Dps Security Analysis and Portfolio Management

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T.Y.B.F.M SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

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SECURITY ANALYSIS: INTRODUCTION

MEANING OF SECURITY ANALYSIS

A security means a document that gives its owner a specific claim of ownership of

a particular financial asset. Financial market provides facilities for buying and

selling of financial claims and services. Thus, securities are the financial

instruments which are bought and sold in the financial market for investment.

The important financial instruments are shares, debentures, bonds etc. Other

financial instruments are also known as securities such as treasury bills, mutual

fund units, fixed deposits, insurance policies, post office savings etc. These

securities are used by investors for their investment. Some of these securities are

transferable while some of them are not transferable.

Security analysis is about valuing the assets, debt, warrants, and equity of

companies from the perspective of outside investors using publicly available

information. The security analyst must have a thorough understanding of financial

statements, which are an important source of this information. As such, the

ability to value equity securities requires cross-disciplinary knowledge in both

finance and financial accounting.

While there is much overlap between the analytical tools used in security analysis

and those used in corporate finance, security analysis tends to take theperspective of potential investors, whereas corporate finance tends to take an

inside perspective such as that of a corporate financial manager.


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An updated look at security analysis and how to use it during tough financial

times. Due to the current economic climate, individual investors are starting to

take much more time and effort to really understand their investments. They've

been investing on their own in record numbers, but many have no idea how to

handle the current financial crisis.

HOW DO YOU USE SECURITY ANALYSIS

Security analysis is the analysis of tradable financial instruments called securities. These can be classified into debt securities, equities, or some hybrid of the two.

More broadly, futures contracts and tradable credit derivatives are sometimes

included. Security analysis is typically divided into fundamental analysis, which

relies upon the examination of fundamental business factors such as financial

statements, and technical analysis, which focuses upon price trends and

momentum. Quantitative analysis may use indicators from both areas.

The main goal of security analysis is to calculate a security' s real value from

analytical data. Just because a company's stock is rising or seems to be a great

bargain, doesn't make it so. Analysts go behind the scenes to see how good a

company really is relative to other companies.

Security analysts go behind the scenes to see how good a company really isrelative to other companies.
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Security analysis is also used to predict a security's future price movements.

Knowledge of expected returns and true company value gives analysts a sound

basis upon which to make their predictions.

Many investments succeed or fail depending on whether a security is over- or

undervalued. Investors can use security analysis to determine whether a

security's market price is over or under its actual value.

Investors buy undervalued securities at low prices and hold onto them in the

hopes that someday the market will realize the company's value and increase the

security's prices.

FUNCTIONS OF SECURITY ANALYSIS:

1. Descriptive Function: Limits itself to marshaling the important facts relating to

an issue and presenting them in a coherent, readily intelligible manner.

The least imaginative type is what is presented by various securities

manuals (Value line). Here the material is accepted in the form supplied by

the company.

A more penetrating descriptive analysis is by various kinds of adjustments

in order to bring the true operating results in the period covered andparticularly in order to place the data of a number of companies on a fairly

comparable plane. (LIFO vs. FIFO, non-recurring gains/losses,

nonconsolidated subsidiaries, reserves)
http://bobbrinker.educatedinvestor.com/fss/learningCenter/article.html?cn=Ways%20to%20Build%20Wealth&tn=Principles%20of%20Investment%20Analysis&aid=-743047560&template=default#Expected_Returnhttp://bobbrinker.educatedinvestor.com/fss/learningCenter/article.html?cn=Ways%20to%20Build%20Wealth&tn=Principles%20of%20Investment%20Analysis&aid=-743047560&template=default#Investmenthttp://bobbrinker.educatedinvestor.com/fss/learningCenter/article.html?cn=Ways%20to%20Build%20Wealth&tn=Principles%20of%20Investment%20Analysis&aid=-743047560&template=default#Market_Pricehttp://bobbrinker.educatedinvestor.com/fss/learningCenter/article.html?cn=Ways%20to%20Build%20Wealth&tn=Principles%20of%20Investment%20Analysis&aid=-743047560&template=default#Markethttp://bobbrinker.educatedinvestor.com/fss/learningCenter/article.html?cn=Ways%20to%20Build%20Wealth&tn=Principles%20of%20Investment%20Analysis&aid=-743047560&template=default#Markethttp://bobbrinker.educatedinvestor.com/fss/learningCenter/article.html?cn=Ways%20to%20Build%20Wealth&tn=Principles%20of%20Investment%20Analysis&aid=-743047560&template=default#Market_Pricehttp://bobbrinker.educatedinvestor.com/fss/learningCenter/article.html?cn=Ways%20to%20Build%20Wealth&tn=Principles%20of%20Investment%20Analysis&aid=-743047560&template=default#Investmenthttp://bobbrinker.educatedinvestor.com/fss/learningCenter/article.html?cn=Ways%20to%20Build%20Wealth&tn=Principles%20of%20Investment%20Analysis&aid=-743047560&template=default#Expected_Return


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On a still higher level would include consideration of the changes in the

companys pos ition over a long period of years, also a detailed comparison

with others in the same field, also projects of earning power on various

assumptions as to future conditions.

2. The Selective Function: The analyst must be ready to pass judgment on the

merits of securities and is expected to advice others on their sale, purchase,

retention or exchange.

Graham says that the laymen belief that analyst should be able to give

advice of this sort about any stock or bond issue at any time is incorrect.

There are times and situations that are propitious for a sound analytical

judgment; others which is poorly qualified to handle; many others for

which his study and his conclusions may be better than nothing, but still of

questionable value to the investor.

A proper analysis of common stock will take into account all the important

points in the companys past record and present position, and it will apply

informed judgment to the projection of future results.

The approach Graham suggests to select common stocks is to value the

stock independently of its market price and to purchase it when it is

available at a substantial discount to this value. This independent value is

called Intrinsic Value or Central Value.

Intrinsic value is defined as that value which is justified by the facts e.g.,

assets, earnings, d ividends, definite prospects. In the usual case the most

important single factor determining value is now held to be the indicated

average future earning power. IV would then be found by first estimating


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this earnings power, and then multiplying that estimate by an appropriate

capitalization factor.

The multiplier takes into account a large number of valuation elements,

such as the expected stability of earnings, the expected growth factor, the

expected dividend policy all of which may be comprehended in the

quality of the company and perhaps the assets behind the shares.

Graham says that experience affirms that the price and the independently

ascertained value do tend to converge as time goes on.

The weakness of this method is lack of precision and un-dependable nature

of any calculation of economic future.

A valuation may be very skillfully done in the light of all pertinent data and

the soundest judgment of future probabilities; yet the market may delay

adjusting itself to the indicated value for so long a period that new

conditions may supervene and bring with them a new value. Thus even

though the price ultimately converges with that new value, the old

valuation may have proved undependable.

These limitations should be acknowledged by the analyst and must use

good judgment in distinguishing between securities and situations that are

better suited and those that are worse suited to value analysis. Its working

assumption is that the past record affords at least a rough guide to the

future. The more questionable this assumption, the less valuable is the

analysis. Hence this technique is more useful when applied to a business of

inherently stable character than to one subject to wide variations and more

useful when carried on under fairly normal general conditions than in times

of great uncertainty and radical change.


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INVESTMENT

MEANING OF INVESTMENT

The concept of investment has many meanings. Investment is the employment of

funds with the aim of getting return on it. It is the commitment of funds which

have been saved from current consumption with the hope that some benefits will

receive in future. Thus it is a reward for waiting for money. Savings of the people

are invested in assets depending on their risk and return. There are two concepts

of investments:

1: Economic investment: The concept of economic investment means additions

to the capital stock of the society. The capital stock of the society is the goods

that are used in the production of other goods. The term investment implies the

formation of new and productive capital in the form of new construction and

producers durable instrument such as plant and machinery. Inventories are also

included in this concept.

2: Financial investment: This is an allocation of monetary resources to assets that

are expected to yield some gain or return over a period of time. It is a general or

extended sense of term. It means an exchange of financial claims such as shares

and bonds. Real estate, etc. Financial investment involves contract written on

pieces of paper such as shares and debentures.

The economic and financial concepts of investment are related to each other

because investment is a part of the savings of individuals which flow into the

capital market either directly or through institutions.


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INVESTMENT OBJECTIVES:

Investing is a wide spread practice and many have made their fortunes in the

process. The starting point in this process is to determine the characteristics of the various investments and then matching them with individual needs and

preferences. All personal investing is designed in order to achieve certain

objectives. These objectives may be tangible or intangible objectives. These

objectives can be classified as financial or personal objectives. Financial objectives

are safety, profitability and liquidity. Personal objectives may be related to

personal characteristics of individuals such as family commitments, status,consumption and provision for retirement etc. The objectives can be classified on

the basis of the investors approach as follows:

1: Short term high priority objectives: Investors have a high priority towards

achieving certain objectives in a short term time. For example a young couple will

give a high priority to buy a house. Thus, investors will go for high priority

objectives and invest their money accordingly.

2. Long term high priority objectives: Some investors look forward and invest on

the basis of objectives of long term needs. They want to achieve financial

independence in long period. For example, investing for retirement period or

education of a child etc. Investors usually prefer a diversified approach while

selecting different types of investments.

3. Low priority objectives: These objectives have low priority in investing. These

objectives are not painful. After investing in high priority assets, investors can


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invest in these low priority assets. For example, provision for tour, domestic

appliances.etc

4. Money making objectives: Investors put their surplus money in this kind of

investment. Their objective is to maximize wealth. Usually the investors invest in

shares of companies which provide capital appreciation apart from regular

income from dividend.

The basic objective of investment is to maximize yield and minimize risk. The

other objectives are:

(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 stock exchange. Investment should be liquid as well as marketable.

The portfolio should contain a planned proportion of high grade and readily

saleable investment.

(d) Safety: Safety means protection for investment against loss under reasonable

variations.


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INVESTMENT ALTERNATIVES:

Wide varieties of investment avenues are now available in India. An investor can

himself select the best avenue after studying the merits and demerits of differentavenues. Even financial advertising, newspaper supplements on financial matters

and investment journals offer guidance to investors in the selection of suitable

investment avenues. The following indicates alternative avenues for investment:

Various investment avenues:

1. National (postal) savings schemes

2. Real estate

3. PF & PPF

4. UTI mutual funds

5. GOI savings bonds

6. Shares and debentures

7. Gold and silver

8. Money market securities

9. LIC schemes

10. HDFC schemes

11. Public deposits

12. Bank deposits


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Investment avenues are the outlets of funds. There are variety of investment

avenues or alternatives. Investors are free to select any one or more alternative

avenues depending upon their needs. There are some avenues where tax benefits

are available. Such schemes are called tax savings schemes of investment. The tax

liability reduces when investment is made in such schemes. The schemes are

decided by the government and announced along with the annual budget.


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BASIC CONCEPT

1. Introduction: Security Analysis stands for the proposition that a well-disciplined

investor can determine a rough value for a company from all of its financial

statements, make purchases when the market inevitably under-prices some of

them, earn a satisfactory return, and never be in real danger of permanent loss.

2. Approach of Security Analysis: There are basically two main approaches of

security analysis- Fundamental analysis and Technical analysis.

3. Fundamental Analysis: Fundamental analysis is based on the assumption that

the share prices depend upon the future dividends expected by the shareholders.

The present value of the future dividends can be calculated by discounting the

cash flows at an appropriate discount rate and is known as the 'intrinsic value of

the share'. The intrinsic value of a share, according to a fundamental analyst,depicts the true value of a share. A share that is priced below the intrinsic value

must be bought, while a share quoted above the intrinsic value must be sold.

4. Models of Fundamental Analysis

(a) Dividend Growth Model

P(0) = D( 0 )( 1 + g ) / (k - g )Where,

P(0) = Price of Share

D(0) = Current Dividend

g= growth rate


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k= cost of equity

(b) Dividend Growth Model and the PE Multiple

P(0)= b E( 0 ) (1 + g) / (k - g )

Where,

b = Dividend Pay-out fraction or ratio

E(0)= Current EPS

5. Types of Fundamental Analysis: There are three types of fundamental analysis-

Economic analysis, Industry analysis and Company analysis.

6. Economic Analysis : Macro- economic factors e. g. historical performance of the

economy in the past/ present and expectations in future, growth of different

sectors of the economy in future with signs of stagnation/degradation at present

to be assessed while analyzing the overall economy. Trends in peoples income

and expenditure reflect the growth of a particular industry/company in future.

Consumption affects corporate profits, dividends and share prices in the market.

7.Factors Affecting Economic Analysis: Some of the economy wide factors are as

under:

(a) Growth Rates of National Income and Related Measures

(b) Growth Rates of Industrial Sector

(c) Inflation

(d) Monsoon


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8.Techniques Used For Economic Analysis:

(i) Anticipatory Surveys: They help investors to form an opinion about the future

state of the economy.

(ii) Barometer/Indicator Approach: Various indicators are used to find out how

the economy shall perform in the future.

(iii) Economic Model Building Approach: In this approach, a precise and clear

relationship between dependent and independent variables is determined.

9.Industry Analysis: An assessment regarding all the conditions and factors

relating to demand of the particular product, cost structure of the industry and

other economic and government constraints have to be done.

10. Factors Affecting Industry Analysis: The following factors may particularly be

kept in mind while assessing the factors relating to an industry :

(a) Product life cycle

(b) Demand supply gap

(c) Barriers to entry

(d)Government attitude

(e)State of competition in the Industry

(f)Cost conditions and profitability

(g)Technology and research


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11. Techniques Used For Industry Analysis

(a) Regression Analysis: Investor diagnoses the factors determining the demand

for output of the industry through product demand analysis.

(b) Input Output Analysis: It reflects the flow of goods and services through the

economy, intermediate steps in production process as goods proceed from raw

material stage through final consumption.

12. Company Analysis: Economic and industry framework provides the investor

with proper background against which shares of a particular company are

purchased. This requires careful examination of the company's quantitative and

qualitative fundamentals.

13. Techniques Used in Company Analysis

Correlation & Regression Analysis: Simple regression is used when inter

relationship covers two variables. For more than two variables, multiple

regression analysis is followed.

Trend Analysis: The relationship of one variable is tested over time using

Regression analysis. It gives an insight to the historical behavior of the

variable.

Decision Tree Analysis: In decision tree analysis, the decision is taken

sequentially with probabilities attached to each sequence. To obtain the

probability of final outcome, various sequential decisions are given along

with probabilities,then probabilities of each sequence is to be multiplied

and then summed up.


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14. Technical Analysis: Technical analysis is a method of share price movements

based on a study of price graphs or charts on the assumption that share price

trends are repetitive, that since investor psychology follows a certain pattern,

what is seen to have happened before is likely to be repeated.

15. Types of Charts

(i) Bar Chart : In a bar chart, a vertical line (bar) represents the lowest to the

highest pirice, with a short horizontal line protruding from the bar representing

the closing price for the period.

(ii) Line Chart: In a line chart, lines are used to connect successive days prices.

The closing price for each period is plotted as a point. These points are joined by a

line to form the chart. The period may be a day, a week or a month.

(iii) Point and Figure Chart: Point and Figure charts are more complex than line or

bar charts. They are used to detect reversals in a trend.


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ANALYSIS

1. Investment Analysis :

An investor has to analyze the securities available for investment. Investment

analysis means to make to comparative study of the type of industry, kind of

security, fixed or variable securities. This helps to form beliefs regarding future

behavior of prices and stocks, the expected return and risk associated with it.

Investors need to definite ideas regarding a number of features such as liquidity,

safety, income stability, capital appreciation, tax incentives and legality. Allinvestment decisions are to be made on a scientific analysis.

The securities listed on stock exchange are equities, preference shares, bonds

and debentures. These securities are traded on the stock exchange. It gives the

price for each security. Trading provides liquidity to these securities. Thus

investment is promoted and savings flow into investment. The market reflects the

economic and financial developments in the country. It also protects the interest

of the investors and ensures safety and liquidity to their investment. The market

is influenced by the flow of information and money. These flows and other

environmental factors determine the prices of securities in stock market.

2. Fundamental Analysis:

Fundamental analysis is a method of finding out the future price of security which

an investor wants to buy. The objective of fundamental analysis is to appraise the

intrinsic value of a security. There is an intrinsic value for each security and it

can be determined by making an analysis of the fundamental factors relating to


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the company, industry and economy. At any given point of time, the current

market price of a security can be different from its intrinsic value due to the

temporary market conditions.

The fundamental analysis can determine the intrinsic value of a security by

discounting the prospective dividend using the rate of return required by the

investor as the discount rate. The prospective dividend or interest stream

depends upon the economic and industrial environment in the country. The

fundamental analysis is an attempt to estimate the real worth of a security by

considering the earning potentials of a company. The earnings potential of a

company depends on investment environmental factors such as growth of

national economy, monetary policies, corporate laws, and taxation, social and

political environment in the country. The real worth of security depends to a large

extent, on the companys competitiveness, quality of management, operation al

efficiency, profitability, and capital structure and dividend policy. Thus the

intrinsic value of a security is closely associated with the economic environment in

the country.


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3. Economic Analysis:

It is very important to assess the state of the economy for the purpose of making

investments. If a recession is likely, or undergoing, the stock market is affected at

certain times. On the other hand, if a strong economic expansion is undergoing,

the stock market is also affected at certain times. This status of an economic

activity has a major impact on overall stock market. Therefore, it is very important

for the investors to assess the state of the economy and its impact on the stock

market. The current state of national economy should be determined for the

purpose of making investments.

The analyst can collect the data or required information from different sources.

Economic survey published by the government before budget every year, will be

very much useful in this respect. Investment climate can be studied from GNP and

its components. GNP stands from Gross National Product. It is the broadest

measure of economic activity. It represents the aggregate amount of goods and

services produced in the economy for a period of time. The analyst has also to

study the Gross Domestic Product (GDP), Gross Domestic Savings and Gross

Domestic Capital formation.

These factors must be favorable at the time of making investments. The investor

has to make analysis of the economy in order to determine his investment

strategy. The important thing is to identify the trends in the economy and adjust

his investments portfolio accordingly. A investor has to make his own economic

forecasts. If the economy is expected to increase in real terms next year, the stock


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market should be expected to improve accordingly. Inflation and price increase

are also important.

A real growth of GNP without inflation is desirable. A deficit in trade and balance

of payments position of the country depreciate the currency in foreign exchange

markets and it will have negative impact on the economy and the stock market.

An examination of interest rates, corporate profits, employment generation,

housing, agriculture. And other economic variables will give investors an easy

reference in interpreting and assessing the direction of the economy and stock

market.

4. Industry Analysis:

Industry analysis is the study of industries which are on the upswing or growing.

The ideal investment is the investment in the growing industry. There are certain

industries which have been growing in India. The recent examples are of entertainment and computer software. The petrochemicals, bio-technology and

capital goods industries are also growing. Investment in these industries will

definitely gain in future.

The investor should know the industry classification used in the economy. It is

also necessary to know the characteristics, problems and practices in different in

industries. There is also need to study those present and future developments,

operating features, seasonal variations and competitiveness in order to establish

the proper perspective. A careful analysis of growth of industries will help to

select few industries for investment.


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In recent times growth of industries has been affected due to technological

changes, competitive pressure, population, etc. The competitive position of

industries is also affected due to high labor costs, change in social habits,

government regulations and automation.

An investor should select few industries that are in the expansion stage.

Investment should not be made in the industries which are in the pioneering

stage. Similarly industries that are in the stagnation stage or declining in economic

importance should be avoided. Investors should select such industries which have

developed a strong competition position. It is difficult to identify a good industry

for investment.

5. Company Analysis:

The industry analysis helps to select few industries for investment in securities.

There are many companies in an industry. For example, if an investor wants toinvest in computer software industry, then he has to select few companies from

that industry. There are thousands of listed companies from computer software

industry. Therefore an investor has to select few companies for investment.

A company analysis is a study of the variables which influence the futures price of

a companys share. It is an assessment of companys competitive position, earning

capacity and profitability. It is a method of finding out the intrinsic value of a

companys share. This requires internal as well as external information of the

company. Internal information consists of data and events of the company which

is available from its financial statements. External information consists of


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demand, supply, from industry associations, chambers of commerce, government

departments and stock exchange bulletins.

The basic financial statements which are used as tools of company analysis

are the income statement, the balance sheet and the statement of changes in

financial position. While making company analysis, investors should carefully

judge that these statements are correct, complete, consistent and comparable.

The accuracy of the financial statements can be identified from the report of the

auditors.

6. Ratio Analysis :

Ratio analysis is the systematic process of determining and interpreting the

numerical relationship of various pairs of items derived from the financial

statements of a business. Absolute figures of any aspect of business may not

convey any tangible meaning. Hence it is one of the most important tools of

financial statement analysis. It is the principal technique used in judging the

condition disclosed by the financial statements.

It is a process of computing, deterring, and presenting the relationship between

items or groups in the financial conditions, efficiency and profitability of a firm. A

ratio is simply a number expressed in terms of another. It is a statistical yardstick

that provides a measure of the relationship between figures.

The relationship can be expressed as a percent or as a quotient. An accounting

ratio expresses the relationship between two figures or group of items in the

financial statements. Ratio analysis is a useful tool of financial appraisal at macro


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level as well as micro levels. However their use depends on the user and the

purposes. Certain ratios are useful at, micro level while others are useful at macro

level.


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APPROACHES

APPROACHES TO SECURITY ANALYSIS

An investor is surrounded by many factors in his considerations to make

investment. The investor has to try and form a strategy for making investment

decisions. In other words he has to follow certain approach in making investment

decision. Different investors may follow different approaches for different

investments. Basically there are four approaches to investment decision making.These are as follows:

1. Fundamental approach: The basic talents of fundamental approach are as

follows:

(a) There is an intrinsic value for each stock and this value can be determined by a

penetrating analysis of the fundamental; factors relating to the company, industry

and economy.

(b) At any given point of time due to temporary market disequilibrium, the

current market price of a stock can be at variance with its intrinsic value.

Therefore, superior returns can be earned by buying undervalued securities and

selling overvalued securities. This approach focuses on certain basic factors

relating to the economy and seeks to determine the optimum price of a security.

The Fundamental approach suggests that every Stock has an intrinsic value which

should be equal to the present value of the future Stream of income from that

stock discounted at an appropriate risk related rate of Interest. Estimate of real


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worth of a stock is made by considering the earnings potential of firm which

depends upon investment environment and factors relating to specific industry,

competitiveness, quality of management.

Operational efficiency, profitability, capital structure and dividend policy. Thus,

security analysis is done to evaluate the current market value of particular

security with the intrinsic or theoretical value. Decisions about buying and selling

an individual security depend upon the conferred relative value. Sinc6 this

approach is based on relevant facts, it gives true estimate of the value of a

security and it is widely use in estimation of security prices

2. Technical approach: The technical approach involves plotting the price

movement of the stock and drawing inferences from the price movement in the

market. Many investors use technical approach because it gives the following

advantages:

(a) Objectivity: Once the technician has determined the particular rule to use in

the technical strategy, making the actual investment decision becomes easy.

(b) It is easy to learn and requires no specialized knowledge.

(c) They have ready access to all the information they need.

Thus they are concerned with market timing i.e. the question of when and not

with the determination of a right price i.e. the question of what. They usually

predict near term price movements. The basic assumption of this approach is that

the price of a stock depends on supply and demand in the market place and has

little relationship with its intrinsic value. All financial date and market information

of a given security is reflected in the market price of a security. Therefore, an


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attempt is made through charts to identify price movement patterns which

predict future movement of the security,

The main tools used by technical analysis are: (1) The Dow Jones theory which

asserts that stock prices demonstrate a pattern over four to five years and these

patterns are mirrored by indices of stock prices. The theory employs two Dow

Jones Averages - the industrial average and the transportation average. If

industrial average is rising, then transport average should also rise. Simultaneous

price movement is the maid prediction which may show bullish as well as bearish

results (2) Chart Patterns are used along with Dow Jones Theory to predict the

market movements. Various types of charts are used for this purpose.

3. Efficient market theory approach: The efficient market theory is based on

efficiency of capital market. It believes that market is efficient and the

information about individual stocks is available in the market. Thus portfolio

analysts feel that market cannot be influenced by a single investor. They feel that

there is risk involved in managing a portfolio. Therefore they try to diversify

between different risk classes of securities. If they positive towards the market,

they establish a portfolio of risk choice that have higher risk and return than the

market. The modern portfolio management is based on the random walk model

which means that successive price changes are independent. It is based on the

assumption that in efficient capital markets prices of traded securities always fully

reflect all publicly available information concerning those securities. For market

efficiency there are three essential conditions:

(1) All available information is cost free to all market participants,


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(2) No transaction costs, and

(3) All investors similarly view the implications of available information on current

prices and distribution of future prices of each security.

It has been empirically proved that stock prices behave randomly under the above

conditions. These conditions have been rendered unrealistic in the light of the

actual experience because there is not only transaction cost involved but brokers

have their own information base made available by processing compute fed date.

Moreover, information is not costless and all investors do not take similar views.

Research studies devoted to test the EMT are put into three categories i.e.

(a) The week form theory,

(b) The semi-strong form, and

(c) The strong form.

(a) The Weak Form theory: This theory states that current security prices fully

reflect information available in the market regarding historical events of thecompany Study of the historical sequence of prices, can neither assist the

investment analysts or investors to abnormally enhance their investment neither

return nor improve their ability to select stocks. It means that knowledge of past

patterns of stock prices does not aid investors to make a better choice. Random


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Walk Theory is the offshoot of this test. Random walk Hypothesis: The Hypothesis

presupposes that stock prices move randomly. No sure prediction can be made of

future movement of stock prices on the basis of given prices at the end of one

period. There is no relationship between today's price and tomorrow's price. Price

movement is a random. The various statistical tests conducted in U.K. and U.S.A.

on stock price have proved that the "extent of dependence between Successive

price changes is negligible".

(b) Semi-strong form of Efficient Market Hypothesis: This hypothesis holds that

security prices adjust rapidly to all publicly available information such as

functional statements and reports and investment advisory reports, etc. All

publicly available information, whether good or bad is fully reflected in security

prices. The buyers and sellers will raise the price as soon as a favorable price of

information is made available to the public; opposite will happen in case of

unfavorable piece of information. The reaction is almost instantaneous, thus,

printing to the greater efficiency of securities market. lt is to be noted that the

semi-strong form of efficient market hypothesis includes that week form of

efficient market hypothesis also because internal market information is a part of

all publicly available information.

(c) The Strong Form test of the inside information and the Efficiency of the

Market: This test is concerned with whether two sets of individuals - one having

inside information about the company and the other uninformed could generate

random effect in price movements. The strong form holds that the prices reflect


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all information that is known. It contemplates that even the corporate officials

cannot, benefit from the inside information of the company.

The market is not only efficient but also perfect. Lt is to be noted that it includes

both the weak form and semi-strong form of efficient market hypothesis. The

findings are that very few and negligible people are in such a privileged position

to have inside information and may make above-average gains but they do not

affect the normal functioning of the market.

Efficient Market Hypothesis has put to challenge the fundamental and a technical

analyst to the extent that random walk model is valid description of reality and

the work of charists is of no real significance is stock price analysis. In practice, it

has been observed that markets are not fully efficient in the semi-strong or strong

sense. Inefficiencies and imperfections of certain kinds have been observed in the

studies conducted so far to test the efficiency of the market. Thus, the scope of earning higher returns exists by using original, unconventional and innovative

techniques of analysis. Also, the availability of inside information and its rational

interpretation can lead to strategies for deriving superior returns.

4. Psychological Approach: The psychological approach is based on the

assumption that the stock prices are guided by emotion, rather than reason. Thus,

prices of stocks are believed to be influenced by the psychological mood of the

investors. Technical analysis believes that stock market movement is 10 percent


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logical and 90 percent psychological. Therefore, most of their tools are designed

to read the psychology of the market.

If the stock market is dominated by Institutional or Foreign investors, operators

on the wolf pack theory follow the leaders. When major money managers start to

buy regardless of the reason, the price of the stock will go up. Similarly, political

matters, natural calamities, declaration of war also affect the prices of securities

due to different behavior of the investors or operators.


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INVESTMENT VALUATION RATIOS:

This analysis looks at a wide array of ratios that can be used by investors toestimate the attractiveness of a potential or existing investment and get an idea

of its valuation.

This ratio help the investors to value the firm (returns) in terms of bonus,

dividend, Net Profit per share their face values free reserves etc. In short the

return given or amount given to the shareholders or investors, shown by this

ratio.1. Dividend per Share or Dividend Yield:

Dividend Yield= Annual Dividend per Share Stock Price per Share

A stock's dividend yield is expressed as an annual percentage and is calculated as

the company's annual cash dividend per share divided by the current price of thestock. The dividend yield is found in the stock quotes of dividend-paying

companies. Investors should note that stock quotes record the per share dollar

amount of a company's latest quarterly declared dividend. This quarterly dollar

amount is annualized and compared to the current stock price to generate the

per annum dividend yield, which represents an expected return.

2. Net Operating Profit per Share:

Net Operating Profit per Share=Net Operating Profit after Tax (NOPAT) Total

Share Capital


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It shows the net profit which investors will going to earn on each shares they held

in the company

3. Bonus per Share:

Bonus given by the company to their investor in the ratio of 1:1 or 1:2 means if it

is 1:1 then they give same number of shares which already held by the share

holder. The companies give bonus out of their free reserves built out of the

genuine profits or share premium collected in cash only.

Bonus per share increase the number of share for the investor and it

automatically increase their amount and profit out of that company. Investor isconsider this news i.e. declaration of bonus as the best news from the company.

So, the company which gives more bonuses per share selected first by us and so

on.

3.1 Profitability Ratios:

1. Gross Profit Margin

The gross profit margin looks at cost of goods sold as a percentage of sales. This

ratio looks at how well a company controls the cost of its inventory and the

manufacturing of its products and subsequently passes on the costs to its

customers. The larger the gross profit margin, the better for the company.

The calculation is: Gross Profit/Net Sales Both terms of the equation come fromthe company's income statement.
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2. Operating Profit Margin

Operating profit is also known as EBIT and is found on the company's income

statement. EBIT is earnings before interest and taxes. The operating profit marginlooks at EBIT as a percentage of sales. The operating profit margin ratio is a

measure of overall operating efficiency, incorporating all of the expenses of

ordinary, daily business activity.

The calculation is: EBIT/Net Sales . Both terms of the equation come from the

company's income statement.

3. Net Profit Margin

When doing a simple profitability ratio analysis, net profit margin is the most

often margin ratio used. The net profit margin shows how much of each sales

dollar shows up as net income after all expenses are paid. For example, if the net

profit margin is 5% that means that 5 cents of every dollar is profit.

The net profit margin measures profitability after consideration of all expenses

including taxes, interest, and depreciation.

The calculation is: Net Income/Net Sales Both terms of the equation come from

the income statement.

4. Return on Assets (also called Return on Investment)

The Return on Assets ratio is an important profitability ratio because it measures

the efficiency with which the company is managing its investment in assets and

using them to generate profit. It measures the amount of profit earned relative to
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the firm's level of investment in total assets. The return on assets ratio is related

to the asset management category of financial ratios.

The calculation for the return on assets ratio : Net Income/Total Assets .NetIncome is taken from the income statement and total assets is taken from the

balance sheet. The higher the percentage, the better, because that means the

company is doing a good job using its assets to generate sales.

5. Return on Capital Employed (ROCE ):

Return on Capital Employed (ROCE) = Net Income Capital Employed

Capital Employed = Average Debt Liabilities + Average Shareholders Equity

The return on capital employed (ROCE) ratio, expressed as a percentage,

complements the return on equity (ROE) ratio by adding a company's debt

liabilities, or funded debt, to equity to reflect a company's total "capital

employed". This measure narrows the focus to gain a better understanding of a

company's ability to generate returns from its available capital base. By

comparing net income to the sum of a company's debt and equity capital,

investors can get a clear picture of how the use of leverage impacts a company's

profitability. Financial analysts consider the ROCE measurement to be a more

comprehensive profitability indicator because it gauges management's ability to

generate earnings from a company's total pool of capital.
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3.2 Liquidity and solvency Ratios:

Liquidity ratios attempt to measure a company's ability to pay off its short-termdebt obligations. This is done by comparing a company's most liquid assets (or,

those that can be easily converted to cash), its short-term liabilities.

In general, the greater the coverage of liquid assets to short-term liabilities the

better as it is a clear signal that a company can pay its debts that are coming due

in the near future and still fund its ongoing operations. On the other hand, a

company with a low coverage rate should raise a red flag for investors as it maybe a sign that the company will have difficulty meeting running its operations, as

well as meeting its obligations.

The biggest difference between each ratio is the type of assets used in the

calculation. While each ratio includes current assets, the more conservative ratios

will exclude some current assets as they arent as easily converted to cash.

The ratios that we'll look at are the current, quick and cash ratios and we will alsogo over the cash conversion cycle, which goes into how the company turns its

inventory into cash.

1. Current Ratio:

Current Ratio= Current Assets Current Liabilities

The current ratio is a popular financial ratio used to test a company's liquidity

(also referred to as its current or working capital position) by deriving the

proportion of current assets available to cover current liabilities.


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The concept behind this ratio is to ascertain whether a company's short-term

assets (cash, cash equivalents, marketable securities, receivables and inventory)

are readily available to pay off its short-term liabilities (notes payable, current

portion of term debt, payables, accrued expenses and taxes). In theory, the higher

the current ratio, the better.

2. Quick ratio:

The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity

indicator that further refines the current ratio by measuring the amount of the

most liquid current assets there are to cover current liabilities. The quick ratio is

more conservative than the current ratio because it excludes inventory and other

current assets, which are more difficult to turn into cash. Therefore, a higher ratio

means a more liquid current position.

3. Debt equity ratio:

Debt Equity Ratio= debt equity ratio shows the relationship between long-term

debts and shareholders funds. It is also known as External -Internal equity ratio.

Debt Equity Ratio = Debt/Equity

Where Debt (long term loans) include Debentures, Mortgage Loan, Bank Loan,

Public Deposits, Loan from financial institution etc.

Equity (Shareholders Funds) = Share Capital (Equity + Preference) + Reserves and

Surplus Fictitious Assets


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This ratio is a measure of owners stock in the business. Proprietors are always

keen to have more funds from borrowings because:

(i) Their stake in the business is reduced and subsequently their risk too

(ii) Interest on loans or borrowings is a deductible expenditure while computing

taxable profits. Dividend on shares is not so allowed by Income Tax Authorities.

The normally acceptable debt-equity ratio is 2:1.

4. Proprietary ratio: Proprietary Ratio establishes the relationship between

proprietors funds and total tangible assets. This ratio is also termed as Net

Worth to Total Assets or Equity -Assets Ratio.

Proprietary Ratio = Proprietors Funds/Total Assets

Where Proprietors Funds = Shareholders Funds = Share Capital (Equity +

Preference) + Reserves and Surplus Fictitious Assets

Total Assets include only Fixed Assets and Current Assets. Any intangible assets

without any market value and fictitious assets are not included.

This ratio indicates the general financial position of the business concern. This

ratio has a particular importance for the creditors who can ascertain the

proportion of shareholders funds in the total assets of the business. Higher theratio, greater the satisfaction for creditors of all types.


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3.3 Debt coverage Ratios:

It shown the debt recovery every year by the company how much amount of debt

is paid to creditors and banks and also received from the debtors are shown with

the help of this ratio This ratio also indicates the debt of the company which is

levied on the investors or the owner or the shareholder or three of all.

Total Debt to Owners fund:

Total Debt to Owners fund= Total Debt Owners Fund

Owners fund = Total Assets - Current Liabilities - Long Term Loans

Total debt includes current liabilities and loans outstanding

This ratio indicates the liabilities and outstanding on the share capital or share

holders fund the more the ratio the less preference for investment is given by the

share holders and portfolio manager.

So, we give the preference to the l ess debt to owners fund ratio having company

at prior than the other and so on.

3.4 Management Efficiency ratios:

1. Inventory turnover ratio: Inventory turnover illustrates how well a company

manages its inventory level. If inventory turnover is too low, it suggest that a

company may be over stocking or over building its inventory or it may be having

issues selling products to customers. All else equal, higher inventories are better.


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Inventory turnover = cost of sales/ average inventory

2. Fixed Assets Turnover Ratio: Fixed assets turnover ratio establishes a

relationship between net sales and net fixed assets. This ratio indicates how wellthe fixed assets are being utilized.

Fixed Assets Turnover Ratio = Net Sales/Net Fixed Assets

In case Net Sales are not given in the question cost of goods sold may also be

used in place of net sales. Net fixed assets are considered cost less depreciation.

This ratio expresses the number to times the fixed assets are being turned over in

a stated period. It measures the efficiency with which fixed assets are employed.

A high ratio means a high rate of efficiency of utilization of fixed asset and low

ratio means improper use of the assets.

3. Stock Turnover Ratio: Stock turnover ratio is a ratio between cost of goods sold

and average stock. This ratio is also known as stock velocity or inventory turnover

ratio.

Stock Turnover Ratio = Cost of Goods Sold/Average Stock

Where Average Stock = [Opening Stock + Closing Stock]/2

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses ClosingStock

Stock is a most important component of working capital. This ratio provides

guidelines to the management while framing stock policy. It measures how fast


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the stock is moving through the firm and generating sales. It helps to maintain a

proper amount of stock to fulfill the requirements of the concern. A proper

inventory turnover makes the business to earn a reasonable margin of profit.

4. Debtors Turnover Ratio: Debtors turnover ratio indicates the relation between

net credit sales and average accounts receivables of the year. This ratio is also

known as Debtors Velocity.

Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivables

Where Average Accounts Receivables = [Opening Debtors and B/R + ClosingDebtors and B/R]/2

Credit Sales = Total Sales Cash Sales

This ratio indicates the efficiency of the concern to collect the amount due from

debtors. It determines the efficiency with which the trade debtors are managed.

Higher the ratio, better it is as it proves that the debts are being collected very

quickly.

3.5 Cash flow indicators ratio:

This section of the financial ratio tutorial looks at cash flow indicators, which

focus on the cash being generated in terms of how much is being generated and

the safety net that it provides to the company. These ratios can give users

another look at the financial health and performance of a company.

At this point, we all know that profits are very important for a company. However,

through the magic of accounting and non-cash-based transactions, companies


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that appear very profitable can actually be at a financial risk if they are generating

little cash from these profits. For example, if a company makes a ton of sales on

credit, they will look profitable but haven't actually received cash for the sales,

which can hurt their financial health since they have obligations to pay.

The ratios in this section use cash flow compared to other company metrics to

determine how much cash they are generating from their sales, the amount of

cash they are generating free and clear, and the amount of cash they have to

cover obligations. We will look at the operating cash flow/sales ratio, free cash

flow/operating cash flow ratio and cash flow coverage ratios.

1. Dividend Payout Ratio:

Dividend Payout Ratio= Total Dividend Payment/Net Profit

This ratio shows the yearly dividend paid by the company out of their net profit.

With the help of this ratio we can get the idea how much company keep the profit

for their own expansion and how much they give it to their shareholders.

More the dividend payout it is better for the investors. They get the money

physically after giving dividend. Although if company did not give dividend it is the

amount of investors keep by them but yet not given to them and used for the

company.


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2. Earnings retention ratio

It gives the percentage of a publicly-traded company's post-tax earnings that are

not paid in dividends. Most earnings retained are re-invested into the company's

operations. Tracking year-on-year earnings retention ratios is important to

fundamental analysis to investigate whether a company is increasing or

decreasing its rate of re-investment. The earnings retentions ratio is calculated

thusly:

Earning Retention Ratio= Net IncomeDividends/Net Income


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INTRODUCTION TO PORTFOLIO MANAGEMENT

Investing in securities such as shares, debentures, and bonds is profitable as well

as exciting. It is indeed rewarding, but involves a great deal of risk and calls forscientific knowledge as well artistic skill. In such investments both rationale and

emotional responses are involved. Investing in financial securities is now

considered to be one of the best avenues for investing one savings while it is

acknowledged to be one of the best avenues for investing one saving while it is

acknowledged to be one of the most risky avenues of investment. It is rare to find

investors investing their entire savings in a single security. Instead, they tend toinvest in a group of securities. Such a group of securities is called portfolio.

Creation of a portfolio helps to reduce risk, without sacrificing returns. Portfolio

management deals with the analysis of individual securities as well as with the

theory and practice of optimally combining securities into portfolios. An investor

who understands the fundamental principles and analytical aspects of portfolio

management has a better chance of success.


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WHAT IS PORTFOLIO:

A portfolio is a collection of securities. Since it is rarely desirable to invest the

entire funds of an individual or an institution in a single security, it is essential that

every security be viewed in a portfolio context. A set or combination of securities

held by investor. A portfolio comprising of different types of securities and assets.

As the investors acquire different sets of assets of financial nature, such as gold,

silver, real estate, buildings, insurance policies, post office certificates, NSC etc.,

they are making a provision for future. The risk of each of such investments is to

be understood before hand. Normally the average householder keeps most of his

income in cash or bank deposits and assumes that they are safe and least risky.

Little does he realize that they also carry a risk with them the fear of loss or

actual loss or theft and loss of real value of these assets through the rise price or

inflation in the economy? Cash carries no interest or income and bank deposits

carry a nominal rate of 4% on savings deposits, no interest on current account and

a maximum of 9% on term deposits of one year. The liquidity on fixed deposits is

poor as one has to wait for the period to maturity or take loan on such amount

but at a loss of income due to penal rate. Generally risk averters invest only in

banks, Post office and UTI and Mutual funds. Gold, silver real estate and chit

funds are the other avenues of investment for average Householder, of middle

and lower income groups. If the investor desired to have a real rate of return

which is substantially higher than the inflation rate he has to invest in relatively

more risky areas of investment like shares and debenture of companies or bonds

of Government and semi-Government agencies or deposits with companies and

firms. Investment in Chit funds, Company deposits, and in private limited


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companies has a highest risk. But the basic principle is that the higher the risk, the

higher is the return and the investor should have a clear perception of the

elements of risk and return when he makes investments. Risk Return analysis is

thus essential for the investment and portfolio management.

BASICS OF PORTFOLIO MANAGEMENT IN INDIA

In India, Portfolio Management is still in its infancy. Barring a few Indian banks,

and foreign banks and UTI, no other agency had professional portfolio

management until 1987. After the setting up of public sector mutual funds, since

1987, professional portfolio management, backed by competent research staff

became the order of the day. After the success of the mutual funds in portfolio

management, a number of brokers and Investment consultants some of whom

are professionally qualified have become portfolio managers. They have managed

the funds of the client on both discretionary and non-discretionary basis. It was

found that many of them, including mutual funds have guaranteed a minimum

return or capital appreciation and adopted all kinds of incentives that are now

prohibited by SEBI.

The recent CBI probe into the operations of many market dealers has revealed

the unscrupulous practices by banks, dealers and brokers in their portfolio

operations. The SEBI has then imposed stricter rules, which included their

registration, a code of conduct and minimum infrastructure, experience and

expertise etc. it is no longer possible for any unemployed youth, or retired person


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or self- styled consultant to engage in portfolio management without the SEBIs

license. The guidelines of SEBI are in the direction of making portfolio

management a responsible professional service to be rendered by the experts in

the field.

EVOLUTION OF PORTFOLIO MANAGEMENT

Portfolio management is essentially a systematic method of maintaining ones

investment efficiently. Many factors have contributed to the existence anddevelopment of the concept. In the early years of the century analyst used

financial statements to find the value of the securities. The first to be analyzed

using this was Railroad Securities of the USA. A booklet entitled The Anatomy of

the Railroad was published by Thomas F. Wood lock in 1900. As the time

progressed this method became very important in the investment field, although

most of the writers adopted different ways to publish there data. They generallyadvocated the use of different ratios for this purpose. John Moody in his book.The

Art of wall Street Investing, strongly supported the use of financial ratios to know

the worth of the investment. The proposed type of analysis later on became the

common size analysis.

The other major method adopted was the study of stock price movement with

the help of price charts. This method later on was known as Technical Analysis. It

evolved during1900-1902 when Charles H. Dow, the founder of the Dow Jones

and Co. presented his view in the series of editorials in the Wall Street Journal in

USA. The advocates of technical analysis believed that stock prices movement is


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ordered and systematic and the definite pattern could be identified. There

investment strategy was build around the identification of the trend and pattern

in the stock price movement.

Another prominent author who supported the technical analysis was Ralph N.

Elliot who published a book in the year 1938 titled The Wave Principle. After

analyzing 75 years data of share price, he concluded that the market movement

was quite orderly and followed a pattern of waves. His theory is known as Elliot

Wave Theory. According to J.C. Francis the development of investment

management can be traced chronologically through three different phases. First

phase is known as Speculative Phase. Investment was not a wide spread activity,

buta cake of few rich people. The process is speculative in nature. Investment

management was an art and needed skills. Price manipulation was resorted to by

the investors. During this time period pools and corners were used for

manipulation. The result of this was the stock exchange crash in the year 1929.

Finally the daring speculative ventures of investors were declared illegal in the US

by the Securities Act of 1934.Second phase began in the year 1930. The phase

was of professionalism. After coming up of the Securities Act, the investment

industry began the process of upgrading its ethics, establishing standard practices

and generating a good public image. As a result the investments market became

safer place to invest and the people in different income group started investing.

Investors began to analyze the security before investing. During this period the

research work of Benjamin Graham and David L. Dood was widely publicized and

publicly acclaimed. They published a book Security Analysis in 1934, which was

highly sought after. There research work was considered first work in the field of


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security analysis and acted as the base for further study. They are considered as

pioneers of security analysis as a discipline. Third phase was known as the

scientific phase. The foundation of modern portfolio theory was laid by

Markowitz.

His pioneering work on portfolio management was described in his article in the

Journal of Finance in the year 1952 and subsequent books published later on.

He tried to quantify the risk. He showed how the risk can be minimized through

proper diversification of investment which required the creation of the portfolio.

He provided technical tools for the analysis and selection of optimal portfolio. For

his work he won the Noble Prize for Economics in the year 1990.The work of

Markowitz was extended by the William Sharpe, John Linter and JanMossin

through the development of the Capital Asset Pricing Model (CAPM).

If we talk of the present the last two phases of Professionalism and Scientific

Analysis are currently advancing simultaneously with investment in various

financial instruments becoming safer, with proper knowledge to each and every

investor


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NEED FOR PORTFOLIO MANAGEMENT:

Portfolio management is a process encompassing many activities of investment in

assets and securities. It is a dynamic and flexible concept and involves regular and

systematic analysis judgment and action. 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 to time in tune with the market

conditions. The evaluation of portfolio is to be done in terms of targets set for risk

and returns. The changes in the portfolio are to be effected to meet the changing

condition.

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 investment is

oriented more go towards the assembly of proper combination of individualsecurities to form investment portfolio.

A combination of securities held together will give a beneficial result if they

grouped in a manner to secure higher returns after taking into consideration the

risk elements.

The modern theory is 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 returns.


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SCOPE OF PORTFOLIO MANAGEMENT:

Portfolio management is an art of putting money in fairly safe, quite profitable

and reasonably in liquid form. An investors attempt to find the best combination

of risk and return is the first and usually the foremost goal. In choosing among

different investment opportunities the following

Aspects risk management should be considered:

a) The selection of a level or risk and return that reflects the investors tolerance

for risk and desire for return, i.e. personal preferences.

b) The management of investment alternatives to expand the set of

opportunities available at the investors acceptable risk level.

The very risk-averse investor might choose to invest in mutual funds. The more

risk-tolerant investor might choose shares, if they offer higher returns. Portfolio

management in India is still in its infancy. An investor has to choose a portfolio

according to his preferences. The first preference normally goes to the necessities

and comforts like purchasing a house or domestic appliances. His second

preference goes to some contractual obligations such as life insurance or

provident funds. The third preference goes to make a provision for savings

required for making day to day payments. The next preference goes to short term

investments such as UTI units and post office deposits which provide easy

liquidity. The last choice goes to investment in company shares and debentures.

There are number of choices and decisions to be taken on the basis of the

attributes of risk, return and tax benefits from these shares and debentures. The

final decision is taken on the basis of alternatives, attributes and investor

preferences.


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For most investors it is not possible to choose between mana ging ones own

portfolio. They can hire a professional manager to do it. The professional

managers provide a variety of services including diversification, active portfolio

management, liquid securities and performance of duties associated with keeping

track of investors money.

Objective of Portfolio Management

The objective of portfolio management is to invest in securities is securities insuch a way that one maximizes ones returns and minimizes risks in order to

achieve ones investment objective.

A good portfolio should have multiple objectives and achieve a sound balance

among them. Any one objective should not be given undue importance at the

cost of others. Presented below are some important objectives of portfoliomanagement.

1. Stable Current Return: - Once investment safety is guaranteed, the portfolio

should yield a steady current income. The current returns should at least match

the opportunity cost of the funds of the investor. What we are referring to here

current income by way of interest of dividends, not capital gains.

2. Marketability: - A good portfolio consists of investment, which can be

marketed without difficulty. If there are too many unlisted or inactive shares in


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your portfolio, you will face problems in encasing them, and switching from one

investment to another. It is desirable to invest in companies listed on major stock

exchanges, which are actively traded.

3. Tax Planning: - Since taxation is an important variable in total planning, a good

portfolio should enable its owner to enjoy a favorable tax shelter. The portfolio

should be developed considering not only income tax, but capital gains tax, and

gift tax, as well. What a good portfolio aims at is tax planning, not tax evasion or

tax avoidance.

4. Appreciation in the value of capital: A good portfolio should appreciate in

value in order to protect the investor from any erosion in purchasing power due

to inflation. In other words, a balanced portfolio must consist of certain

investments, which end to appreciate in real value after adjusting for inflation

5. Liquidity : The portfolio should ensure that there are enough funds available at

short notice to take care of the invest ors liquidity requirements. It is desirable to

keep a line of credit from a bank for use in case it becomes necessary to

participate in right issues, or for any other personal needs .

6. Safety of the investment : The first important objective of a portfolio, no

matter who owns it, is to ensure that the investment is absolutely safe. Other

considerations like income, growth, etc., only come into the picture after the

safety of your investment is ensured. Investment safety or minimization of risks is

one of the important objectives of portfolio management. There are many types


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of risks, which are associated with investment in equity stocks, including super

stocks. Bear in mind that there is no such thing as a zero risk investment.

Moreover, relatively low risk investment gives correspondingly lower returns. You

can try and minimize the overall risk or bring it to an acceptable level by

developing a balanced and efficient portfolio. A good portfolio of growth stocks

satisfies the entire objectives outline above.

ADVANTAGES OF PORTFOLIO MANAGEMENT:

Individuals will benefits immensely by taking portfolio management services for

the following reason:

1. 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.

2. 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

3. 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 portfolio


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4. FACTORS AFFECTING THE INVESTOR PORTFOLIO

There may be many reasons why the portfolio of an investor may have to

be changed. The portfolio manager always remains alert and sensitive tothe 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.

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 turnsto be conservative after making huge gains, the portfolio manager should

modify the portfolio accordingly.

1. 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

persons 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,


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

health improves, he may not take retirement.

2. 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

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Dps Security Analysis and Portfolio Management

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