means, the concepts of overvaluation or

under valuation are relative to time, space and man. What may be overvalued a

little while ago has become undervalued following later developments;

information or sentiment and mood may change the whole market scenario and

of the valuation of shares. There are two more decisions, namely, Average Up

and Average Down of prices.

The investment decision may also depend on the investors preferences,

moods, or fancies. Thus an investor may go on a spending spree and invest in


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cats and dogs of companies, if he has taken a fancy or he is flooded with money

from lottery or prizes. A Rational investor would however make investment

decisions on scientific study of the fundamentals of the company and in a

planned manner.

At present, investors mostly depend on hearsay and advice of friends,

relatives, sub-brokers, etc., for the investment decision, but not on any scientific

study of the companys fundamentals. In view of the increasing mushroom

growth of companies and lack of any track record of many promoters,

investment decision making became on hunches, hearsay etc.


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INVESTMENT OBJECTIVES:

1) The first basic objective of investment is the return on it or yields. The

yields are higher, the higher is the risk taken by investors. The risk less return is

the bank deposit rate of 8% at present or Bank rate of 6.5%. Here the risk is

least as funds are safe and returns are certain.

2) Secondly, each investor has his own asset preferences and choice of

investments. Thus some risk adverse operators put their funds in bank or post

office deposits or deposits/certificates with co-operatives and PSUs. Some

invest in real estate; land and building while others invest mostly in gold, silver

and other precious stones, diamonds etc.

3) Thirdly, every investor aims at providing for minimum comforts of

house furniture, vehicles, consumer durables and other household requirements.

After satisfying these minimum needs, he plans for his income, saving in

insurance (LIC and GIC etc.) pension and provident funds etc. In the choice of

these, the return is subordinated to the needs of the investor.

4) Lastly, after satisfying all the needs and requirements, the rest of the

savings would be invested in financial assets, which will give him future

incomes and capital appreciation so as to improve his future standard of living.

These may be in stock/capital market investments.

QUALITIES FOR SUCESSFUL INVESTING

Contrary thinking

Patience

Composure

Flexibility and

Openness


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CHAPTER 5


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ANALYSIS ON FEW SECURITIES

As a part of study few securities are studied to fit the portfolio of clients.Securities are studied on statistical basis to know the risk and return elements of

the portfolio. The analysis on the securities gives a very good idea about which

stock to be picked to best fit the portfolio of the client. In order to pick a stock

several valuations and a good amount of study on that particular company is

very much necessary. A good knowledge about the happenings in the market

should also be considered. The following study is conducted based on 5 monthsdata.

As mentioned above, study is conducted on few securities which are shown as

below:

MARKET PERFORMANCE DURING PAST 5 MONTHS

Past 5 months market has been very volatile, very sensitive to information.

Market recovered well from the huge downturn in the October 2008 and is

performing better now. However, near future of the market is unpredictable


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because it again depends on the reforms government is going to take. Thus,

market being volatile is performing better after recovering from huge downturn.


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CALCULATION OF STANDARD DEVIATION OF RETURN

AND SHARE VALUE OF THE SECURITIES:

Scrip Mean

Returns

Standard

Deviation of

Returns

Standard

Deviation of Share

ValuationsTATA STEEL 0.1121% 4.60 65.31

NTPC 0.1601% 2.40 11.50

ONGC 0.7337% 3.45 135.027

ITC 0.112% 2.38 9.11

DLF 0.75% 6.26 68.229

RELIANCE

INDUSTRIES

0.4933% 3.35 351.113

INFOSYS 0.6433% 2.46 145.95

BHARTI

AIRTEL

-0.21% 3.41 85.20

HDFC 0.33% 4 278.85

HINDUSTAN

UNILEVER

-0.00107% 2.18 9.8218

MTNL -0.00318 2.61 12.017

LARSEN AND

TOUBRO

0.154% 3.41 11.50


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NTPC:

The deviation in the share value and returns of NTPC is not very volatile. As the

company is very strong in its fundamentals, it is performing well in the market.

Company is performing well compared to other shares even in the present

volatile market conditions. Even in the future it is expected to do well as it isclear from the above graph i.e., rising in the end. There might be a slight

increase in the deviation in the end as we can see that when there is an increase

it is reaching up to 3. So the behavior of the stock shows it is better to hold the

stock for long term and collect average returns or time the market well so that

profit can be booked if properly timed.


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LARSEN AND TOUBRO

When we take Nifty as benchmark to analyze this stock, it clearly shows that

the pattern it is following is similar to the market movements. Generally this

share is considered to be speculative scrip. Generally investors time the market

to book profits with this stock. This stock seems risky when held for long term.

Any other stock along with this may produce good returns because risk can be

mitigated. This stock best suits a client who can take risk. There are manyfluctuations in the above graph, which shows this stock should be used for

speculative purpose and time properly to earn good amount of returns.


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ITC

The above graph shows that ITC is following a pattern of deviation in the

market. A decline in the end is expected to grow. But the volatility of returns isless as FMCG is considered to be ever-green sector. Investors mainly use this

sector for the purpose of hedging because however volatile be the market, the

sector deviates very less. It is better to hold this stock for long term along with

some speculative scrip so as to minimize the risk and earn good returns. These

fluctuations can be ignored but should be watched because these deviations can

be controlled if properly used along with some other speculative share.


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DLF

This stock has performed well during last three months because of some

promotional activity, prior to that it has not performed well because of huge

crisis in the reality sector. But it has recovered well and is performing well now.

But this stock should be timed well again well because there was a stage where

the price has come down to Rs. 200. So it is better to use this stock along with

some strong supportive stock to minimize the risk and get every opportunity of

getting good amount of returns from this stock because, it has high potential of

generating good returns.


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INFOSYS

This is again considered as speculative share in the market because nothing can

be predicted, as we have seen that the stock fell even when the company has

announced good amount of profits. So it is better to hold it and check with the

timing of the market. This stock should be maintained along with some long

term security to gain good amount of returns by minimizing the risk. Deviation

in this stock is less and is also going along with the benchmark index. So, it is

better to hold this stock for a risky client and time the market properly.


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BHARTI AIRTEL

This is also a speculative share. Basing on the graph, we can say that it a risky

share. But when the pattern of the share is observed properly, every alternatehead and shoulder is at same level, that means it has very good supporting and

resistant levels. Moreover, the company has recently announced its 37%

penetration in Andhra Pradesh and also its future expansion which is also very

good sign for the company in the market. It is considered as very good stock in

the telecom sector. Its plan to merge with MTNL also may have some effect not

only in the short term but also in the long term. However the deviations can be

minimized by taking the average returns if the share is going to fall after certain

period. But this is considered to be very good stock if its future expansion is

considered. It is better to hold the stock long term.


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Reliance Industries Ltd.

Empirical study shows that Reliance Industries have 30% weight on the market

performance. As the current market is very volatile, the above graph also shows

that the company in the current market situation is not very consistent. When

Nifty is taken as benchmark to analyze this stock, there will be perfect matching

in the above graph. So this will perform well in the long term and better to hold

the stock. This is very risky in the present situation, so better to hold it along

with some hedging device so as to earn positive returns.


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Oil & Natural Gas Corporation Ltd.

The above graph shows that ONGC is following a pattern in the market. The

stock has supporting and resistant levels which is controlling g the movements

of the stock. It is better to hold it for long term and is considered moderately

risky. However, this stock is known fundamentally strong in the respective

sector.


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Tata Steel Ltd.

Clear examination of the above graph shows that the movement is along with

the benchmark index i.e., Nifty but the returns are above the Nifty line. The

deviations in the stock are through the market Nifty Index. So it clearly shows

that it is better to hold the stock short term as in the long term market is

unpredictable as market is very volatile. It is better to time the stock along with

the market movements and book profits. This stock is best suitable for risky

clients.


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HDFC Bank

The above graph shows that the deviations in the stock are increasing

consistently. But, it is expected to perform good in the near future because

among the private banking sector, this stock is performing well. So, it is better

for the investor to hold this stock for long term and minimize the risk. Returns

on this stock are also seen well in the past. This is a risky stock producing good

amount of returns. So, it is better to hold this stock for long term.


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HINDUSTAN UNILEVER

The above stock is known to be very strong in the FMCG sector. The above

graph shows that the returns on the stock is deviating, however the movementsare following a pattern which can be predictable. It has come down from 2.58 to

1.3 and again reached the same level, from where it has reached to 1.95. This

movement of the stock is very clear. So it is better to hold the stock for long

term as the returns at present are negative because market is not performing

well but HUL which is considered to be very strong fundamentally will perform

well in the long term.


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The above charts depict that major part of risk is covered by speculative shares

like DLF, Tata Steel, Reliance Industries, L&T, and Bharti Airtel where as

major part of average returns are yielded from the same companies. So, the

golden rule Higher the risk, higher the return is perfectly suitable here.

Risk on Midcap shares such as MTNL, HUL are less risky and returns are also

less but performing well.

So, a perfect combination of these two minimizes the risk and maximizes return.

However, it can be noticed that shares viz., Infosys, ONGC which are moderate

risky occupy major share in the returns chart. So a perfect blend of these stocks

along with the above mentioned risky and very less volatile stocks may produce

good amount of returns thereby minimizing the risk.

Stocks such as HUL and MTNL, which have very less share in the returns, are

expected to perform well in the long term because of their penetration in themarket. So, an eye on these stocks may minimize the risk and generate good

returns.


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CORRELATION BETWEEN STOCKS

In the case of perfect positive correlated Securities or Stock, The risk canbe reduced to a minimum level, where as in the case of negative correlated

securities the risk can be reduced to zero, which is company risk but the market

risk prevails the same for the security or stock in a portfolio.

Positive correlation means both the securities are moving in the same

direction i.e., either upward or downward. Whereas negative correlation means,

the securities are moving in opposite direction, which is more profitable because

when securities which are moving in the opposite directions are put together,

the resultant risk may be minimized.

So it is always important to check the correlation co-efficient between

two securities while picking so as to perfectly fit the portfolio.

The portfolio which is constructed is picked only after understanding the

correlation between the securities. It is always better to choose securities in a

portfolio only after checking their correlation and return factors.


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BETA VALUES OF THE ABOVE MENTIONED SHARES

BETAS

MTNL 0.41

INFOSYS 0.71

ONGC 0.85

ITC 0.54

BHARTI AIRTEL 0.92

DLF 1.59

HUL 0.48

HINDALCO 1.18

HDFC 1

L&T 1.11

TATA STEEL 1.34

NTPC 0.87

Beta value shows the responsiveness of a particular stock with the movements

of the market. The above table clearly shows HDFC Bank is responding

according to the market. Higher beta value gives higher returns, so DLF, Tata

Steel gives maximum returns. MTNL has low beta value, so returns from that

particular stock can be expected to be very low.


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CHAPTER 6


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CASE LETS

As a part of study, 3 clients have been picked up to construct portfolio. The

customers are evaluated on different parameters to know their taking capacity

and their expectations as returns. The portfolio is constructed based on their

expectations and limitations in the construction of portfolio. The risk taking

capacity of the customers is evaluated based on the questionnaire andaccordingly the assets are selected. The risk and return of the client on the

portfolio is calculated based on statistical calculations. The details of the client

and selection of portfolio are discussed below:

Client 1

Investor profile

54 year old investor, a government employee, saving and investing to get

regular income and aggressive returns. After evaluating risk, it is concluded that

he is a conservative risk taker.

His annual income is Rs. 550000 per annum.

Out of this, his savings are Rs. 200000 per annum.

Now, diversification is to be made so as to meet his requirements andexpectations.

So, his investment avenues include:

Rs. 50000 in bank deposits out of which Rs. 25000 in Savings Bank

account and Rs. 25000 in Fixed Deposits, to earn to earn regular income

and bear less/nil risk.


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Rs. 50000 in government bonds, 6.07%, 2014 presently trading at Rs.

102.30 whose face value is Rs 100. The bond to be held till maturity so

as to earn regular interest.

Rs. 100000 to be invested in equities so as to earn aggressive returns.

As analyzed above the securities which suit the client better are ONGC

and ITC.

Calculating weights of the security so as to make an ideal investment is shown

below:

Standard Deviation of ONGC= 3.45 (

Standard Deviation of ITC= 2.38 (

Weight of ONGC i.e. X1=

=

= 0.40

Weight of ITC X2= 0.60

That means 40% to be invested in ONGC and 60% to be invested in ITC.

Using the following formula, risk can be calculated

[(X1)2 ( 2 + (X2)2(2)2 + 2(12)(1)(2)(X1)(X2)].

[ (0.40)2(3.45)2 + (0.60)2(2.38)2 + 2(-0.20)(0.4)(0.6)(3.45)(2.38) ]

3.15= 1.78.

Therefore, risk of portfolio is 1.78.


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Now calculating expected return on equities is shown below:

Average return on ITC = 0.112%

Average return on ONGC = 0.7337%.

Probability of occurrence is 0.50 in both the cases.

So, expected return = (0.5)(0.112%)+(0.5)(0.7337%)

= 0.562%.

If 0.562 is for one day then, for 100 days return would be 0.1532

Therefore, return on equity= 100000*0.1532

= 15320+100000=115320.

The above mentioned return is for 6 months.

PORTFOLIO OF CLIENT1

ASSET CLASS INVESTMENT RETURN

FIXED DEPOSITS 50000 8% P.A

SAVINGS DEPOSIT 25000 3% P.A

BONDS 25000 6.07%

EQUITIES 100000 115320 (after 6 months expectedreturns)


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CLIENT 2

INVESTOR PROFILE

28 year old, hardware engineer,

Working for an MNC,

Investing to earn regular fixed income and steady returns.

His annual income is Rs. 700000 and his savings are Rs. 300000 per annum.

Rs. 50000 to be invested every year in Gayatri Projects Ltd to purchase

land after a period of time.

Rs. 25000 to be invested in Life Insurance Policy.

Rs. 50000 to be invested in bank fixed deposits.

Rs. 25000 in savings bank account.

Rs. 25000 to be invested in National Savings Certificate.

Rs. 100000 to be invested in equities to enhance his returns.

Based on the evaluation, he is declared to be risky client.

1= HUL

2= HDFC

3= BHARTI AIRTEL

Calculation of weights

X1= 1/ (1 + 2 + 3)

= 14.47/ (14.47+3.35+4)

= 0.60


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X2 = 2 / (1 + 2 + 3)

= 4 / (4+14.47+3.35)

= 0.20

X3 = 0.20.


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Equity portfolio risk can be calculated as follows:

[(X1)2

(2

+ (X2)2

(2)2

+ 2(12)(1)(2)(X1)(X2)].

= [(.6)2(14.47)2 + (.2)2(4)2 + (.2)2(3.35)2 + 2(.6)(.2)(-0.08)(14.47)(4) +

2(.6)(.2)(-.026)(14.47)(3.35) + 2(.2)(.2)(-.10925)(4)(3.35)]

=8.65

Therefore, risk on portfolio is 8.65%.

Expected return from the portfolio is:

(.2)(-.00102) + (.2)(-.21) + (.5)(.33)

= 0.122796

= 0.122796 * 100000

= Rs. 122796.

Calculating number years of cash outflows

Cost of land is minimum Rs.3000000. the investment is made in annuities i.e.,

equal cash flows. Rate of interest is 12%. Now we have to check in how many

years the land can be acquired.

FV =

1000000 = {50000[(1 + 0.12) n] 1}/ 0.12


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120000 = 50000(1.12) n

log2.4 = nlog1.12

0.380 = 0.0492n

N= 7.72 or 8 years approximately.

PORTFOLIO OF CLIENT 2


LAND 50000 APPRECIATION

LIC POLICY 25000 SUM ASSURED

FIXED DEPOSITS 25000 6.07%

SAVINGS BANK A/C 50000 8%

NATIONAL SAVINGSCERTFICATE

25000 MATURITY

EQUITIES 100000 122796 (expected after 6months)


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CLIENT 3

INVESTOR PROFILE

30 year old, working as Doctor,

Investing to earn regular income.

Slow and positive returns.

His annual income is Rs. 400000.

His savings are Rs. 100000.

He is evaluated to be moderate risk taker.

Diversification

Rs. 15000 to be invested in Savings Bank account.

Rs. 10000 to be invested in Fixed Deposit.

Life Insurance Policy of Rs. 15000.

To be invested in bonds Rs. 10000.

Equities Rs. 50000.

Calculating risk and return on equity segment

1= Infosys = 2.467

2= MTNL = 2.64

3= NTPC = 18.264.

X1= 1/( 1 + 2 + 3).


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= 2.46 / (2.46 + 2.64 + 18.26)

= 0.10.

X2 = 0.12.

X3 = 0.78.


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[(X1)2 ( 2 + (X2)2(2)2 + 2(12)(1)(2)(X1)(X2)].

= [ (.1)2(2.46)2 + (.12)2(2.64)2 + (18.26)2(.78)2 + 2(2.46)(2.64)(.1)(.12) +

2(2.64)(18.26)(-.09)(.12)(0.78) + 2(.33)(.78)(.1)(2.46)(18.26)]

= 7.2

Calculation of expected return =

(.5)(.16) + (.5)(.64) + (.2)(-.933)

= 0.2151.

**Total return (expected for 6 months) = 50000* 0.2150815

= 10754

= Rs.10754 + Rs. 50000

= Rs. 60754.

PORTFOLIO OF CLIENT 3


SAVINGS BANK A/C 15000 3%

FIXED DEPOSIT 10000 8%

LIC POLICY 15000 SUM ASSURED

BONDS 10000 6.07%

EQUITIES 50000 0.2150815% per day on


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average.

CHAPTER 7


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FINDINGS

Investing in more number of equities may turn portfolio very volatile.

Portfolio Management Service is not available in many places because of

lack of awareness and confidence in people.

Rebalancing of portfolio is very important i.e., passive portfolio cannotfetch good returns. In order to play safe in the market one needs to

maintain active portfolio strategy especially in this current volatile

situation.

There are different models in constructing a portfolio, but in market the

ultimate decision lies with the investor, whatever be the model, if one can

understand the market behavior, he can play safe game.

Portfolio of a person differs from one person to another depending on the

risk appetite, return expectations, needs and many other factors.

A portfolio manager should have wide knowledge about each and every

investment avenue. A portfolio manager should be able to study the

market behavior as well as investor very well.

On the company

The company has many inactive accounts piled up which are more than

the active accounts.

The company aggressively tried to recruit customer relations officer in

large number but couldnt penetrate in its own surroundings.


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The company had failed in properly having a strategy to sell their

products.

None of the dealers have knowledge on technical analysis except one.


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SUGGESTIONS TO THE INVESTOR

Grape wine knowledge is not advantageous. Listen to rumors and tips,

check for yourself.

A proper mix of assets is necessary

Buy stocks in companies with potential for surprises.

Take advantage of volatility before reaching a new equilibrium.

The investor must select the right advisors who have sound knowledgeabout the product which they are offering.

Professionalized advisory is the most important feature to the investors.

Professionalized research, analysis which will be helpful for reducing any

kind of risk to overcome.

Check your long term and short term goals before investing.

Do not use idle portfolio.


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CHAPTER 8


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ANNEXURE

To assess your risk tolerance, seven questions are given below. Each question is

followed by three possible answers.

1. Just 6 weeks after you invested in a stock, its price declines by 20%. If

the fundamentals of the stock have not changed, what would you do?

i) Sell

ii) Do nothing

iii)Buy more.

2) Consider the previous question another way. Your stock dropped 20%, but it

is a part of a portfolio designed to meet investment goals with 3 different

time horizons.

a) What would you do if your goal were 5 years away?

i) Sell

ii) Do nothing

iii)Buy more.

b) What would you do if your goal were 15 years away?

i) Sell

ii) Do nothing

iii)Buy more.

c) What would you do if the goal were 30 years away?

i) Sell


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ii) Do nothing

iii)Buy more.


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3) You have bought a stock as a part of your retirement portfolio. Its price rises

by 25% after one month. If the fundamentals of the stock have not changed,

what would you do?

i) Sell

ii) Do nothing

iii)Buy more.

4) You are investing for retirement which is 15 years away. What would youdo?

i) Invest in a money market mutual fund or a guaranteed investment

contract

ii) Invest in a balanced mutual fund has a stock: bond mix of 50: 50.

iii) Invest in an aggressive growth mutual fund.

5) As a prize winner, you have been given some choice. Which one would you

choose?

i) Rs. 50000 in cash.

ii) A 50% chance to get Rs. 125000.

iii)A 20% chance to get Rs. 375000.

6) A good investment opportunity has come your way. To participate in it you

have to borrow money. Would you like to take loan?

i) No.

ii) Perhaps.


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iii)Yes.

7) Your company, which is planning to go public after 3 years, is offering stock

to its employees. Until it goes public, you cant sell shares. Your investment,

however, has the potential of multiplying 10 times when the company goes

public. How much money would you invest?

i) Nothing.

ii) Three months salary.

iii)6 months salary.

CHAPTER 9


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BIBLIOGRAPHY

Referred Books:

Security Analysis and Portfolio Management, Parvathy Pandian.

Security Analysis and Portfolio Management, Prasanna Chandra.

Websites:

www.nseindia.com

www.indiainfoline.com

www.finance.yahoo.com

www.bseindia.com

www.investopedia.com

www.docstoc.com
http://www.nseindia.com/http://www.indiainfoline.com/http://www.finance.yahoo.com/http://www.bseindia.com/http://www.investopedia.com/http://www.docstoc.com/http://www.nseindia.com/http://www.indiainfoline.com/http://www.finance.yahoo.com/http://www.bseindia.com/http://www.investopedia.com/http://www.docstoc.com/


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“AN INSIGHT INTO PORTFOLIO MANAGEMENT WITH RELEVANCE TO CUSTOMER EXPECTATIONS

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