Portfolio Management Services by Sharekhan

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UNIVERSITY OF MUMBAI

PROJECT REPORT ON

POTFOLIO MANAGEMENT SERVICES

IN PARTIAL FULLFILMENT FOR BACHELORS OF

FINANCIAL MARKETS (SEMESTER V)

2011-12

PROJECT GUIDE

PROF. JENNIE.PRAJITH

SUBMITTED BY: KANNAN.PRAKASH

Roll No:

3039

MAHATAMA EDUCATION SOCIETYS

PILLAIS COLLEGE OF ARTS, COMMERCE &SCIENCENEW PANVEL


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MAHATAMA EDUCATION SOCIETYS

PILLAIS COLLEGE OF ARTS, COMMERCE, SCIENCE

NEW PANVEL

CERTIFICATE

To whomsoever it may concern

This is to certify that the work entered in this journal is the work of

KANNAN PRAKASH T.Y.F.M , have successfully completed a project

report on the PORTFOLIO MANAGEMENT SERVICES topic terms of

the year 2011-12 in the college as laid down by the college authority

_____________

(Professor/Guide) (BFMCo- ordinator)

Prof. Jennie prajith Prof. Jennie prajith

Date: __________ _______________

(External Examiner)


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DECLARATION

I, KANNAN PRAKASH studentofT.Y.F/M, MAHATAMA

EDUCATION SOCIETYS PILLAIS COLLEGE OF ARTS,

COMMERCE &SCIENCE, hereby declare that I have completed theproject report on PORTFOLIO MANAGEMENT SERVICES in the

academic year2011-12. The information submitted by me is true & original

to the best of my knowledge

Signature


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ACKNOWLEDGEMENT

I would like to thank my college that is Pillais College of Arts, Commerce and

Science, New Panvel where I have gained plenty of knowledge which helped me in

turning this project a success.

Apart from my efforts, the success of any project depends largely on the

encouragement and guidelines of many others. I take this opportunity to express my

gratitude to the people who have been instrumental in the successful completion of this

project.

I would especially thank my ProfessorProf. Jennie. Prajith and the T.Y.B.Com

F/M CoordinatorProf. Jennie Prajith for giving her valuable guidance in the design and

the changes that were required to be made for the proper implementation of the project.

Without those efforts this project would not have been successful.

I would also extend my thanks to our Vice Principal Mr. A.N.Kutty for his

support and facilities provided to me for the same.

Lastly, I would like to thank all those who directly and indirectly helped me in

completion of this project.


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Sr no Content

PAGE

NO

EXECUTIVE SUMMARY 6

1 INTRODUCTION1.1 Introduction 7-8

1.2 Objectives of the project 9

1.3 Research methodology 10

2 PROFILE

2.1 Company profile 11-12

2.2 Work structure of share khan 13

2.3 Product and Services offered by share khan 142.4 Reason to choose share khan limited 15-17

2.5 Share khan portfolio management services 18-23

3 CONCEPTUAL FRAMEWORK

3.1 Introduction to stock exchange 24-30

3.2 Portfolio management services 31

3.3 Need of portfolio management services 32-34

3.4 Portfolio Construction 35-42

3.5 Risk and Risk Aversion 43-46

3.6 Risk versus Return 47-53

3.7 Portfolio Diversification 54-59

3.8 Techniques of Portfolio management service 60-63

3.9 Types of portfolios 64-66

4 DATA ANALYSIS 67-82

5 INTERPRETATION OF THE DATA 83-84

6 CONCLUSION 85

7 SUGGESTION AND RECOMMENDATION 86

APPENDICES 87-88

BIBLIOGRAPHY 89


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EXECUTIVE SUMMARY

Investing is both Arts and Science. Every Individual has their own specific financial

need and expectation based on their risk taking capabilities, whereas some needs and

expectation are universal. Therefore, we find that the scenario of the Stock Market is

changing day by day hours by hours and minute by minute.

In order to keep the Investor safe from market fluctuation and make them profitable,

Portfolio Management Services (PMS) is fast gaining Investment Option for the High

Networth Individual (HNI).

In order to identify the effectiveness of Sharekhan PMS services this Research is

carried throughout specified area. At the time of investing money everyone look for the

Risk factor involve in the Investment option. The Report is prepared on the basis of

Research work done through the different Research Mythology the data is collected from

both the source Primary sources which consist of Questionnaire and secondary data is

collected from different sources such as Company website, Magazine and other sources.

As the PMS services ofSharekhan Limited have the best result in its field .It has

given 43.50% return in Trailing stops, 94.30%return in Nifty and 38.10% in Beta

Portfolio which is the result when the Market was not doing well from last one year.

In this project I have shown the details of financial planning as well as wealth

management so as to understand about the customers needs and wants with respect to

market and how a clients portfolio can be designed and what factors a portfolio manager

must consider for designing a portfolio. This project includes primary and secondary

data.


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INTRODUCTION

The field of investment traditionally divided into security analysis and portfolio

management. The heart of security analysis is valuation of financial assets. Value in turn

is the function of risk and return. These two concepts are in the study of investment

.Investment can be defined the commitment of funds to one or more assets that will be

held over for some future time period.

In today fast growing world many opportunities are available, so in order to move

with changes and grab the best opportunities in the field of investments a professional

fund manager is necessary.

Therefore, in the present scenario the Portfolio Management Services (PMS) is fast

gaining importance as an investment alternative for the High Networth Investors.

Portfolio Management Services (PMS) is an investment portfolio in stocks, fixed

income, debt, cash, structured products and other individual securities, managed by a

professional money manager that can potentially be tailored to meet specific investment

objectives.

When you invest in PMS, you own individual securities unlike a mutual fund

investor, who owns units of the entire fund. You have the freedom and flexibility to tailor

your portfolio to address personal preferences and financial goals. Although portfolio

managers may oversee hundreds of portfolio, your account may be unique.

Investment Management Solution in PMS can be provided in the following ways:

i. Discretionaryii. Non Discretionary

iii. AdvisoryDiscretionary: Under these services, the choice as well as the timings of the investment

decisions rest solely with the Portfolio Manager.


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Non Discretionary: Under these services, the portfolio manager only suggests the

investment ideas. The choice as well as the timings of the investment decisions rest solely

with the Investor.

However the execution of trade is done by the portfolio manager.

Advisory: Under these services, the portfolio manager only suggests the investment

ideas.

The choice as well as the execution of the investment decisions rest solely with the

Investor.

Rule 2, clause (d) of the SEBI (portfolio managers) Rules, 1993 defines the term

Portfolio as total holding of securities belonging to any person.

As a matter of fact, portfolio is combination of assets the outcomes of which cannot

be defined with certainty new assets could be physical assets, real estates, land, building,

gold etc. or financial assets like stocks, equity, debenture, deposits etc.

Portfolio management refers to managing efficiently the investment in the securities

held by professional for others.

Merchant banker and the portfolio management with a view to ensure maximum

return by such investment with minimum risk of loss of return on the money invested in

securities held by them for their clients. The aim Portfolio management is to achieve the

maximum return from a portfolio, which has been delegated to be managed by manger or

financial institution.

There are lots of organization in the market on the lookout for the people like you

who need their portfolios managed for them .They have trained and skilled talent willwork on your money to make it do more for you.

Therefore, if any investors still insist on managing their own portfolio, then ensure

you build discipline into their investment. Work out their strategy and stand by it.


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1.1 Objectives of the Study

To know the concept of Portfolio Management Services. To know about the awareness in public towards stock brokers and share market. To study about the competitive position of Sharekhan Ltd in Competitive Market. To study about the effectiveness & efficiency of Sharekhan Ltd in relation to its

competitors


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1.2 Research Methodology

Primary data:

Primary data is a term for data collected on source which has not been subjected to

processing or any other manipulation, it is known as raw data. In this project primary data have

collected by survey method which questionnaire. Through survey method we can analyze

peoples opinion, suggestions & preferences.

Secondary data:

Secondary data is the data collected by someone other than the user. Secondary data includes

newspapers, books, etc. There are various sources by which we can collect secondary data.Secondary data includes information in detail. Along with it includes many features, functions,

concept & other relative information. In this project secondary data have collected by books,

websites & newspaper.

Research methodology

Primary data Secondary data

Surveys Books

Value guide by Sharekhan

Websites

www. wikicfo.com


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CH-2 PROFILE

2.1 COMPANY PROFILE

Sharekhan is one of the leading retail brokerage of Citi Venture which is running

successfully since 1922 in the country. Earlier it was the retail broking arm of the

Mumbai-based SSKI Group, which has over eight decades of experience in the stock

broking business. Share khan offers its customers a wide range of equity related services

including trade execution on BSE, NSE, Derivatives, depository services, online trading,

investment advice etc.

Earlier with a legacy of more than 80 years in the stock markets, the SSKI group

ventured into institutional broking and corporate finance 18 years ago. SSKI is one of the

leading players in institutional broking and corporate finance activities. SSKI holds a

sizeable portion of the market in each of these segments. SSKIs institutional broking arm

accounts for 7% of the market for Foreign Institutional portfolio investment and 5% of all

Domestic Institutional portfolio investment in the country.

It has 60 institutional clients spread over India, Far East, UK and US. Foreign

Institutional Investors generate about 65% of the organizations revenue, with a daily

turnover of over US$ 2 million. The content-rich and research oriented portal has stood

out among its contemporaries because of its steadfast dedication to offering customers

best-of-breed technology and superior market information. The objective has been to let

customers make informed decisions and to simplify the process of investing in stocks

Mission of the Sharekhan is


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To educate and empower the individual investor to make better investment

decisions through

QUALITY ADVICE INNOVATIVE PRODUCTS and SUPERIOR SERVICE.


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2.2 WORK STRUCUTRE OF SHAREKHAN

Sharekhan has always believed in investing in technology to build its business. The

company has used some of the best-known names in the IT industry, like Sun

Microsystems, Oracle, Microsoft, Cambridge Technologies, Nexgenix, Vignette,

Verisign Financial Technologies India Ltd, Spider Software Pvt. Ltd. to build its trading

engine and content. The Citi Venture holds a majority stake in the company. HSBC, Intel

& Carlyle are the other investors.

On April 17, 2002 Sharekhan launched Speed Trade and Trade Tiger, are net-basedexecutable application that emulates the broker terminals along with host of other

information relevant to the Day Traders. This was for the first time that a net-based

trading station of this caliber was offered to the traders. In the last six months SpeedTrade

has become a de facto standard for the Day Trading community over the net. Sharekhans

ground network includes over 700+ Shareshops in 130+ cities in India.

The firms online trading and investment site www.sharekhan.com - was launched on

Feb 8, 2000. The site gives access to superior content and transaction facility to retail

customers across the country. Known for its jargon-free, investor friendly language and

high quality research, the site has a registered base of over 3 Lacs customers. The number

of trading members currently stands at over 7 Lacs. While online trading currently

accounts for just over 5 per cent of the daily trading in stocks in India, Sharekhan alone

accounts for 27 per cent of the volumes traded online.

The Corporate Finance section has a list of very prestigious clients and has manyfirsts to its credit, in terms of the size of deal, sector tapped etc. The group has placed

over US$ 5 billion in private equity deals. Some of the clients include BPL Cellular

Holding, Gujarat Pipavav, Essar, Hutchison, Planetasia, and Shoppers Stop. Finally,

Sharekhan shifted hands and Citi venture get holds on it.


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2.3 PRODUCT AND SERVICES OFFERD BY SHAREKHAN

1- Equity Trading Platform (Online/Offline).

2- Commodities Trading Platform (Online/Offline).

3- Portfolio Management Service.

4- Mutual Fund Advisory and Distribution.

5- Insurance Distribution.

6-Forex

6. Forex.


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2.4 REASON TO CHOOSE SAHREKHAN LIMITED

ExperienceSSKI has more than eight decades of trust and credibility in the Indian stock market.

In the Asia Money broker's poll held recently, SSKI won the 'India's best broking house

for 2004' award. Ever since it launched Sharekhan as its retail broking division in

February 2000, it has been providing institutional-level research and broking services to

individual investors.

TechnologyWith their online trading account one can buy and sell shares in an instant from any

PC with an internet connection. Customers get access to the powerful online trading tools

that will help them to take complete control over their investment in shares.

Accessibility

Sharekhan provides ADVICE, EDUCATION, TOOLS AND EXECUTION services

for investors. These services are accessible through many centers across the country

(Over 650 locations in 150 cities), over the Internet (through the website

www.sharekhan.com) as well as over the Voice Tool.

Knowledge

In a business where the right information at the right time can translate into direct

profits, investors get access to a wide range of information on the content-rich portal,.

Investors will also get a useful set of knowledge-based tools that will empower them to

take informed decisions.


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Convenience

One can call Sharekhans Dial-N-Trade number to get investment advice and execute

his/her transactions. They have a dedicated call-center to provide this service via a Toll

Free Number 1800 22-7500 & 39707500 from anywhere in India.

Customer Service

Its customer service team assist their customer for any help that they need relating to

transactions, billing, demat and other queries. Their customer service can be contacted

via a toll-free number, email or live chat on www.sharekhan.com.

Investment AdviceSharekhan has dedicated research teams of more than 30people for fundamental and

technical research. Their analysts constantly track the pulse of the market andprovide

timely investment advice to customer in the form of daily research emails, online chat,

printed reports etc.

Benefits

Free Depository A/c

Instant Cash Transfer Multiple Bank Option. Secure Order by Voice Tool Dial-n-Trade. Automated Portfolio to keep track of the value of your actual purchases. 24x7 Voice Tool access to your trading account. Personalized Price and Account Alerts delivered instantly to your Mobile Phone

& E-mail address.

Live Chat facility with Relationship Manager on Yahoo Messenger Special Personal Inbox for order and trade confirmations. On-line Customer Service via Web Chat. Enjoy Automated Portfolio. Buy or sell even single share Anytime Ordering.


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Share khan offers the following products:-

CLASSIC ACCOUNT

This is a User Friendly Product which allows the client to trade through website

www.sharekhan.com and is suitable for the retail investors who is risk-averse and hence

prefers to invest in stocks or who does not trade too frequently.

Features Online trading account for investing in Equity andDerivatives Live Terminal and Single terminal for NSE Cash, NSE F&O & BSE. Integration of On-line trading, Saving Bank and Demat Account. Instant cash transfer facility against purchase & sale of shares. Competitive transaction charges. Instant order and trade confirmation by E-mail.

Streaming Quotes (Cash & Derivatives). Personalized market watch. Single screen interface for Cash and derivatives and more. Provision to enter price trigger and view the same online in market watch.

SPEEDTRADE

SPEEDTRADE is an internet-based software application that enables you to buy and

sell in an instant. It is ideal for active traders and jobbers who transact frequently during

days session to capitalize on intra-day price movement.


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2.5 Sharekhan Portfolio Management Services

Pro Prime

Product Approach

Investment will be keeping in mind 3 investment tenets.

1. Consistent, steady and sustainable returns.2. Margin of Safety3. Low Volatility

PRO PRIMEPRO

ARBITRAGE

PRO TECH


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Product offering

Pro Prime is the ideal for investors looking at steady and superior with low and

medium risk appetite.

The portfolio consists of a blend of quality blue chip and growth stocks ensuring a

balanced portfolio with relatively medium risk profile.

The portfolio constitutes of relatively large capitalization stocks, based on sector and

themes which have medium to long term growth potential.

Product Characteristics

Bottom up stock selection In depth ,independent fundamental research High quality companies with relatively large capitalization Disciplined valuation approach applying multiple valuation measure. Medium to long term vision, resulting in low portfolio turnover.How to invest?

Minimum Investment : 10 Lacs Lock in : 6 months Reporting: Access to website showing clients holding .Monthly

reporting of portfolio holding /transaction.

Charges: 2.5% pa AMC (Annual Maintenances Charges) fees chargedevery quarter ,0.5% brokerage ,20% profit sharing after 15% hurdle is

crossed chargeable at the end of fiscal year.


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Pro Arbitrage

Product Approach

An opportunity lies in basis which is the difference between cash and future.

Whenever basis is high we buy the stocks and sell the future to lock in difference .The

difference is bound to be zero at expiry.

Product Offered

Cash future arbitrage:

The product intends to spot low risk opportunities which will yield more than thenormal low risk product .Whenever such opportunity is spotted stocks will be bought and

to lock in the basis, future will be sold .This position will be liquated in the expiry or

before that if the basis vanishes early .Similarly the scheme will move on from

opportunity to opportunity.


Low Risk: This is relatively low risk product which can be compared with liquidfunds issued by mutual funds.

High return: Compared with other low risk products, this products offers an

indicative post tax return of 8 to 10% plus.

Product Details

Minimum Investment:Rs.1 Crore Lock in :6 months Reporting: Fortnightly for portfolio Net worth, Monthly reporting pf

portfolio Holding /transaction.

Charges: 0.035% brokerage for future ,0.07% for delivery


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Pro Tech

Protech using the knowledge of technique analysis and the power of depravities

markets to identify trading opportunities in the market .The protech line of the product is

designed around various risk /reward /volatility profiles for the different kind of

investment needs.

Product Approach

Better performance is possible from superior market timing and from picking stocks

before inflation points in their trading cycles .Linear return are possible from having

hedged/ sell market positions in downtrends .Absolute return are targeted by focusing on

finding trading opportunities & not out performance of an index.

Product offered

1.

Nifty Thirty:

Nifty futures will be bought and sold on the basis of an automated trading

system generated calls to go long/short. The exposure will never exceed the value

of portfolio i.e. no leveraging; but allows us to be short /hedged in Nifty in falling

market therefore allowing the client to earn irrespective of the market direction.

2. Beta Portfolio :Positional trading opportunities are identified in the future segment based on

technical analysis .Inflection points in the momentum cycles are identified to go

long /short on stock/index futures with 1-2 months time horizon .The idea is to

generate the best possible return in the medium term irrespective of the direction

of the market without really leveraging beyond the portfolio value. Risk

protection is done based on stop losses on daily closing prices.


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3. Star Nifty:Swing trading technique and Dow theory is used to identify short term

reversal levels for Nifty futures and ride with trend both on the long and short side

.This return can be earned in bull and bear market .Stop and reverse means to

reverse ones position from long to short or vice a versa at the reversal levels

simultaneously .The exposure never exceeds value of portfolio i.e. there is no

leveraging.

4.

Trailing Stops.Momentum trading techniques are used to spot short term momentum of 5-

10 days in stocks and stocks /index futures .Trailing stop loss method of risk

management or profit protection is used to lower the portfolio volatility and

maximize return .Trading opportunities are exposed both on the long side and the

short side as the market demands to get the best of both upward and downward

trends.


Using swing based index trading systems stop and reverse .trend following andmomentum trading technique.

Nifty based products for low impact cost and low product volatility Both long and short strategies to earn returns even in falling market. Trading in future market to allow for active risk protection using trailing stop

losses


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CHAP-3 CONCEPTUAL FRAMEWORK

3.1 INTRODUCTION TO STOCK EXCHANGE

The emergence of stock market can be traced back to 1830. In Bombay, business

passed in the shares of banks like the commercial bank, the chartered mercantile bank,

the chartered bank, the oriental bank and the old bank of Bombay and shares of cotton

presses. In Calcutta, Englishman reported the quotations of 4%, 5%, and 6% loans of East

India Company as well as the shares of the bank of Bengal in 1836. This list was a further

broadened in 1839 when the Calcutta newspaper printed the quotations of banks like

union bank and Agra bank. It also quoted the prices of business ventures like the Bengal

bonded warehouse, the Docking Company and the storm tug company.

Between 1840 and 1850, only half a dozen brokers existed for the limited business.

But during the share mania of 1860-65, the number of brokers increased considerably. By

1860, the number of brokers was about 60 and during the exciting period of the American

Civil war, their number increased to about 200 to 250. The end of American Civil war

brought disillusionment and many

Failures and the brokers decreased in number and prosperity. It was in those

troublesome times between 1868 and 1875 that brokers organized an informal association

and finally as recited in the Indenture constituting the Articles of Association of the

Exchange.

On or about 9th day of July,1875, a few native brokers doing brokerage business in

shares and stocks resolved upon forming in Bombay an association for protecting the

character, status and interest of native share and stock brokers and providing a hall or

building for the use of the Members of such association.


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As a meeting held in the broker Hall on the 5th day of February, 1887, it was

resolved to execute a formal deal of association and to constitute the first managing

committee and to appoint the first trustees. Accordingly, the Articles of Association ofthe Exchange and the Stock

Exchange was formally established in Bombay on 3rd day of December, 1887. The

Association is now known as The Stock Exchange.

The entrance fee for new member was Re.1 and there were 318 members on the list,

when the exchange was constituted. The numbers of members increased to 333 in 1896,

362 in 1916and 478 in 1920 and the entrance fee was raised to Rs.5 in 1877, Rs.1000 in

1896, Rs.2500 in 1916 and Rs. 48,000 in 1920. At present there are 23recognized stock

exchanges with about 6000 stock brokers. Organization structure of stock exchange

varies.

14 stock exchanges are organized as public limited companies, 6 as companies

limited by guarantee and 3 are non-profit voluntary organization. Of the total of 23, only

9 stock exchanges have been permanent recognition. Others have to seek recognition on

annual basis.These exchange do not work of its own, rather, these are run by some persons and

with the help of some persons and institution. All these are down as functionaries on

stock exchange. These are:

i. Stockbrokersii. Sub-broker

iii.

Market makersiv. Portfolio consultants etc.


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1. Stockbrokers:

Stock brokers are the members of stock exchanges. These are the

persons who buy, sell or deal in securities. A certificate of registration from SEBI is

mandatory to act as a broker. SEBI can impose certain conditions while granting thecertificate of registrations. It is obligatory for the person to abide by the rules, regulations

and the buy-law. Stock brokers are commission broker, floor broker, arbitrageur etc.

Detail of Registered Brokers

Total no. of registered brokers as

on 31.03.09

Total no. of sub-broker as on

31.03.09

9000 24,000

2. Sub-broker:

A sub-broker acts as agent of stock broker. He is not a member of a

stock exchange. He assists the investors in buying, selling or dealing in securities through

stockbroker. The broker and sub-broker should enter into an agreement in whichobligations of both should be

specified. Sub-broker must be registered SEBI for a dealing in securities. For getting

registered with SEBI, he must fulfill certain rules and regulation.


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3. Market Makers:

Market maker is a designated specialist in the specified

securities. They make both bid and offer at the same time. A market maker has to abide

by bye-laws, rules regulations of the concerned stock exchange. He is exempt from themargin requirements. As per the listing requirements, a company where the paid-up

capital is Rs. 3 Crore but not more than Rs. 5 core and having a commercial operation for

less than 2 years should appoint a market maker at the time of issue of securities.

4. Portfolio Consultants:

A combination of securities such as stocks, bonds andmoney market instruments is collectively called as portfolio. Whereas the portfolio

consultants are the persons, firms or companies who advise, direct or undertake the

management oradministration of securities or funds on behalf of theirclients.

Traditionally stock trading is done through stock brokers, personally or through

telephones.

As number of people trading in stock market increase enormously in last few years,

some issues like location constrains, busy phone lines, miss communication etc start

growing in stock broker offices. Information technology (Stock Market Software) helps

stock brokers in solving these problems with Online Stock Trading.

Online Stock Market Trading is an internet based stock trading facility. Investor can

trade shares through a website without any manual intervention from Stock Broker.

There are two different type of trading environments available for online equitytrading.


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1.Installable software based Stock Trading Terminals

This trading environment requires software to be installed on investors computer.

This software is provided by the stock broker. This software requires high speed internet

connection. These kind of trading terminals are used by high volume intraday equitytraders.

2.Web (Internet) based trading application

This kind of trading environment doesn't require any additional software installation.

They are like other internet websites which investor can access from around the world

through normal internet connection.

Stock exchanges are like market places, where stockbrokers buy and sell securities for

individuals or institutions. As per the SCRA (Securities Contracts Regulation Act) 1956,

the definition of securities includes shares, bonds, stocks, debentures, government

securities, derivatives of securities, units of collective investment scheme (CIS) etc. The

securities market has two interdependent segments: the primary and secondary market.

The primary market is the channel for creation of new securities issued by public

limited companies or by government agencies. New securities issued in the primary

market are traded in the secondary market.

The secondary market operates through the over-the-counter (OTC) market and the

exchange trade market.

Advantages of Stocks Trading1. Better returns

Actively trading stocks can produce better overall returns than simply buying and

holding.


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2. Huge Choice

There are thousands of stocks listed on markets around the world. There is always a

stock whose price is moving - its just a matter of finding them.

3. FamiliarityThe most traded stocks are in the largest companies that most of us have heard of and

understand - Microsoft, IBM, and Cisco etc

Disadvantages of Stocks Trading

1. LeverageWith a margined account the maximum amount of leverage available for stock

trading is usually 4:1. Meaning a $25,000 could trade up to $100,000 of stock. This is

pretty low compared to Forex trading or futures trading.

2. Pattern Day Trader Rules

It requires at least $25,000 to be held in a trading account if the trader completes

more than 4 trades in a 5 day period. No such rule applies to Forex trading or futures

trading.

3. Uptick Rule on Short Selling

A trader must wait until a stock price ticks up before they can short sell it. Again

there are no such rules in Forex trading or futures trading where going short are as easy

as going long.

4. Need to Borrow Stock to Short

Stocks are physical commodities and if a trader wishes to go short then the broker

must have arrangements in place to borrow that stock from a shareholder until the trader

closes their position. This limits the opportunities available for short selling. Contrast this

to futures trading where selling is as easy as buying.


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5. Costs

Although online trading costs for stock trading are low they still add considerably to

the costs of day trading. Online futures trading are about 1/4 of the cost for the equivalent

value. In the UK 0.5% stamp duty is also levied on all share purchases making tradingvirtually impossible, hence the popularity of spread betting.


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3.2 PORTFOLIO MANGEMNT SERVICES (PMS)

Portfolio (finance) means a collection of investments held by an institution or a

private individual. Holding a portfolio is often part of an investment and risk-limiting

strategy called diversification. By owning several assets, certain types of risk (in

particular specific risk) can be reduced. There are also portfolios which are aimed at

taking high risks these are called concentrated portfolios.

Investment management is the professional management of various securities (shares,

bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the

benefit of the investors. Investors may be institutions (insurance companies, pension

funds, corporations etc.) or private investors (both directly via investment contracts and

more commonly via collective investment schemes e.g. mutual funds).

The term asset management is often used to refer to the investment management of

collective investments, whilst the more generic fund management may refer to all forms

of institutional investment as well as investment management for private investors.

Investment managers who specialize in advisory or discretionary management on behalf

of (normally wealthy) private investors may often refer to their services as wealthmanagement or portfolio management often within the context of so-called "private

banking".

The provision of 'investment management services' includes elements of financial

analysis, asset selection, stock selection, plan implementation and ongoing monitoring of

investments. Outside of the financial industry, the term "investment management" is

often applied to investments other than financial instruments. Investments are often

meant to include projects, brands, patents and many things other than stocks and bonds.

Even in this case, the term implies that rigorous financial and economic analysis methods

are used.


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3.3 Need of portfolio management services

As in the current scenario the effectiveness of PMS is required. As the PMS gives

investors periodically review their asset allocation across different assets as the portfoliocan get skewed over a period of time. This can be largely due to appreciation /

depreciation in the value of the investments.

As the financial goals are diverse, the investment choices also need to be different to

meet those needs. No single investment is likely to meet all the needs, so one should keep

some money in bank deposits and / liquid funds to meet any urgent need for cash and

keep the balance in other investment products/ schemes that would maximize the return

and minimize the risk. Investment allocation can also change depending on ones risk-

return profile.


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Objective of PMS

There are the following objective which is full filled by Portfolio Management

Services.

1. Safety Of Fund: -The investment should be preserved, not be lost, and should remain in the

returnable position in cash or kind.

2. Marketability: -The investment made in securities should be marketable that means, the

securities must be listed and tradedin stock exchange so as to avoid difficulty intheir encashment.

3. Liquidity: -The portfolio must consist of such securities, which could be en-cashed

without any difficulty or involvement of time to meet urgent need for funds.

Marketability ensuresliquidity to the portfolio.

4. Reasonable return: -The investment should earn a reasonable return toupkeep the declining value

of money and be compatible with opportunity cost of the money in terms of

current income in theform of interest or dividend.

5. Appreciation in Capital: -

The money invested in portfolio should grow andresult into capital gains.

6. Tax planning: -

Efficient portfolio management is concerned with composite tax planning

covering income tax, capital gain tax,wealth tax and gift tax.


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7. Minimize risk: -

Risk avoidance and minimization of risk are important objective of portfolio

management. Portfoliomanagers achieve these objectives by effective investment

planning and periodical review of market, situation and economic environmentaffecting the financial market.


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3.4 PORTFOLIO CONSTRUCTION

The Portfolio Construction of Rational investors wish to maximize the returns on

their funds for a given level of risk. All investments possess varying degrees of risk.Returns come in the form of income, such as interest or dividends, or through growth in

capital values (i.e. capital gains).

The portfolio construction process can be broadly characterized as comprising the

following steps:

1. Setting objectives.

The first step in building a portfolio is to determine the main objectives of the fund

given the constraints (i.e. tax and liquidity requirements) that may apply. Each investor

has different objectives, time horizons and attitude towards risk. Pension funds have

long-term obligations and, as a result, invest for the long term. Their objective may be to

maximize total returns in excess of the inflation rate. A charity might wish to generate the

highest level of income whilst maintaining the value of its capital received from bequests.

An individual may have certain liabilities and wish to match them at a future date.

Assessing a clients risk tolerance can be difficult. The concepts of efficient portfolios

and diversification must also be considered when setting up the investment objectives.


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2. Defining Policy.

Once the objectives have been set, a suitable investment policy must be established.

The standard procedure is for the money manager to ask clients to select their preferred

mix of assets, for example equities and bonds, to provide an idea of the normal mix

desired. Clients are then asked to specify limits or maximum and minimum amounts they

will allow to be invested in the different assets available. The main asset classes are cash,

equities, gilts/bonds and other debt instruments, derivatives, property and overseas assets.

Alternative investments, such as private equity, are also growing in popularity, and will

be discussed in a later chapter. Attaining the optimal asset mix over time is one of the key

factors of successful investing.

3. Applying portfolio strategy.

At either end of the portfolio management spectrum of strategies are active and

passive strategies. An active strategy involves predicting trends and changingexpectations about the likely future performance of the various asset classes and actively

dealing in and out of investments to seek a better performance. For example, if the

manager expects interest rates to rise, bond prices are likely to fall and so bonds should

be sold, unless this expectation is already

factored into bond prices. At this stage, the active fund manager should also determine

the style of the portfolio. For example, will the fund invest primarily in companies with

large market capitalizations, in shares of companies expected to generate high growth

rates, or in companies whose valuations are low? A passive strategy usually involves

buying securities to match a preselected market index. Alternatively, a portfolio can be

set up to match the investors choice of tailor-made index. Passive strategies rely on

diversification to reduce risk. Outperformance versus the chosen index is not expected.

This strategy requires minimum input from the portfolio manager. In practice, many


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active funds are managed somewhere between the active and passive extremes, the core

holdings of the fund being passively managed and the balance being actively managed.

4. Asset selections.

Once the strategy is decided, the fund manager must select individual assets in which

to invest. Usually a systematic procedure known as an investment process is established,

which sets guidelines or criteria for asset selection. Active strategies require that the fund

managers apply analytical skills and judgment for asset selection in order to identify

undervalued assets and to try to generate superior performance.

5. Performance assessments.

In order to assess the success of the fund manager, the performance of the fund is

periodically measured against a pre-agreed benchmark perhaps a suitable stock

exchange index or against a group of similar portfolios (peer group comparison). The

portfolio construction process is continuously iterative, reflecting changes internally and

externally. For example, expected movements in exchange rates may make overseas

investment more attractive, leading to changes in asset allocation. Or, if many large-scaleinvestors simultaneously decide to switch from passive to more active strategies, pressure

will be put on the fund managers to offer more active funds. Poor performance of a fund

may lead to modifications in individual asset holdings or, as an extreme measure; the

manager of the fund may be changed altogether.


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Steps to Stock Selection Process

\


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Types of assets

The structure of a portfolio will depend ultimately on the investors objectives and on

the asset selection decision reached. The portfolio structure takes into account a range of

factors, including the investors time horizon, attitude to risk, liquidity requirements, tax

position and availability of investments. The main asset classes are cash, bonds and other

fixed income securities, equities, derivatives, property and overseas assets.

Cash and cash instruments

Cash can be invested over any desired period, to generate interest income, in a range of

highly liquid or easily redeemable instruments, from simple bank deposits, negotiable

certificates of deposits, commercial paper (short term corporate debt) and Treasury bills

(short term government debt) to money market funds, which actively manage cash

resources across a range of domestic and foreign markets. Cash is normally held over the

short term pending use elsewhere (perhaps for paying claims by a non-life insurance

company or for paying pensions), but may be held over the longer term as well. Returnson cash are driven by the general demand for funds in an economy, interest rates, and the

expected rate of inflation. A portfolio will normally maintain at least a small proportion

of its funds in cash in order to take advantage of buying opportunities.

Bonds

Bonds are debt instruments on which the issuer (the borrower) agrees to make interest

payments at periodic intervals over the life of the bond this can be for two to thirty

years or, sometimes, in perpetuity. Interest payments can be fixed or variable, the latter

being linked to prevailing levels of interest rates. Bond markets are international and have

grown rapidly over recent years. The bond markets are highly liquid, with many issuers

of similar standing, including governments (sovereigns) and state-guaranteed


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organizations. Corporate bonds are bonds that are issued by companies. To assist

investors and to help in the efficient pricing of bond issues, many bond issues are given

ratings by specialist agencies such as Standard & Poors and Moodys. The highest

investment grade is AAA, going all the way down to D, which is graded as in default.Depending on expected movements in future interest rates, the capital values of bonds

fluctuate daily, providing investors with the potential for capital gains or losses. Future

interest rates are driven by the likely demand/ supply of money in an economy, future

inflation rates, political events and interest rates elsewhere in world markets. Investors

with short-term horizons and liquidity requirements may choose to invest in bonds

because of their relatively higher return than cash and their prospects for possible capital

appreciation. Long-term investors, such as pension funds, may acquire bonds for the

higher income and may hold them until redemption for perhaps seven or fifteen years.

Because of the greater risk, long bonds (over ten years to maturity) tend to be more

volatile in price than medium- and short-term bonds, and have a higher yield.

Equities

Equity consists of shares in a company representing the capital originally provided by

shareholders. An ordinary shareholder owns a proportional share of the company and an

ordinary share carries the residual risk and rewards after all liabilities and costs have been

paid. Ordinary shares carry the right to receive income in the form of dividends (once

declared out of distributable profits) and any residual claim on the companys assets once

its liabilities have been paid in full. Preference shares are another type of share capital.

They differ from ordinary shares in that the dividend on a preference share is usually

fixed at some amount and does not change. Also, preference shares usually do not carry

voting rights and, in the event of firm failure, preference shareholders are paid beforeordinary shareholders. Returns from investing in equities are generated in the form of

dividend income and capital gain arising from the ultimate sale of the shares. The level of

dividends may vary from year to year, reflecting the changing profitability of a company.

Similarly, the market price of a share will change from day to day to reflect all relevant

available information. Although not guaranteed, equity prices generally rise over time,


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reflecting general economic growth, and have been found over the long term to generate

growing levels of income in excess of the rate of inflation. Granted, there may be periods

of time, even years, when equity prices trend downwards usually during recessionary

times. The overall long-term prospect, however, for capital appreciation makes equitiesan attractive investment proposition for major institutional investors.

Derivatives

Derivative instruments are financial assets that are derived from existing primary

assets as opposed to being issued by a company or government entity. The two most

popular derivatives are futures and options. The extent to which a fund may incorporate

derivatives products in the fund will be specified in the fund rules and, depending on the

type of fund established for the client and depending on the client, may not be allowable

at all.

A futures contract is an agreement in the form of a standardized contract between

two counterparties to exchange an asset at a fixed price and date in the future. The

underlying asset of the futures contract can be a commodity or a financial security. Each

contract specifies the type and amount of the asset to be exchanged, and where it is to be

delivered (usually one of a few approved locations for that particular asset). Futures

contracts can be set up for the delivery of cocoa, steel, oil or coffee. Likewise, financial

futures contracts can specify the delivery of foreign currency or a range of government

bonds. The buyer of a futures contract takes a long position, and will make a profit if

the value of the contract rises after the purchase. The seller of the futures contract takes a

short position and will, in turn, make a profit if the price of the futures contract falls.

When the futures contract expires, the seller of the contract is required to deliver theunderlying asset to the buyer of the contract. Regarding financial futures contracts,

however, in the vast majority of cases no physical delivery of the underlying asset takes

place as many contracts are cash settled or closed out with the offsetting position before

the expiry date.


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An option contract is an agreement that gives the owner the right, but not

obligation, to buy or sell (depending on the type of option) a certain asset for a specified

period of time. A call option gives the holder the right to buy the asset. A put option givesthe holder the right to sell the asset. European options can be exercised only on the

options expiry date. US options can be exercised at any time before the contracts

maturity date. Option contracts on stocks or stock indices are particularly popular.

Buying an option involves paying a premium; selling an option involves receiving the

premium. Options have the potential for large gains or losses, and are considered to be

high-risk instruments. Sometimes, however, option contracts are used to reduce risk. For

example, fund managers can use a call option to reduce risk when they own an asset.

Only very specific funds are allowed to hold options.

Property

Property investment can be made either directly by buying properties, or indirectly by

buying shares in listed property companies. Only major institutional investors with long-

term time horizons and no liquidity pressures tend to make direct property investments.

These institutions purchase freehold and leasehold properties as part of a property

portfolio held for the long term, perhaps twenty or more years. Property sectors of

interest would include prime, quality, well-located commercial office and shop

properties, modern industrial warehouses and estates, hotels, farmland and woodland.

Returns are generated from annual rents and any capital gains on realization. These

investments are often highly illiquid.


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3.5 Risk and Risk Aversion

Portfolio theory also assumes that investors are basically risk averse, meaning that,

given a choice between two assets with equal rates of return they will select the asset with

lower level of risk.

For example, they purchased various type of insurance including life insurance,

Health insurance and car insurance. The Combination of risk preference and risk aversion

can be explained by an attitude toward risk that depends on the amount of money

involved.

A discussion of portfolio or fund management must include some thought given to

the concept of risk. Any portfolio that is being developed will have certain risk

constraints specified in the fund rules, very often to cater to a particular segment of

investor who possesses a particular level of risk appetite. It is, therefore, important to

spend some time discussing the basic theories of quantifying the level of risk in an

investment, and to attempt to explain the way in which market values of investments are

determined

Definition of Risk

Although there is a difference in the specific definitionsof risk and uncertainty, for our

purpose and in most financialliterature the two terms are used interchangeably. In fact,

oneway to define risk is the uncertainty of future outcomes. Analternative definition

might be the probability of an adverse outcome.

Composite risks involve the different risk as explained below:-

(1). Interest rate risk: -

It occurs due to variability cause in return by changes in level of interest rate. In long

runs all interest rate move up or downwards. These changes affect the value of security.

RBI, in India, is the monitoring authority which effectalises the change in interest rate.


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in depression brings downfall in the prizes of all types of securities. Flexible income

securities are nearly affected than fix rate securities during depression due to decline n

the market prize.

(4) Financial risk:

Financial risk emanates from the changes in the capital structure of the company. It is

also known as leveraged risk and expressed in term of debt equity ratio. Excess of debts

against equity in the capital structure indicates the company to be highly geared or highly

levered. Although leveraged companys earnings per share (EPS) are more but

dependence on borrowing exposes it to the risk of winding up. For, its inability to thehonor its commitments towards the creditors are most important.

Here it is imperative to express the relationship between risk and return, which is

depicted graphically below


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Maximize returns, minimize risks


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3.6 RISK VERSUS RETURN

Risk versus return is the reason why investors invest in portfolios. The ideal goal in

portfolio management is to create an optimal portfolio derived from the best riskreturn

opportunities available given a particular set of risk constraints. To be able to make

decisions, it must be possible to quantify the degree of risk in a particular opportunity.

The most common method is to use the standard deviation of the expected returns. This

method measures spreads, and it is the possible returns of these spreads that provide the

measure of risk. The presence of risk means that more than one outcome is possible. An

investment is expected to produce different returns depending on the set of circumstances

that prevail.

For example, given the following for Investment A:

Circumstance Return(x) Probability(p)

I 10% 0.2

II 12% 0.3III 15% 0.4

IV 19% 0.1

It is possible to calculate:

1. The expected (or average) returnMean (average) = x = expected value (EV) = px

Circumstan

ce

Return(x) Probability(p) px


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If the above exercise were to be performed using another investment that offered the

same expected return, but a different standard deviation, then the following result might

occur:

If the above exercise were to be performed using another investment that offered the

same expected return, but a different standard deviation, then the following result might

occur:

Plan Expected Return Risk(standard

deviation)

Investment A 9% 2.5%

Investment B 9% 4.0%

Since both investments have the same expected return, the best selection of

investment would be Investment A, which provides the lower risk. Similarly, if there are

two investments presenting the same risk, but one has a higher return than the other, that

investment would be chosen over the investment with the lower return for the same risk.

In the real world, there are all types of investors. Some investors are completely risk

averse and others are willing to take some risk, but expect a higher return for that risk.

Different investors will also have different tolerances or threshold levels for riskreturn

trade-offs i.e. for a given level of risk, one investor may demand a higher rate of return

than another investor.


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INDIFFERNCE CURVE

Suppose the following situation exists

Plan Expected Return Risk(Standard

Deviation)

Investment A 10% 5%

Investment B 20% 10%

The question to ask here is, does the extra 10% return compensate for the extra risk?

There is no right answer, as the decision would depend on the particular investorsattitude to risk. A particular investors indifference curve can be ascertained by plotting

what rate of return the investor would require for each level of risk to be indifferent

amongst all of the investments.

For example, there may be an investor who can obtain a return of 50% with zero risk and

a return of 55 %with a risk or standard deviation of 5% who will be indifferent between

the two investments. If further investments were considered, each with a higher degree ofrisk, the investor would require still higher returns to make all of the investments equally

attractive. The investor being discussed could present the following as the indifference

curve shown in Figure.

Indifference Curve

Expected Return Risk

50% 0%

55% 5%

70% 10%

100% 15%

120% 18%


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230% 25%

Risk

Indifference curve

It could be the case that this investor would have different indifference curves given a

different starting level of return for zero risk. The exercise would need to be repeated for

various levels of riskreturn starting points. An entire set of indifference curves could be

constructed that would portray a particular investors attitude towards risk


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Indifference Curve

Utility scores

At this stage the concept of utility scores can be introduced. These can be seen as a

way of ranking competing portfolios based on the expected return and risk of those

portfolios. Thus if a fund manager had to determine which investment a particular

investor would prefer, i.e. Investment A equaling a return of 10% for a risk of 5% or

Investment B equaling a return of 20% for a risk of 10%, the manager would create

indifference curves for that particular investor and look at the utility scores. Higher utility

scores are assigned to portfolios or investments with more attractive riskreturn profiles.

Although several scoring systems are legitimate, one function that is commonlyemployed assigns a portfolio or investment with expected return or value EV and

variance of returns 2the following utility value:

U = EV .005A2 where:


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U = utility value

A = an index of the investors aversion, (the factor of .005 is a scaling convention that

allows expression of the expected return and standard deviation in the equation as apercentage rather than a decimal).

Utility is enhanced by high expected returns and diminished by high risk. Investors

choosing amongst competing investment portfolios will select the one providing the

highest utility value. Thus, in the example above, the investor will select the investment

(portfolio) with the higher utility value of 18.

Expected

Return(EV)

Standard deviation() Utility=EV-.005A2

10% 5% 10 .005 4 25 = 9.5

20% 10% 20 .005 4 100 = 18

(Assume A= 4 in this case)


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3.7 Portfolio Diversification

There are several different factors that cause risk or lead to variability inreturns on an

individual investment. Factors that may influence risk in any given investment vehicle

include uncertainty of income, interest rates,inflation, exchange rates, tax rates, the state

of the economy, default risk and liquidity risk (the risk of not being able to sell on the

investment). Inaddition, an investor will assess the risk of a given investment (portfolio)

within the context of other types of investments that may already be owned,i.e. stakes in

pension funds, life insurance policies with savings components, and property.

One way to control portfolio risk is via diversification, whereby investments are

made in a wide variety of assets so that the exposure to the risk of anyparticular security

is limited. This concept is based on the old adage do notput all your eggs in one basket.

If an investor owns shares in only onecompany, that investment will fluctuate depending

on the factors influencing that company. If that company goes bankrupt, the investor

might lose 100 per cent of the investment. If, however, the investor owns shares in

several companies in different sectors, then the likelihood of allof those companies going

bankrupt simultaneously is greatly diminished. Thus, diversification reduces risk.

Although bankruptcy risk has beenconsidered here, the same principle applies to other

forms of risk


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RISK RETURN MATRIX

Covariance and Correlation

The goal is to hold a group of investments or securities within a portfolio potentially

to reduce the risk level suffered without reducing the level of return. To measure the

success of a potentially diversified portfolio, covarianceand correlationare considered.

Covariance measures to what degree the returns of two risky assets move in tandem. A

positive covariance means that the returns of the two assets move together, whilst a

negative covariance means that they move in inverse directions.


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Covariance

COV(x, y) = p(x-x) (y-y) for two investments x and y, where p is the

probability.

Covariance is an absolute measure, and covariances cannot be compared with one

another. To obtain a relative measure, the formula for correlation coefficient [r] is used.

Correlation coefficient

r = COVxy

xy

To illustrate the above, here is the example:

Circumstance Probability x-x y-y

p(x-x) (y-y)

I 0.2 +1.0 -3.5 -0.7

II 0.3 0 -1.5 0

III 0.4 +1.5 +1.5 0.9

IV 0.1 -4 +5.5 -2.2

COVxy =-2.0


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For data regarding (y y), see earlier example. Assume that a similar exercise has

been run for data regarding (x x). Assume the variance or 2 of x=2.45, and the

variance or2 of y = 7.06. Thus, the correlation coefficient would be

r= -2.0 = -0.481

2.45 *7.056

If, the same example is run again, but using a different set of numbers for y, a

different correlation coefficient might result of say, 0.988. It can be concluded that a

large negative correlation confirms the strong tendency of the two investments to move

inversely.

Perfect positive correlation (correlation coefficient = +1) occurs when the

returns from two securities move up and down together in proportion. If these securities

were combined in a portfolio, the offsetting effect would not occur.

Perfect negative correlation(correlation coefficient = 1) takes place when one

security moves up and the other one down in exact proportion. Combining these two

securities in a portfolio would increase the diversification effect.

Uncorrelated(correlation coefficient = 0) occurs when returns from two securities

move independently of each other that is, if one goes up, the other may go up or down


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or may not move at all. As a result, the combination of these two securities in a portfolio

may or may not create a diversification effect. However, it is still better to be in this

position than in a perfect positive correlation situation.

Unsystematic and systematic risk

As mentioned previously, diversification diminishes risk: the more shares or assets

held in a portfolio or in investments, the greater the risk reduction. However, it is

impossible to eliminate all risk completely even with extensive diversification. The risk

that remains is called market risk; the risk that is caused by general market influences.

This risk is also known as systematic risk or non-diversifiable risk. The risk that isassociated with a specific asset and that can be abolished with diversification is known as

unsystematic risk, unique risk or diversifiable risk.

Total risk = Systematic risk + Unsystematic risk

Systematicrisk= the potential variability in the returns offered by a security or asset

caused by general market factors, such as interest rate changes, inflation rate movements,

tax rates, state of the economy.

Unsystematic risk = the potential variability in the returns offered by a security or

asset caused by factors specific to that company, such as profitability margins, debt

levels, quality of management, susceptibility to demands of customers and suppliers.

As the number of assets in a portfolio increases, the total risk may decline as a result

of the decline in the unsystematic risk in that portfolio. The relationship amongst these

risks can be quantified as follows


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TR2 = SR2 + UR2 or 2i = s2 + u

2

Where:

= the investments total risk (standard deviation)

s =the investments systematic risk

u =the investments unsystematic risk.

The correlation coefficient between two investment opportunities can be

expressed as:

s = i CORim

Where,

s = the investment systematic risk

i = the investments total risk (systematic and unsystematic)

CORim = the correlation coefficient between the return of the investment andthose of the market.

If an investment were perfectly correlated to the market so that all its movements

could be fully explained by movements in market, then all of the risk would be

systematic & i = sIfan investment were not correlated at all to the market, then all of

its risk would be unsystematic


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3.8 TECHNIQUES OF PORTFOLIO MANAGEMENT

Various types of portfolio require different techniques to be adopted to achieve the

desired objectives. Some of the techniques followed in India by portfolio managers are

summarized below.

(1). Equity portfolio-

Equity portfolio is affected by internal and external factors:

(a) Internal factors

Pertain to the inner working of the particular company of which equity shares are

held. These factors generally include:

(1) Market value of shares

(2) Book value of shares

(3) Price earnings ratio (P/E ratio)

(4) Dividend payout ratio

(b) External factors

(1) Government policies

(2) Norms prescribed by institutions

(3) Business environment

(4) Trade cycles


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(2). Equity stock analysis

The basic objective behind the analysis is to determine the probable future value of

the shares of the concerned company. It is carried out primarily fewer than two ways. :

(a) Earnings per share

(b) Price earnings ratio

(A)Trend of earning: -

A higher price-earnings ratio discount expected profit growth. Conversely, adownward trend in earning results in a low price-earnings ratio to discount

anticipated decrease in profits, price and dividend. Rising EPS causes

appreciation in price of shares, which

benefits investors in lower tax brackets? Such investors have not pay tax or to give

lower rate tax on capital gains. Many institutional investor like stability and growth and support high EPS.

Growth of EPS is diluted when a company finances internally its expansionprogram and offers new stock.

EPS increase rapidly and result in higher P/E ratio when a company finances itsexpansion program from internal sources and borrowings without offering new

stock.


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(B) Quality of reported earning: -

Quality of reported earnings affects P/E ratio. The factors that affect the quality of

reported earnings are as under:

Depreciation allowances: -Larger (Non Cash) deduction for depreciation provides more funds to

company to finance profitable expansion schemes internally. This builds up

future earning power of company.

Research and development outlets: -There is higher P/E ratio for a company, which carries R&D programs. R&D

enhances profit earning strength of the company through increased future sales.

Inventory and other non-recurring type of profit: -Low cost inventory may be sold at higher price due to inflationary conditions

among profit but such profit may not always occur and hence low P/E ratio.

(C) Dividend policy: -

Dividend policy is significant in affecting P/E ratio. With higher dividend ratio, equity

price goes up and thus raises P/E ratio. Dividend rates are raised to push in share prices

up. Dividend cover is calculated to find out the time the dividend is protected, In terms of

earnings. It is calculated as under:

Dividend Cover = EPS / Dividend per Share

(D) Investors demand: -

Demand from institutional investors for equity also enhances the P/E ratio.


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(3) Quality of management: -

Investors decide about the ability and caliber of management and hold and dispose of

equity academy. P/E ratio is more where a company is managed by reputed entrepreneurs

with good past records of management performance.


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3.9 Types of Portfolios

The different types of Portfolio which is carried by any Fund Manager to maximize

profit and minimize losses are different as per their objectives .They are as follows.

Aggressive Portfolio:

Objective: Growth. This strategy might be appropriate for investors who

seek High growth and who can tolerate wide fluctuations in market values,

over the short term.

Growth Portfolio:

Objective: Growth. This strategy might be appropriate for investors who

have a preference for growth and who can withstand significant fluctuations

in market value.


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Balanced Portfolio:

Objective: Capital appreciation and income. This strategy might be

appropriate for investors who want the potential for capital appreciation and

some growth, and who can withstand moderate fluctuations in market values


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Conservative Portfolio:

Objective: Income and capital appreciation. This strategy may be

appropriate for investors who want to preserve their capital and minimize

fluctuations in market value.


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Chapter 4.Collection and interpretation of data.

This survey conducted by 40 selected respondents. Questions are regarding to the

portfolio management services by share khan.

1. Do you know about the Investment Option available?

COMMENT

As the above table shows the knowledge of Investor out of 100

respondent carried throughout the Hyderabad Area is only 85%. The

remaining 15% take his/her residential property as an investment According

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

YES

NO

YES, 85%

NO, 15%

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