portfolio management of an individual

8/11/2019 Portfolio Management of an Individual

1/43

Executive Summary

When you hear the term portfolio management, what do you think of?

Chances are that the images that spring to mind depend greatly on

your financial situation and your educational and professional

background. Some people will think of mutual fund managers, while

others will think of richly panelled conference rooms and wealthy

individuals strategizing with their financial advisors. The reality of the

current world of financial planning is that every adult should be

somewhat conversant with concepts of portfolio management. Most

working adults will ultimately be responsible for making sure that their

future non-wage income is sufficient to meet their needs. In the old

world of pension plans, your pension plan provider carried all the risks

of being able to invest properly so as to fund a guaranteed future

income to you.

In todays world, the funds you have available for future income will be

largely (if not wholly) determined by what you save and how you

manage your total portfolio.

For a quick definition, I describe portfolio management as the process

of planning and executing a portfolio of investments in order togenerate a desired future income stream . This means that portfolio

management starts with looking at what you are investing for, and how

far into the future you are looking. The next stage is to look at how

much you need to invest, how you allocate those investments to meet

your goals with reasonable certainty, and how much uncertainty you


2/43

are willing to bear. Finally, portfolio management is an ongoing process

of reviewing your plans and altering those plans as time goes on.

For many people, these concepts will sound pretty abstract. If you ask

people what tools they use in their managing their personal portfolios,

you are likely to get some fairly blank looks back, even if you are

talking to people with substantial investments.

Many (if not most) financial advisors still use fairly simplistic tools for

portfolio planning and have no way to estimate the optimal portfolio

balance of risk and return to meet a clients personal goals.

The good news is that there are standard financial techniques that can

dramatically assist individuals in portfolio management.

These financial techniques, embedded in software, will show you your

financial portfolio in ways that you have not considered previously and

will enable you to make far better portfolio management decisions.


3/43

INTRODUCTION

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 for scientific 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 to invest 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.

Portfolio management is all about s t rengths , weaknesses ,

oppor tun i t i e s and threats in the choice of debt vs . equi ty,

domest ic vs . in ternat ional , growth vs . safe ty , and many other

tradeoffs encountered in the attempt to maximize return at a given

appetite for risk.


4/43

WHAT IS PORTFOLIO MANAGEMENT?

An investor considering investment in securities is faced with the

problem of choosing from among a large number of securities and

how to allocate his funds over this group of securities. Again he is

faced with problem of deciding which securities to hold and how much

to invest in each. The risk and return are the characteristics of

portfolios. The investor tries to choose the optimal portfolio taking into

consideration the risk return characteristics of all possible portfolios.

An investor invests his funds in a portfolio expecting to get good

returns consistent with the risk that he has to bear. The return realized

from the portfolio has to be measured and the performance of the

portfolio has to be evaluated.

It is evident that rational investment activity involves creation of an

investment portfolio. Portfolio management comprises all the

processes involved in the creation and maintenance of an investment

portfolio. It deals specifically with the security analysis, portfolio

analysis, portfolio selection, portfolio revision & portfolio evaluation.

Portfolio management makes use of analytical techniques of analysis

and conceptual theories regarding rational allocation of funds. Portfolio

management is a complex process which tries to make investment

activity more rewarding and less risky.

Portfolio management is the on-go ing p rocess of constructing

portfolios that balance an investor's ever changing goals with the

portfolio manager's assumptions about the future.
http://hubpages.com/hub/How-to-begin-an-investment-portfoliohttp://hubpages.com/hub/How-to-begin-an-investment-portfolio


5/43

OBJECTIVES OF PORTFOLIO MANAGEMENT

The basic objective of Portfolio Management is to maximize yield and

minimize risk . The other objectives are as follows:

Stabi l i ty of Inco m e : An investor considers stability of income

from his investment. He also considers the stability of purchasing

power of income.

Capi tal Grow th : 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.

Liqu id i ty : An investment is a liquid asset. It can be converted

into cash with the help of a stock exchange. Investment should

be liquid as well as marketable. The portfolio should contain a

planned proportion of high-grade and readily salvable investment.

Safety : Safety means protection for investment against loss

under reasonably variations. In order to provide safety, a careful

review of economic and industry trends is necessary. In other

words, errors in portfolio are unavoidable and it requires

extensive diversification.

Tax Inc entiv es : Investors try to minimize their tax liabilities from

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

investment avenues along with the return risk, profile, taximplications, yields and other returns.


6/43

SELECTION OF PORTFOLIO

The selection of portfolio depends upon the objectives of the investor.

The selection of portfolio under different objectives are dealt

subsequently

Objectives and asset mix:

If the main objective is getting adequate amount of current income,

sixty percent of the investment is made in debt instruments and

remaining in equity. Proportion varies according to individual

preference.

Growth of income and asset mix :

Here the investor requires a certain percentage of growth as the

income from the capital he has invested. The proportion of equity

varies from 60 to 100 % and that of debt from 0 to 40 %. The debt may

be included to minimize risk and to get tax exemption.

Capital appreciation and Asset Mix:

It means that value of the investment made increases over the year.

Investment in real estate can give faster capital appreciation but the

problem is of liquidity. In the capital market, the value of the shares is

much higher than the original issue price.

Safety of principle and asset mix:

Usually, the risk adverse investors are very particular about the

stability of principal. Generally old people are more sensitive towards

safety.


7/43

Risk and return analysis:

An investor wants higher returns at the lower risk. But the rule of the

game is that more risk, more return. So while making a portfolio the

investor must judge the risk taking capability and the returns desired.

Diversification:

Once the asset mix is determined and risk return relationship is

analysed the next step is to diversify the portfolio. The main advantage

of diversification is that the unsystematic risk is minimized.


8/43

PORTFOLIO MANAGEMENT PROCESS

The Portfolio Management Process

IDENTIFY GOAL S A ND OB JECTIVES

When will you need the money from your investments? What are you

saving your money for? With the assistance of your financial advisor, the

Investor Profile Questionnaire will guide you through a series of questions

to help identify the goals and objectives for your investments.

DETERMINE OPTIMA L INVESTMENT MIX

Once you have completed the Investor Profile Questionnaire , your optimal

investment mix or asset allocation will be determined. An asset allocation

represents the mix of investments (cash, fixed income and equities) that

match your individual risk and return needs.


9/43

This step represents one of the most important decisions in your portfolio

construction, as asset allocation has been found to be the major

determinant of long-term portfolio performance.

CREA TE A CUSTOMIZED INVESTMENT POL ICY STA TEMENT

When your optimal investment mix is determined, the next step is to

formalize your goals and objectives in order to utilize them as a benchmark

to monitor progress and future updates. At this stage in the process, you

will be provided with a detailed written Investment Policy Statement , which

summarizes your needs including liquidity, growth and investment horizon.

SELECT INVESTMENTS

Your customized portfolio is created using an allocation of select QFM

Funds. Each QFM Fund is designed to satisfy the requirements of a

specific asset class, and is selected in the necessary proportion to match

your optimal investment mix. The QFM Funds invest in Exchange Traded

Funds ( ETFs ), third party mutual funds and individual securities from

around the world to ensure that you maximize your return while minimizing

your risk.
http://www.qtrade.ca/_pdfs/ETFs.pdfhttp://www.qtrade.ca/_pdfs/ETFs.pdfhttp://www.qtrade.ca/_pdfs/ETFs.pdf


10/43

MONITOR PROGRESS

Building an optimal investment mix is only part of the process. It is equally

important to maintain your optimal mix when varying market conditions

cause your investment mix to drift away from its target.

To ensure that your mix of asset classes stays in line with your unique

needs, your portfolio will be monitored and rebalanced back to your optimal

investment mix should you drift from these target allocations? No matter

how the markets perform, you can be confident that your portfolio will stay

on track with the objectives set out in your Investment Policy Statement .

REASSESS NEEDS AND GOAL S

Just as markets shift, so do your goals and objectives throughout your life.

Whether your personal goals include retirement, funding education or a

major purchase, it is important to conduct regular reviews with yourfinancial advisor to ensure that your portfolio continues to meet your needs.

With the flexibility of the Portfolio Program and Asset Management

Program , when your needs or other life circumstances change, your

portfolio has the flexibility to accommodate such changes.


11/43

TYPES OF INSTRUMENTS

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 and property.

Given below is a self explanatory comparison on different

instruments available for Investments today:

Type of

Investments Yields Perspective

Bank Deposits

and Govt of

India Bonds

4 to 5.5%

Banks offer liquidity but if you place

your funds in the Bonds you can be

locked in for the term applied for.

Stock Markets

& Mutual

Funds

Your Principle

amount can double

or shrink in a

matter of days.

Offers great liquidity, but you have

to be constantly monitoring the

same.

Commercial

Real Estate

Returns of 8 to11% P.A., along

with a steady

income flow to plan

Long term investment,coupled withbenefits on enhancing liquidity

through rent discounting, planning

your future income inflows.


12/43

your future

investments.

Escalations in the prices in the

market can make your asset grow

notionally.

Residential

Real Estate

Returns of 4 to 6%

p.a.

Mostly bought for future self usage,

good chances of growth in the price

of the real estate over a period of

time, safest investment as per the

Indian mind set.

Risk Return Liquidity

Real Estate Depends Depends Very Low

Mutual Fund Low High High

Commodities High High High

Stocks Depends Depends High

Govt. Sec. Low Low Low

Money

MarketLow Low High


13/43

Fixed

DepositLow Low Low

PPF Low Low Low

Insurance Low High Moderate

Source: Knight Frank India Research 'India Property Investment

Review'-Yahoo finance

From the chart below it can be easily identified the traditional andModern alternatives of investments:


14/43

PORTFOLIO MANAGER

Portfolio Manager is a professional who manages the portfolio of an

investor with the objective of profitability, growth and risk minimization.

According to SEBI , Any person who pursuant to a contract or

arrangement with a client, advises or directs or undertakes on behalf of the

client the management or administration of a portfolio of securities or the

funds of the client, as the case may be is a portfolio manager.

He is expected to manage the investors assets prudently and choose

particular investment avenues appropriate for particular times aiming at

maximization of profit. He tracks and monitors all your investments, cash

flow and assets, through live price updates. The manager has to balance

the parameters which defines a good investment i.e. security, liquidity and

return. The goal is to obtain the highest return for the client of the managed

portfolio.

There are two types of portfolio manager known as Discretionary

Portfolio Manager and Non Discretionary Portfolio Manager. Discretionary

portfolio manager is the one who individually and independently manages

the funds of each client in accordance with the needs of the client and non-

discretionary portfolio manager is the one who manages the funds in

accordance with the directions of the client.


15/43

GENERAL RESPONSIBILITIES OF A PORTFOLIO MANAGER

Following are some of the responsibilities of a Portfolio Manager:

The portfolio manager shall act in a fiduciary capacity with regard to the

client's funds.

The portfolio manager shall transact the securities within the limitations

placed by the client.

The portfolio manager shall not derive any direct or indirect benefit out of

the client's funds or securities.

The portfolio manager shall not borrow funds or securities on behalf of

the client.

The portfolio manager shall ensure proper and timely handling of

complaints from his clients and take appropriate action immediately

The portfolio manager shall not lend securities held on behalf of clients to

a third person except as provided under these regulations.

CODE OF CONDUCT OF A PORTFOLIO MANAGER

Every portfolio manager in India as per the regulation 13 of SEBI shall

follow the following Code of Conduct:

1. A portfolio manager shall maintain a high standard of integrity fairness.

2. The clients funds should be deployed as soon as he receives.


16/43

3.A Portfolio manager shall render all times high standards and unbiased

service.

4. A portfolio manager shall not make any statement that is likely to be

harmful to the integration of other portfolio manager.5. A portfolio manager shall not make any exaggerated statement.

6. A portfolio manager shall not disclose to any client or press any

confidential information about his client, which has come to his knowledge.

7. A portfolio manager shall always provide true and adequate information.

8. A portfolio manager should render the best pose advice to the client.

SEBI GUIDELINES TO PORTFOLIO MANAGEMENT

SEBI has issued detailed guidelines for portfolio management services.

The guidelines have been made to protect the interest of investors. The

salient features of these guidelines are:

The nature of portfolio management service shall be investment

consultant.

The portfolio manager shall not guarantee any return to his client.

Clients funds will be kept in a separate bank account.

The portfolio manager shall act as trustee of cl ients funds.

The portfolio manager can invest in money or capital market. Purchase and sale of securities will be at a prevailing market price.


17/43

OWERS OF SEBI

SEBI has the following powers to control and manage the portfolio

managers:

1. The portfolio manager shall submit to SEBI such reports, returns and

documents as may be prescribed.

2. SEBI may investigate the affairs of a portfolio manager such as

inspection of books of accounts, records, etc.,

3. SEBI has full authority in the event of violation of any provision tosuspend or cancel the license.

4. No exemptions will be given under any circumstances to portfolio

manager.

TYPES OF INVESTMENT RISK

There are many types of risk that are caused by different factors, or

which affect different investments to varying extents. Some factors affect

most investments and are called systematic risks . Some risks are

specific to a business or asset, and are called non-systematic risks ,

or diversifiable risks , because such risks can be lowered by diversified

investments.

1. Inflation risk is a systematic risk that lessens real returns due to thedecreasing purchasing power of the returns. Although inflation

negatively affects most investment returns, in some cases, currency

inflation can yield higher returns, such as when it is sold short in a

currency transaction.


18/43

2. Interest rate risk is a risk that lowers yields or returns due to

changes in the prevailing interest rate. Interest rate risk can affect

different securities in different ways. The price of bonds in the

secondary market, for instance, varies inversely to interest rates wheninterest rates rise, the price of bonds drops, and vice versa.

3. Business risk is any risk that can lower a businesss net assets or

net income that could, in turn, lower the return of any security based on

it. Higher mortgage rates can increase the business risk for real estateor construction companies, for instance.

4. Financial risk is the risk that a business will not be able to make

payments due to its debt load. Interest and principal must be paid on

borrowed money failure to make payments can force the business into

bankruptcy.

5. Tax risk is the risk that a taxing authority will change tax laws that

will affect an investment negatively. Higher taxes on investment income

reduce real returns and can lower the prices of investments in the

secondary markets. Higher taxes on businesses will lower their net

income, which will usually lower its stock price.

6. Market risk is the risk that market conditions can negatively impact

investment returns. For instance, the prices of securities are dependent

on general supply and demand that fluctuates independently of any

security in particular.


19/43

Market risk is generally dependent on economic conditions, such as

inflation, consumer sentiment, or credit availability.

7. Liquidity risk , which is the risk that an investment cannot be sold

quickly for a reasonable price. Real estate, for instance, is an illiquid

investment because it takes considerable time to sell unless it is sold

below market value.

These are the general risks that affect virtually every investment.

IDEAL PORTFOLIO DESIGNED FOR VARIOUS KINDS OF PEOPLE

PORTFOLIO DESIGNED FOR A CONSERVATIVE PERSON:

Share market- 35% [Rs. 35 lakhs]

Mutual Funds- 35% [Rs. 35 lakhs]

Fixed deposits- 10% [Rs. 10 lakhs]

Money market- 10% [Rs. 10 lakhs]

Commodity- 5% [Rs. 5 lakhs] [Not for trading]

Banks Saving- 5% [Rs. 5 lakhs]


20/43

Assumption & Explanation :

Conservative persons are mostly from Conservative family background or

with more no. of persons depending on him or he may be a retired/ aged

person, who is worried about their near future. So, their risk appetite is very

low. They invest money into some investment instrument from where they

will get fixed returns which will be very useful.

When designing portfolio for these people, very less amount is be assigned

in share market where risk is high. So, we have assigned 35% for share

market wherein we can have diversified portfolio like investing largely into

large cap, who perform well with less risk. In those 35 lacs, we can have

60% for large cap, 40% for mid cap companies.

As mutual funds are having low risk, money can be allocated to this asset

class also. Other forms of investment like fixed deposits, money market are

always having low risk. Bank savings are very necessary as day to day

expenses can be met by this investment. Commodity can be purchased for

safe investment as every family does it.

Commodities like Gold and silver are traditional form of investment from

long time. They help in killing inflation.

Assuming that person of any age and conservative can purchase real

estate for his own family from the returns he gets from fixed returns

investment. He will not think of others asset classes like Art.


21/43

PORTFOLIO DESIGNED FOR A MODERATE PERSON:


Mutual funds- 25% [Rs. 25 lakhs]


Money market- 10% [Rs. 10 lakhs]

Bank savings- 3% [Rs. 3 lakhs]


Assumption & Explanation :

These types of people are having moderate risk taking capability. But, still

they dont prefer other type of asset classes where returns are very low. In

share market also, they go for small cap companies with very little

investment; so that even if they dont get expected returns, they are not

worse off.

Considering this, we have allocated 50% investment to share market i.e. 50

lakhs. In this asset classes, person can choose between large cap, mid cap

& small cap companies or sector wise companies who are performing

good. Lots of options are available with the person to choose. Out of that

50 lakhs, 50% for large cap, 30% for mid cap, 20% for small cap

companies can be allocated.


22/43

Mutual funds are also having lots of schemes, having good returns.

Mutual fund companies are having lots of schemes for different levels with

different allocation for different sectors.

In this case, person can invest into fixed deposits with good returns for

limited period of time say up to 3 years. Then, he can divert his money from

one asset class to another depending upon performance of the other class.

As time passes if person can think of trading in commodity if he can

generate high risk appetite for him for certain amount of money. He also

can go for another asset class like insurance, if he thinks there is a need forthat.

In case of moderate risk taking people, they keep less amount of money in

their bank accounts as their vision is too invest more and get more returns

and keep doing that. They like to mostly get the experience in share market

and new asset classes like commodity trading.

PORTFOLIO DESIGNED FOR AN AGGRESSIVE PERSON:


Mutual funds- 15% [Rs. 15 lakhs]


Bank savings- 3% [Rs. 3 lakhs]



23/43


24/43

The profits are calculated on the basis of ' h igh wate rmark ing ' concept.

This means, that the fee is paid only on the basis of positive returns on the

investment. In addition to these criteria, the manager also gets around 15-

20% of the total profit earned by the client. The portfolio managers can alsoclaim some separate charges gained from brok erage, cus todia l services ,

and t ax payments .

MEASURING PORTFOLIO RETURNS

Portfolio returns come in the form of current income and capital

gains. Current income includes dividends on stocks and interest paymentson bonds. A capital gain or capital loss results when a security is sold, and

is equal to the amount of the sale price minus the purchase price. The

return of the portfolio is equal to the net of the capital gains or losses plus

the current income for the holding period.

Unrealized capital gains or losses on securities still held are also added to

the return to evaluate the holding period return of the portfolio. The portfolioreturn is adjusted for the addition of funds and the withdrawal of funds to

the portfolio, and is time-weighted according to the number of months that

the funds were in the portfolio.


25/43

Below is the formula for calculating the portfolio return for 1 year:

Portfoli

o

Return

=

Dividends + Interest + Realized Gains or Losses + Unrealized

Gains or Losses

Initial Investment + (Added Funds x Number of Months in

Portfolio / 12) - (Withdrawn Funds x Number of Months

Withdrawn from Portfolio / 12)

Realized gains (or losses) are gains or losses actualized by the selling of

the securities, whereas unrealized gains or losses are securities that are

still owned but are marked to market to determine the portfolio's return.

Comparing Portfolio Returns :

There are several ways of comparing portfolio returns with each other andwith the market in general. A simple comparison is to simply compare their

returns. However, returns by themselves do not account for the risk taken.

If 2 portfolios have the same return, but one has lower risk, then that would

be the preferable, more efficient portfolio.

There are 3 common ratios that measure a portfolios risk -return trade-off:

Sharpes ratio

Treynors ratio

Jensens Alpha


26/43

Sharpe Ratio:

The Sharpe ratio (aka Sharpes measure), developed by William F. Sharpe,

is the ratio of a portfolios total return minus the risk -free rate divided by the

standard deviation of the portfolio, which is a measure of its risk. The

Sharpe ratio is simply the risk premium per unit of risk, which is quantified

by the standard deviation of the portfolio.

Risk Premium = Total Portfolio Return Risk-free Rate

Sharpe Ratio = Risk Premium / Standard Deviation of Portfolio

The risk-free rate is subtracted from the portfolio return because a risk-free

asset has no risk premium since the return of a risk-free asset is certain.

Therefore, if a portfolios return is equal to or less than the risk -free rate,

then it makes no sense to invest in the risky assets.

Hence, the Sharpe ratio is a measure of the performance of the portfolio

compared to the risk taken the higher the Sharpe ratio, the better the

performance and the greater the profits for taking on additional risk.

Example Calculating The Sharpe Ratio

If a fund has a return of 12% and a standard deviation of 15% , and if

the risk-free rate is 2% , then what is its Sharpe ratio?

Solution:

Sharpe Ratio = ( 12% 2% ) / 15% = 10% / 15% = 66.7% (rounded)


27/43

Treynor Ratio

While the Sharpe ratio measures the risk premium of the portfolio over the

portfolio risk, or its standard deviation, Treynors ratio, popularized by Jack

L. Treynor, compares the portfolio risk premium to the diversifiable risk of

the portfolio as measured by its beta.

Treynor Ratio =

Total Portfolio Return Risk-Free Rate

Portfolio Beta

Note that since the beta of the general market is defined to be 1, the

Treynor Ratio of the market would be equal to its return minus the risk-free

rate.

Example Calculating The Treynor Ratio

If a portfolio has a return of 12% and a beta of 1.4 , and if the risk-free

rate is 2% , then what is its Treynor ratio?

Solution:

Treynor Ratio = ( 12 2) / 1.4 = 10 / 1.4 = 7.14 (rounded)

Note that here we used whole numbers for the return and risk-free rate

because it simplifies the math and because it makes no difference when

comparing portfolios if the same method is used consistently.


28/43

Jensen's Alpha (Aka Jensen Index):

Alpha is a coefficient that is proportional to the excess return of a portfolio

over its required return, or its expected return, for its expected risk as

measured by its beta. Hence, alpha is determined by the fundamental

values of the company in contrast to beta, which measures the return due

to its volatility. Jensens alpha (aka Jensen index), developed by Michael C.

Jensen, uses the capital asset pricing model (CAPM) to determine the

amount of the return that is firm-specific over that which is due to market

risk, which causes market volatility as measured by the firms beta.

Jensens Alpha = Total Portfolio Return Risk-Free Rate [Portfolio

Beta x (Market Return Risk-Free Rate)]

Jensens alpha can be positive, negative, or zero. Note that, by definition,

Jensens alpha of the market is zero. If the alpha is negative, then the

portfolio is underperforming the market.

Formula investment plans are long-term investment strategies based on afixed formula of dollars to investments that is applied over a period of time

and does not involve security analysis or market timing. While easy to

implement, their main drawback is that profits will probably be less than

that resulting from active analysis and management. There is potentially an

infinite number of formula plans, or variations of them, but the most

common formula plans are: dollar-cost averaging, constant-dollarinvestment, constant-ratio investment, and variable-ratio investment.


29/43

Summary

How successful any of these plans are in actuality will depend on the

specific details of the plans and the investment horizon. However,

they are more likely to be successful the longer the investment

horizon, especially if a large part of the portfolio is invested in risky

assets.

CURRENT STATUS OF PORTFOLIO MANAGEMENT IN INDIA:

Now-a-days, portfolio management is very popular concept because everyinvestor wants to increase his investment. In the earlier days, it was not sogood. People make optimize profits but now investors are taking the help ofthe professionals and they help them in various decisions. Select the rightblend of projects that can increase ROI, market share and achieve asustainable growth portfolio.

They apply an investment plan to maintain a balancebetween investment risk and return. They follow certain rules to allocate themajor portion of resources to invest whether in extremely volatile marketslike share and equity market or in treasury notes, money market funds.

They provide a good investment option, excellent return at manageablerisk. So any individuals, a beginner or an experienced investor or a monthlyearner for living can take the advantages of portfolio management service.

With the considerable investments required to expand new products andthe risks involved, portfolio Management in India is becoming aprogressively more important tool to make strategic decisions aboutproduct development and the investment of company reserves.


30/43

All professionals and business leaders in the investment services have

become mindful that only right technologies and active financial

management can achieve financial goals.

Portfolio management in India has provided the vital insights to expand

competitive initiation in this complex financial market. The portfolio

management team involves managers who try to increase the market

return by actively managing financial portfolio through investment decisions

based on research and individual investment choices. They actively

manage closed-end funds because they have years of actual daily trading

experience. These managers are highly skilful and adept at carrying on

profound research. They can perform with passion and innovation in

investment services. So they can give fruitful financial advice to expand

financial gains.

Investment services involve different financial instruments such as pension

fund, mutual fund, equity and share, investment on property, commodity,

IT, stock, and bond, financial derivatives. These instruments have a certain

level of risk and give returns in the long run. The returns can be positive

only when it is invested professionally.

Many Companies dealing in Portfolio Management are Kotak Securities,

Unicon Portfolio Management, UTI, Karvy, Reliance etc.


31/43

FUTURE PROSPECTUS OF THE PORTFOLIO MANAGEMENT

SERVICES IN INDIA

Now, if we talk about the future prospective of portfolio services, then we

see every investor want to see growth in its investment and returns. He/

she want higher return than risk. They want their investments are

diversified in such a manner so that the risk of one may compensated by

another and for this they have to take the services of the experts.

So, we can say that the future of the portfolio management is very brightbecause in todays world everyone wants to invest in a wisely manner and

so that it may reduce their risk. So, on the every step they have to take the

help of the professionals or experts. In Mutual fund, there are also the

experts who manage the asset mix of the investors but there are some

shortcomings in the mutual fund like flexibility is not there. So portfolio

managers provide these facilities to their clients and they feel satisfied from

their managers.

Moreover, many companies are providing the facilities of portfolio

management and many other are entering into these services. So, we can

say that in the near future, portfolio management services will grow very

fast and from this many investors are taking benefits from this. There are

specialised portfolio managers who are taking care for it and chargescommission for their services and many other companies are entering for

providing better services to the investors. So, in the near future it will

definitely increase.


32/43

STUDY OF A COMPANY

Here, we take the example of Ko tak Secur i t ies

Kotak Securities: Portfolio Management Services


33/43

Kotak Securities is one of Indias oldest portfolio management companies

with over a decade of experience. It is also one of the largest, with Assets

under Management of over Rs. 3300 Crores.

Kotak Portfolio Management from Kotak Securities comes as an answer to

those who would like to grow exponentially on the crest of the stock market,

with the backing of an expert.

Kotak Securities is a SEBI registered Portfolio Manager for providing both

Discretionary as well as Non Discretionary portfolio management service.

Kotak Securities is a depository participant with National SecuritiesDepository Limited (NSDL) and Central Depository Services Limited

(CDSL).

Unlike many other companies, Kotak Securities Ltd. has a Centralised Risk

Management System and an in-house Research Team which allows it to

offer the same levels of service to customers across all locations. Kotak

Securities was awarded as the most customer responsive company in theFinancial Institution sector by AVAYA Global Connect Award both in 2006

and 2007.

Kotak Portfolio Management offers various schemes to suit individual

investment objectives.


34/43

Fol lowing are the pro du cts offered by Ko tak Secur i t ies

o GUARDIAN PORTFOLIO

With the Guardian Portfolio Kotak Securities invests in both gold and

equity. At any point of time around 20 per cent of the assets will be

invested in the gold. The allocation to gold may go up to 50 per cent

depending upon the market condition and the rest will be invested in the

equity market. The minimum investment is Rs 10 lakhs.

o BEP Large cap focus por t fo l io

In the BEP Large cap focus portfolio, investments will be made in mis-

priced large cap stocks that have a high growth potential and can withstand

macro level risks to sustain in an adverse environment.

Large Caps are dominant players in their respective sectors, and hencehave the strength and the ability to maintain margins in a tough operating

environment.

o GEMS PORTFOLIO

GEMS are a 30-month closed-end product. The scheme intends to create a

focused portfolio of stocks from across sectors and market capitalization

ranges. Its main feature is its special mandate to participate in the pre-FPO

(follow-on public offer) placements and private placements of listed

companies. Investments of up to 30 per cent of the overall assets can be

made in such opportunities.


35/43

o ORIGIN

Origin portfolio aims to invest in growth oriented companies with

sustainable business models backed by strong management capabilities

with emphasis on smaller capitalized companies with a market

capitalization not exceeding Rs. 2500 crore at the time of investment.

o INVEST GUA RD PORTFOL IO

The Invest guard Plan is a CPPI Model which invests across shares and

fixed income products, moving from shares into fixed interest investments

when the funds value drops below a predetermined floor. When markets

start to move up, the product increases its holdings in shares, tapping into

these growth opportunities.

o CORE PORTFOLIO

Core Portfolio aims to capture the long term upside of the India Growth

Story by diversifying across the major themes. The investments are in all

equity and equity related instruments with emphasis on companies in the

business areas driven by consumerism, outsourcing, real estate and core

infrastructure players and is essentially a mix of small, medium and large

capitalization companies.

The Portfolio Management Service combines competent fund

management, dedicated research and technology to ensure a rewarding

experience for its clients. Special relationship managers are appointed to

manage your investments in the best possible manner and make sure that

you get maximum returns of your investments.


36/43

Kotak PMS has a dedicated fund management and research team that

frequently meets management of companies and is well-placed to spot

such opportunities.

BENEFITS OF CHOOSING PORTFOLIO MANAGEMENT SERVICES

(PMS) INSTEAD OF MUTUAL FUNDS:

While selecting Portfolio management service (PMS) over mutual funds

services it is found that portfolio managers offer some very services which

are better than the standardized product services offered by mutual funds

managers.

Such as :

Asset Allocation : Asset allocation plan offered by Portfolio management

service helps in allocating savings of a client in terms of stocks, bonds or

equity funds. The plan is tailor made and is designed after the detailed

analysis of client's investment goals, saving pattern, and risk taking

capacity.

Timing : Portfolio managers preserve client's money on time. Portfolio

management service (PMS) help in allocating right amount of money in

right type of saving plan at right time. This means, portfolio manager

provides their expert advice on when his client should invest his money in

equities or bonds and when he should take his money out of a particularsaving plan. Portfolio manager analyzes the market and provides his expert

advice to the client regarding the amount of cash he should take out at the

time of big risk in stock market.


37/43

Flexibility: Portfolio Managers plan saving of his client according to their

need and preferences. But sometimes, portfolio managers can invest

client's money according to his preference because they know the market

very well than his client. It is his client's duty to provide him a level of

flexibility so that he can manage the investment with full efficiency and

effectiveness.

In c o m p a ri s o n t o m u t u al f u n d s, portfolio managers do not need to follow

any rigid rules of investing a particular amount of money in a particularmode of investment.

Mutual fund managers need to work according to the regulations set up by

financial authorities of their country. Like in India, they have to follow rules

set up by SEBI.

CASE STUDY: FINANCIAL PLANNING INTERRUPTED

Any financial planner worth his salt will vouch for the importance ofdiversification while building a portfolio. Furthermore, the diversificationneeds to work at various levels. For example, within each asset class, it ispertinent to be invested across multiple instruments; similarly, the portfolioshould be diversified across various asset classes as well.

We have taken a case study of a client whose portfolio was anything butdiversified. And this wasn't his only problem. To make matters worse, heseemed to have contravened every basic tenet of financial planning,making his portfolio an ideal candidate for a makeover.


38/43

The facts of the case:

The client is 40 years of age, and the sole earning member in his

family.

His wife is a homemaker and his sons are aged 10 and 5

respectively.

He is employed with a multinational corporation and his salary

income more than makes up for his expenses i.e. the monthly cash

inflows outweigh outflows.

The client's investments/financials are as follows:

He has invested in 3 properties (including the one in which he

resides), which account for 83% of his assets.

Equities (stocks and investments in only 2 diversified equity funds)

account for 16% of assets.

The balance (1%) is held in cash/savings bank accounts.

He has opted for 2 child ULIPs (unit linked insurance plans), the total

annual premium for which is Rs 120,000

On the liabilities front, he has an outstanding home loan and also a loan

against his mutual fund investment.

As can be seen, property i.e. real estate as an asset class accounts for a

disproportionately high portion of the asset portfolio.


39/43

Furthermore, all the properties are in the same city, depriving the client of

any diversification opportunity.

While it is important to have property in one's

portfolio, it certainly shouldn't account for

such a high proportion. Also given that

property as an asset class tends to be rather

illiquid (a distress sale when liquidity needs

are urgent could lead to a loss-making proposition), only accentuates theunenviable situation. A downturn in property prices could spell disaster for

the client.

How much should property account for in your portfolio?

The remedy for this situation lies in introducing other assets like equitiesinto the portfolio and thereby converting the portfolio into a more balanced

one. Studies have shown that equities as an asset class (if invested

smartly) can outperform others like real estate, gold and fixed income

instruments over longer time frames. Considering that the client's needs

(planning for retirement and providing for children's education) are long-

term in nature, the presence of a higher equity component should be

treated as vital.

The solution - put on hold any plans to buy more property. With 3

properties, the client has adequately taken care of that.


40/43

The surplus cash inflows should now be utilized to beef up the portfolio's

equity component. But the same needs to be done in a planned manner.

Sadly, the client has not even set himself any concrete objective in terms of

planning for retirement or providing for children's education. In other words,it's yet another case of investing randomly without setting any objectives.

To complicate matters, the client has erred by investing nearly Rs 3 m in

just 2 diversified equity funds, again pointing to lack of diversification.

Identify your financial goals at the outset

The solution - set tangible objectives (in monetary terms) and then investsin well-managed equity funds in a disciplined manner for achieving the

same. This will help on various levels. First, the enhanced equity

component will ensure that the portfolio becomes well-diversified across

asset classes. Second, it will make the equity investments diversified

across multiple schemes. Finally, it will aid in gainfully utilizing the surplus

monies.

On the insurance front, the client is woefully underinsured. Considering that

he is the sole earning member in the family, the ideal choice would have

been to opt for a term plan.

Term plans are pure risk cover plans; they offer the opportunity to obtain a

high insurance cover at relatively lower premiums. After getting himself

adequately insured, savings-based products like ULIPs should have found

place in the portfolio. The client should rectify the anomaly by buying a term

plan and fortifying his insurance portfolio.


41/43

Term Plans - Comparative premium chart

The liability side could do with some rework as well. While the home loan

can aid in tax-planning (interest and principal repayments qualify for

deduction from gross total income), we aren't quite convinced about the

loan against mutual fund investment. The client is sufficiently liquid and

certainly doesn't need to shoulder the burden of a redundant loan

repayment. He would be better off paying off the loan at the earliest.

The client's financial status and condition make rather interesting reading.

On the surface, we have an individual, whose income streams more thanmake up for his expenses, whose asset portfolio seems rather well-

stocked. In other words, it's a seemingly picture perfect situation. But

scratch the surface, and a radically different picture emerges.

The investments are lop-sided in favor of a single asset class (i.e.

property). Despite the needs being long-term in nature, the client is virtually

unprepared to meet those needs; in fact, he hasn't even quantified hisneeds - which should be the starting point for the exercise. He doesn't have

an adequate insurance cover and has in his books avoidable liabilities.

The case only underscores the difference between having finances and

being financially sound. And missing out on the latter could well mean that

one is headed for a financial disaster.

Source: Yahoo Finance


42/43

CONCLUSION

From the above discussion it is clear that portfolio functioning is based on

market risk, so one can get the help from the professional portfoliomanager or the Merchant banker if required before investment. Becauseapplicability of practical knowledge through technical analysis can help aninvestor to reduce risk.

Casino make money on a roulette wheel, not by knowing what number willcome up next, but by slightly improving their odds with the addition of a 0and 00. Yet many investors buy securities without attempting to controlthe odds. If we believe that this dealings is not a Gambling we have tostart up it with intelligent way. Through it is basically a future estimation orexpectation, one should know the standard norms and related rules forlowering the risk.

After the overall study about this topic it shows that portfolio managementis a dynamic and flexible concept which involves regular and systematicanalysis, proper management, judgment, and actions and also that theservice which was not so popular earlier as other services has become abooming sector as on today and is yet to gain more importance andpopularity in future as people are slowly and steadily coming to know aboutthis concept and its importance.It also helps both an individual the investor and FII to manage their portfolioby expert portfolio managers. It protects the investors portfolio of fundsvery crucially.Portfolio management service is very important and effective investmenttool as on today for managing investible funds with a surety to secure it. Asand how development is done every sector will gain its place in this world

of investment. It can be concluded, that future of portfolio management isbright provided proper regulations prevail and investors needs are satisfiedby providing variety of schemes.


43/43

BIBLIOGRAPHY

PRASANNA CHANDRA SECURITY ANLYSIS AND PORTFOLIOMANAGEMENT.

V.A. AVADHANI SECURITY ANLYSIS AND PORTFOLIOMANAGEMENT.

GORDON AND NATRAJAN FINANCIAL SERVICES AND MARKETS.

IGNOU MBA COURSE MATERIAL

WEBLIOGRAPHY

www.npd-solutions.com/ portfolio .html http://www.ipcc.ca/services/portfolioplanning.aspx http://www.indianchild.com/management/portfolio-management.htm http://www.kotaksecurities.com/whatweoffer/portfoliomanagement.ht

ml http://www.botinternational.com/portfolio_management.htm http://www.articlesbase.com/investing-articles/portfolio-management-

is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGr http://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id

=14 http://www.sushilfinance.com/capitalmarket/Services/portfolio-

management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3

http://hubpages.com/hub/Kotak-Securities-PMS http://www.investopedia.com/terms/p/portfoliomanagement.asp www.moneycontrol.com
http://www.kotaksecurities.com/whatweoffer/portfoliomanagement.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliomanagement.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliomanagement.htmlhttp://www.botinternational.com/portfolio_management.htmhttp://www.articlesbase.com/investing-articles/portfolio-management-is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGrhttp://www.articlesbase.com/investing-articles/portfolio-management-is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGrhttp://www.articlesbase.com/investing-articles/portfolio-management-is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGrhttp://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id=14http://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id=14http://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id=14http://www.sushilfinance.com/capitalmarket/Services/portfolio-management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3http://www.sushilfinance.com/capitalmarket/Services/portfolio-management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3http://www.sushilfinance.com/capitalmarket/Services/portfolio-management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3http://hubpages.com/hub/Kotak-Securities-PMShttp://www.investopedia.com/terms/p/portfoliomanagement.asphttp://www.investopedia.com/terms/p/portfoliomanagement.asphttp://hubpages.com/hub/Kotak-Securities-PMShttp://www.sushilfinance.com/capitalmarket/Services/portfolio-management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3http://www.sushilfinance.com/capitalmarket/Services/portfolio-management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3http://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id=14http://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id=14http://www.articlesbase.com/investing-articles/portfolio-management-is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGrhttp://www.articlesbase.com/investing-articles/portfolio-management-is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGrhttp://www.botinternational.com/portfolio_management.htmhttp://www.kotaksecurities.com/whatweoffer/portfoliomanagement.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliomanagement.html

portfolio management of an individual

Documents