INTRODUCTION TO INVESTMENT MANAGMENT

Investment
management is
the
professional asset
management of
various securities (shares,
bonds
and
other
securities)
and
other assets (e.g., real estate) in order to meet specified investment goals
for the benefit of the investors. Investors may be institutions (insurance
companies,
pension
funds,
corporations,
charities,
educational
establishments etc.) or private investors (both directly via investment
contracts and more commonly via collective investment schemes e.g. mutual
funds or exchange-traded funds).
The term asset management is often used to refer to the investment
management of collective investments, while 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 money
management or portfolio management often within the context of so-called
"private banking".
The provision of investment management services includes elements
of financial statement analysis, asset selection, stock selection, plan
implementation and ongoing monitoring of investments. Coming under the
remit of financial services many of the world's largest companies are at least
in part investment managers and employ millions of staff.
Fund manager (or investment advisor in the United States) refers to both
a firm that provides investment management services and an individual who
directs fund management decisions.
According to a Boston Consulting Group study, the assets managed
professionally for fees reached an all-time high of US$62.4 trillion in 2012,
after remaining flat-lined since 2007.[1] Furthermore, these industry assets
under management were expected to reach US$70.2 trillion at the end of
2013 as per a Cerulli Associates estimate.
The global investment management industry is highly concentrated in
nature, in a universe of about 70,000 funds roughly 99.7% of the US fund
flows in 2012 went into just 185 funds. Additionally, a majority of fund
managers report that more than 50% of their inflows go to just three funds.

INVESTMENT MANAGEMENT INDUSTRY IN INDIA

Purpose
The Investment Management (IM) component provides functions to support
the planning, investment, and financing processes for:
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 Capital investments, such as the acquisition of fixed assets as the result ofhouse production or purchase
Investments in research and development
Projects that fall primarily under overhead, such as continuing education of
employees or establishing new markets
Maintenance programs
The term investment, therefore, is not limited only to investments you
capitalize for bookkeeping or tax purposes. An investment in this context can
be any measure that initially causes costs, and that may only generate
revenue or provide other benefits after a certain time period has elapsed (for
example, plant maintenance projects).
The IM component contains functions for managing investments in the area
of fixed assets. Financial assets are managed in the Treasury component.
Implementation considerations
For information on implementing the IM component, refer to the
Implementation Guide (IMG) for Investment Management. Choose SAP
Customizing Implementation Guide Investment Management.
Integration
The investment program and the appropriation request are objects that
originate in the IM component. In order to represent the measure, the IM
component uses internal orders from Overhead Cost Controlling - Overhead
Orders (CO-OM-OPA) and Plant Maintenance (PM), as well as work breakdown
structure (WBS) elements from the Project System (PS).
The integration with Asset Accounting (FI-AA) enables you to easily capitalize
the costs of internal orders and WBS elements that require capitalization to a
fixed asset. Costs that do not require capitalization can be settled to cost
accounting.
You can post acquisitions to a measure in the Logistics components of the
SAP System.

Sub-Components of Investment Management and their Integration

The integrated planning process allows you to roll up planned values from
appropriation requests and measures on the investment program to which
they are assigned. You carry out budgeting of measures, on the other hand,
from the top down within the investment program.
You can transfer expected depreciation on all planned investments to
management accounting in the form of planned costs.
Features
Investment Management consists of the following components:
Component
Used for
Investment
Program

cyclical planning and management of investment

budgets for a number of measures, throughout your
whole enterprise

Appropriation management of the planning and approval phase

Requests
of investments and other types of measures
Investment
Measures

parallel handling of cost accounting and financial

accounting needs for individual investments.
Measures take the form of internal orders, projects
and maintenance orders.

Investment Programs
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Purpose
You can use investment programs as a supplement for any planning for
individual measures and for budgeting in the following areas:
Planning
Administration
Monitoring of a global budget
Investment programs support the annual creation of an investment plan and
budget if these are to be monitored globally.
You can obtain an overview of planning and budgeting processes in complex
enterprise structures for all investments and large projects of the group,
while at the same time maintaining strict budgetary control.
Features
The Investment Programs component provides functions for planning and
monitoring of investment budgets encompassing many different measures,
on a cyclical basis, of an entire corporate group. You can benefit from the
integration
of
this
component
with
the Investment
Measures and Appropriation
Requests components.
Measures
and
appropriation requests can be assigned to investment program positions. By
rolling up their plan values in the investment program, these measures and
appropriation requests are integrated in the comprehensive investment
planning process. At the same time, you can budget and oversee the
measures using the investment program.
Comprehensive investment programs in the SAP System offer the advantage
of their direct integration with the individual measures (orders or WBS
elements), in contrast to non-integrated planning systems. By means of this
integration, you are quickly made aware if your comprehensive budget is
overrun. You can also monitor expenses for both external acquisitions as
well as internal costs (activity allocation, overhead).
The Investment Programs component includes the following processes and
functions:
Process/Function
Areas Used
Structure of the Investment Investments listed in a hierarchy
Program
Planning and Budgeting of - Bottom-up: Planning investments in
Investment Programs
an investment program
- Top-down: Budget distribution
Fiscal Year Change

Carrying forward a current investment

program into a new approval year

Structure of the Investment Program

Use

The system displays the program structure in maintenance transactions in

the form of a horizontal tree diagram. You can assign investment measures
and appropriation requests to the investment program positions.
Features
Creating the Program Structure and Program Positions
When you create or change the tree diagram, you can also directly define
the corresponding program positions and assign them to the desired position
in the hierarchy using fast entry.
The system uniquely identifies each program position based on its:
Investment program name and approval year
Position ID that has a maximum of 24 characters
The maximum number of hierarchy levels is 99.
There are limitations on how complex the investment program can be, due to
performance considerations. Since performance is strongly dependent on
your system configuration, we can only offer a figure for orientation: If your
investment program has more than 10,000 positions, you should contact
your SAP consultant.
You can make organizational assignments for each program position (such
as, assignment to a company code, business area, plant, or cost center).
When you create new program positions below existing positions in the
hierarchy, the system automatically copies the assignments and the general
data from the higher-level position to the new lower-level position you are
creating.
However, if you later change the organizational assignment of a program
position that has subordinate positions in the hierarchy, the system
does not automatically copy the changes to these subordinate program
positions.
There is a report you can use to check the consistency of the organizational
units in investment programs (refer to
Top Positions and Controlling Area
You have to assign the top positions of a program to a controlling area. The
system then automatically copies this controlling area to all subordinate
positions. In this way, it is guaranteed that a subtree of an investment
program always belongs to a given controlling area.
Measures
The program positions that do not have any subordinate positions assigned
to them in the hierarchy are called end nodes The individual measures of the
investment program can be assigned to these end node positions. You can
assign internal orders, maintenance orders and WBS elements to investment
programs as measures (refer to
Connection between Programs and Measures).
You can make one of the following specifications for an end node position:
The individual measures assigned to the end node can be budgeted
separately, and the totals of these budgets are compared with the budget for

the program position only on a periodic basis in reports. (TheBudget dist.

overall indicator is not set.
Union bank Asset Management Group
Union Banks Asset Management Group offers you a complete range of
financial planning, investment and estate servicesall from the same source
you already rely on for your personal and business banking. Regardless of
the current value of your savings, portfolio or estate, Union Banks
experienced advisors are happy to work with you to develop a plan and
identify strategies that will help you manage your money and assets to meet
your goals.
Our wide range of expertise includes:
Investment Management from advisory to fully managed accounts
Personal Trusts with the fiduciary services you expect
Retirement Strategies tailored to your lifestyle
Estate Services covering both planning and settlement
Commercial Client Services including escrow, investment management and
custodial accounts
Investment Management
All of our clients are unique. That's why from the very first moment we meet
with you, we listen. We believe listening is the basic ingredient of all good
relationships. What we learn from you forms the basis for our
recommendations. Understanding your present need is crucial to laying the
foundation for your investments and for your familys future. Add a strong
local presence to our experience, and the result is excellent service, insight
and care that you can count on over time. We believe you deserve that!
Our investment strategy balances your risk with careful diversification to
reduce your overall exposure.
We offer:
Advisory accountsfor investors who like a hands-on approach to their
investments, but whom also want to work with an expert.
Custodial accountsincludes safekeeping of securities and record keeping. A
custodial account can also be a retirement account managed for eligible
employees by a custodian.
Fully managed accountscompletely managed personalized asset
management and investment portfolios tailored to your specific needs.
Personal Trusts
Protecting your assets just makes sense, and to do that well you need the
counsel of a trustworthy financial advisor. Union Banks expert staff, long
history and solid reputation ensure you that the guidance and service you
receive will help establish your financial security.
One of the most effective means of guarding your estate is setting up a trust.
The trust can include a variety of assetsmoney, real estate, furniture, etc.
The trust itself is a financial agreement used to benefit either a person (child,

spouse or whomever) or group of people (a charity, other non-profit or cause,

etc.).
Living trusts" provide for the control and use of your assets during your
lifetime and are distributed when you die as directed by the trust. The
probate process is avoided for assets put into the trust.
Testamentary trusts" take effect when you die and are tied to a will. A
testamentary trust can help distribute your assets to those you wish to
inherit at a future date.
A Union Bank Asset Management advisor can offer you the financial services
and management required to deliver on your wishes, including:
A revocable trust is in place as long as the grantor is still living; at any time,
the grantor can revoke the trust.
An irrevocable trust cannot be changed.
A charitable trust is an irrevocable trust set up to benefit a charitable
organization.
A supplemental needs trust is for someone who has special needs or
requirements.
Retirement Strategies
It is never too early to consider your retirement. A Union Bank Asset
Management advisor can create a multifaceted plan for your retirement that
matches your goals and dreams. We select among traditional and nontraditional investment vehicles based on your income, assets and lifestyle so
that your hard work pays off. We also keep an eye to how your retirement
investments should be structured given the stage of life you are in. Longterm vision and sensible balancing of your portfolio can make all the
difference.
Retirement services we offer include:
Estate Services
Estate Planning & Settlement
The best way to ensure that your beneficiaries receive what you wish them
to is to have a clear, well-thought-out, documented plan of action, with due
consideration given to taxes and other issues. Union Bank Asset
Management advisor will give you the guidance you need to ensure that your
wishes are followed and that those you care for are the recipients.
Commercial Client Services
Union Bank's Asset Management Group offers escrow, investment
management and custodial services to commercial clients.
Escrow
Investment management
Custodial service
HISTORY OF UNION BANK ASSET MANAGEMENT CO
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Union Bank of India (UBI) was registered on 11 November 1919 as a limited

company in Mumbai and was inaugurated by Mahatma Gandhi. At the time of
India's Independence in 1947, UBI only had four branches - three in Mumbai
and one in Saurashtra, all concentrated in key trade centres. After
Independence UBI accelerated its growth and by the time the government
nationalised it in 1969, it had grown to 240 branches in 28 states. Shortly
after nationalisation, UBI merged in Belgaum Bank, a private sector bank
established in 1930 that had itself merged in a bank in 1964, the Shri Jadeya
Shankarling Bank. Then in 1985 UBI merged in Miraj State Bank, which had
been established in 1929. In 1999 the Reserve Bank of India requested that UBI
acquire Sikkim Bank in a rescue after extensive irregularities had been
discovered at the non-scheduled bank. Sikkim Bank had eight branches
located in the North-east, which was attractive to UBI.
UBI began its international expansion in 2007 with the opening of
representative offices in Abu Dhabi, United Arab Emirates, and Shanghai,
Peoples Republic of China. The next year, UBI established a branch in Hong
Kong, its first branch outside India. In 2009, UBI opened a representative
office in Sydney, Australia.
At present, the offshore banking operations of Union Bank of India are led by
its branches in Hong Kong and newly opened branch in Dubai at Dubai
International Financial Centre.
Established in 1995, as the 8th indigenous Bank, Union Bank is positioned to
be the preferred Bank for the Small and Medium Enterprises and Retail
sectors in Sri Lanka. As one of Sri Lanka's fastest growing Banks, Union Bank
offers its preferred customer segments a range of comprehensive financial
solutions to support the development and growth of these sectors. Known for
its strong shareholder strength which includes high caliber local and foreign
investors, financial stability, innovative range of technology-driven products,
supported by superior service delivery enables Union Bank to forge ahead as
a key player in the Banking industry in Sri Lanka.
In order to deliver the Bank's unique value proposition to customers, Union
Bank continues to expand its reach rapidly in Sri Lanka through its growing
branch network which also includes 7 branches in the Northern and Eastern
provinces in the country. A number of new branches are expected to open in
several new areas in the coming year and beyond, which is specially focused
and geared to grow Union Bank's SME portfolio.
Listed in the Colombo Stock Exchange in March 2011, the Bank's Initial Public
Offering (IPO) received overwhelming response making the IPO one of the
highest oversubscribed in Sri Lanka and globally further highlighting public
confidence in Union Bank as a rapidly progressing and potential business
entity.
The Bank's expansion also includes the Bank actively pursuing opportunities
for related diversifications in the Finance Industry and as such acquired 51%
stake in National Asset Management Limited, Sri Lanka's premier Asset
8

Management Company in February 2011 and subsequently in November

2011, acquired 98% of voting shares with a strategic foreign investor
Shorecap in The Finance and Guarantee Company Limited, one of Sri Lanka's
oldest finance companies established in 1961.
August 2014, UBC announced it has entered into an investment agreement
with Culture Financial Holdings Ltd. an affiliate of TPG, a leading global
private investment firm with over $59Bn of capital under management. The
investments is one of the largest foreign direct investments into Sri Lanka in
recent years and places Union Bank amongst the top 5 banks in Sri Lanka.
Under the agreement, TPG will invest up to approximately US$117 million
( or LKR 15Bn) in UBC through a combination of primary and secondary
shares, representing up to 70% of the issued share capital.
Union Bank of India
Union Bank of India (UBI) (BSE: 532477) is one of the largest governmentowned banks of India (the government owns 60.13% of its share capital). It is
listed on the Forbes 2000, and has assets of USD 13.45 billion. All the bank's
branches have been networked with its 6420 ATMs. Its online Telebanking
facility are available to all its Core Banking Customers - individual as well as
corporate. It has representative offices in Abu Dhabi, United Arab Emirates,
Beijing, Peoples Republic of China, London, Shanghai, and Sydney, and branches
in Hong Kong,Dubai(Dubai International Financial Centre) and Antwerp,
Belgium.
The bank is in the process of upgrading its representative offices in London
and Sydney to branches. UBI is active in promoting financial inclusion policy
and is a member of the Alliance for Financial Inclusion (AFI).

INVESTMENT MANAGERS AND PORTFOLIO STRUCTURES OF UNION

BANK ASSET MANAGEMENT
At the heart of the investment management industry are the managers who
invest and divest client investments.
A certified company investment advisor should conduct an assessment of
each client's individual needs and risk profile. The advisor then recommends
appropriate investments.
Asset allocation
The different asset class definitions are widely debated, but four common
divisions are stocks, bonds, real estate and commodities. The exercise of
allocating funds among these assets (and among individual securities within
each asset class) is what investment management firms are paid for. Asset
classes exhibit different market dynamics, and different interaction effects;
thus, the allocation of money among asset classes will have a significant
effect on the performance of the fund. Some research suggests that
allocation among asset classes has more predictive power than the choice of
individual holdings in determining portfolio return. Arguably, the skill of a
successful investment manager resides in constructing the asset allocation,
and separately the individual holdings, so as to outperform certain
benchmarks (e.g., the peer group of competing funds, bond and stock
indices).
Long-term returns
It is important to look at the evidence on the long-term returns to different
assets, and to holding period returns (the returns that accrue on average
over different lengths of investment). For example, over very long holding
periods (e.g. 10+ years) in most countries, equities have generated higher
returns than bonds, and bonds have generated higher returns than cash.
According to financial theory, this is because equities are riskier (more
volatile) than bonds which are themselves more risky than cash.
Diversification
Against the background of the asset allocation, fund managers consider the
degree of diversification that makes sense for a given client (given its risk
preferences) and construct a list of planned holdings accordingly. The list will
indicate what percentage of the fund should be invested in each particular
stock or bond. The theory of portfolio diversification was originated by
Markowitz (and many others). Effective diversification requires management
of the correlation between the asset returns and the liability returns, issues
internal to the portfolio (individual holdings volatility), and crosscorrelations between the returns.
Investment styles
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There are a range of different styles of fund management that the institution
can implement. For example, growth, value, growth at a reasonable price
(GARP), market neutral, small capitalisation, indexed, etc. Each of these
approaches has its distinctive features, adherents and, in any particular
financial environment, distinctive risk characteristics. For example, there is
evidence that growth styles (buying rapidly growing earnings) are especially
effective when the companies able to generate such growth are scarce;
conversely, when such growth is plentiful, then there is evidence that value
styles tend to outperform the indices particularly successfully.
Performance measurement
Fund performance is often thought to be the acid test of fund management,
and in the institutional context, accurate measurement is a necessity. For
that purpose, institutions measure the performance of each fund (and
usually for internal purposes components of each fund) under their
management, and performance is also measured by external firms that
specialize in performance measurement. The leading performance
measurement firms (e.g. Frank Russell in the USA or BI-SAM [1] in Europe)
compile aggregate industry data, e.g., showing how funds in general
performed against given indices and peer groups over various time periods.
In a typical case (let us say an equity fund), then the calculation would be
made (as far as the client is concerned) every quarter and would show a
percentage change compared with the prior quarter (e.g., +4.6% total return
in US dollars). This figure would be compared with other similar funds
managed within the institution (for purposes of monitoring internal controls),
with performance data for peer group funds, and with relevant indices
(where available) or tailor-made performance benchmarks where
appropriate. The specialist performance measurement firms calculate
quartile and decile data and close attention would be paid to the (percentile)
ranking of any fund.
Generally speaking, it is probably appropriate for an investment firm to
persuade its clients to assess performance over longer periods (e.g., 3 to 5
years) to smooth out very short term fluctuations in performance and the
influence of the business cycle. This can be difficult however and, industry
wide, there is a serious preoccupation with short-term numbers and the
effect on the relationship with clients (and resultant business risks for the
institutions).
An enduring problem is whether to measure before-tax or after-tax
performance. After-tax measurement represents the benefit to the investor,
but investors' tax positions may vary. Before-tax measurement can be
misleading, especially in regimens that tax realised capital gains (and not
unrealised). It is thus possible that successful active managers (measured
before tax) may produce miserable after-tax results. One possible solution is
to report the after-tax position of some standard taxpayer.
Risk-adjusted performance measurement
Performance measurement should not be reduced to the evaluation of fund
returns alone, but must also integrate other fund elements that would be of
11

interest to investors, such as the measure of risk taken. Several other

aspects are also part of performance measurement: evaluating if managers
have succeeded in reaching their objective, i.e. if their return was sufficiently
high to reward the risks taken; how they compare to their peers; and finally
whether the portfolio management results were due to luck or the managers
skill. The need to answer all these questions has led to the development of
more sophisticated performance measures, many of which originate
in modern portfolio theory. Modern portfolio theory established the
quantitative link that exists between portfolio risk and return. The Capital
Asset Pricing Model (CAPM) developed by Sharpe (1964) highlighted the
notion of rewarding risk and produced the first performance indicators, be
they risk-adjusted ratios (Sharpe ratio, information ratio) or differential
returns compared to benchmarks (alphas). The Sharpe ratio is the simplest
and best known performance measure. It measures the return of a portfolio
in excess of the risk-free rate, compared to the total risk of the portfolio. This
measure is said to be absolute, as it does not refer to any benchmark,
avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it
does not allow the separation of the performance of the market in which the
portfolio is invested from that of the manager. The information ratio is a
more general form of the Sharpe ratio in which the risk-free asset is replaced
by a benchmark portfolio. This measure is relative, as it evaluates portfolio
performance in reference to a benchmark, making the result strongly
dependent on this benchmark choice.
Portfolio alpha is obtained by measuring the difference between the return of
the portfolio and that of a benchmark portfolio. This measure appears to be
the only reliable performance measure to evaluate active management. In
fact, we have to distinguish between normal returns, provided by the fair
reward for portfolio exposure to different risks, and obtained through passive
management, from abnormal performance (or outperformance) due to the
managers skill (or luck), whether through market timing, stock picking, or
good fortune. The first component is related to allocation and style
investment choices, which may not be under the sole control of the
manager, and depends on the economic context, while the second
component is an evaluation of the success of the managers decisions. Only
the latter, measured by alpha, allows the evaluation of the managers true
performance (but then, only if you assume that any outperformance is due to
skill and not luck).
Portfolio return may be evaluated using factor models. The first model,
proposed by Jensen (1968), relies on the CAPM and explains portfolio returns
with the market index as the only factor. It quickly becomes clear, however,
that one factor is not enough to explain the returns very well and that other
factors have to be considered. Multi-factor models were developed as an
alternative to the CAPM, allowing a better description of portfolio risks and a
more accurate evaluation of a portfolio's performance. For example, Fama
and French (1993) have highlighted two important factors that characterize a
company's risk in addition to market risk. These factors are the book-to12

market ratio and the company's size as measured by its market

capitalization. Fama and French therefore proposed three-factor model to
describe portfolio normal returns (Fama-French three-factor model). Carhart
(1997) proposed to add momentum as a fourth factor to allow the short-term
persistence of returns to be taken into account. Also of interest for
performance measurement is Sharpes (1992) style analysis model, in which
factors are style indices. This model allows a custom benchmark for each
portfolio to be developed, using the linear combination of style indices that
best replicate portfolio style allocation, and leads to an accurate evaluation
of portfolio alpha.

UNION BANK ENTERS MUTUAL FUND SPACE BY JOINING HANDS WITH

KBC ASSET MANAGEMENT OF BELGIUM TO LAUNCH UNION KBC
ASSET MANAGEMENT COMPANY.
Union Bank of India on Wednesday announced its foray into the crowded
mutual fund space joining hands with KBC Asset Management of Belgium to
launch Union KBC Asset Management Company. The joint venture will see
Union Bank of India hold 51 per cent stake and KBC Asset Management own
49 per cent stake in the joint venture firm. Union KBC AMC will float its first
open-ended equity scheme called Union KBC Equity Fund, which would be
open from May 20 to June 3. We would want to be amongst top 10 mutual
fund houses in the country in the next five years,said MV Nair, chairman and
managing director, Union Bank of India. A total of 43 mutual fund houses are
operating in the country with total assets under management in the end
March standing at slightly over Rs 7,00,000 crore, as per details available on
the Amfi website. The mutual fund will look to raise Rs 600 crore by the end
of 2011 for its equity fund schemes. Depending on the market condition, the
fund house may also look to launch equity linked savings scheme (ELSS) and
a mid-cap fund, but floating an offshore fund in the near-term is not in the
radar, said Ashish Ranawade, chief investment officer at Union KBC Mutual
Fund. The first scheme, Union KBC Equity Fund, will primarily invest in a
portfolio consisting of equity and equity related securities, the company said
in a media release. We will invest 80 per cent of the corpus in large-cap
13

stocks consisting of BSE-100 companies in order to bring stability to the

product, said Ranawade. The bank will use it extensive 3,000 branch network
spread across the country and tap its three crore odd customers to sell its
mutual fund schemes. Union Bank of India brings an extensive network and
knowledge of Indian customers, while KBC brings valuable expertise gained
from more than 50 years in investment management,said G Pradeepkumar,
chief executive officer at Union KBC AMC.
The first scheme, Union KBC Equity Fund, will primarily invest in a portfolio
consisting of equity and equity related securities, the company said in a
media release. We will invest 80 per cent of the corpus in large-cap stocks
consisting of BSE-100 companies in order to bring stability to the product,
said Ranawade

PORTFOLIO MANAGEMENT SERVICES

In Todays Competitive world, where banks and

financial

institutions provide number of services which provides a customer with a

wide spectrum of investment opportunities. They in order to retain their
customers provide them special services besides traditional services.
The invention of new technology and services by banks and financial
institutions has given the consumers a wide range of investment avenues to
invest in. One of the special services brought out by banks and
financial institutions is

PORTFOLIO MANAGEMENT SERVICES

(PMS) which aims at providing an investor to invest a combination of

14

securities all together which enables him to earn maximum returns at

minimum level of risk.
The main objective of this project is to review the real meaning of
Portfolio Management, its objectives, role, framework,
responsibilities of portfolio manger and the study of various other issues
related to it such as its comparison with, Mutual funds, role of Merchant
Bankers in
Portfolio Management, SEBI guidelines.
I am inclined to this topic, as it has given me actual knowledge of this service
along with its working and how the portfolio manager manages the portfolio.
Moreover, it has guided me to understand this so called complex world of
investment and also increase my knowledge to such extent. I hope it will
prove beneficial to me in developing my further career.

INTRODUCTION
PORTFOLIO MANAGEMENT SERVICES PROVIDED BY UNION
BANK
As per definition of SEBI Portfolio means a collection of securities owned by
an investor. It represents the total holdings of securities belonging to any
person". It comprises of different types of assets and securities.
Portfolio management refers to the management or administration of a
portfolio of securities to protect and enhance the value of the underlying
investment. It is the 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. It helps to reduce risk without sacrificing returns. It
involves a proper investment decision with regards to what to buy and sell. It
involves proper money management. It is also known as Investment
Management.
Portfolio Management Services, called, as PMS are the advisory
services provided by corporate financial intermediaries. It enables investors
to promote and protect their investments that help them to generate higher
returns. It devotes sufficient time in reshuffling the investments on hand in
line with the changing dynamics. It provides the skill and expertise to steer
15

through these complex, volatile and dynamic times. It is a choice of selecting

and revising spectrum of securities to it with the characteristics of an
investor. It prevents holding of

Stock investors constantly hear the wisdom of diversification. The concept is to

simply not put all of your eggs in one basket, which in turn helps mitigate risk, and
generally leads to better performance or return on investment. Diversifying your
hard-earned dollars does make sense, but there are different ways of diversifying,
and there are different portfolio types. We look at the following portfolio types and
suggest how to get started building them: aggressive, defensive, income,

speculative and hybrid. It is important to understand that building a portfolio will

require research and some effort. Having said that, let's have a peek across our five
portfolios to gain a better understanding of each and get you started.

The Aggressive Portfolio

An aggressive portfolio or basket of stocks includes those stocks with high risk/high
reward proposition. Stocks in the category typically have a high beta, or sensitivity

to the overall market. Higher beta stocks experience larger fluctuations relative to
the overall market on a consistent basis. If your individual stock has a beta of 2.0, it
will typically move twice as much in either direction to the overall market - hence,
the high-risk, high-reward description.
Most aggressive stocks (and therefore companies) are in the early stages of growth,
and have a unique value proposition. Building an aggressive portfolio requires an
investor who is willing to seek out such companies, because most of these names,
with a few exceptions, are not going to be common household companies. Look
online for companies with earnings growth that is rapidly accelerating, and have not
been discovered by Wall Street. The most common sectors to scrutinize would be
technology, but many other firms in various sectors that are pursuing an aggressive
growth strategy can be considered. As you might have gathered, risk management
becomes very important when building and maintaining an aggressive portfolio.
Keeping losses to a minimum and taking profit are keys to success in this type of
portfolio.

The Defensive Portfolio

Defensive stocks do not usually carry a high beta, and usually are fairly isolated from
broad market movements. Cyclical stocks, on the other hand, are those that are
most sensitive to the underlying economic "business cycle." For example, during
recessionary times, companies that make the "basics" tend to do better than those
that are focused on fads or luxuries. Despite how bad the economy is, companies
that make products essential to everyday life will survive. Think of the essentials in
your everyday life, and then find the companies that make these consumer

staple products.

The opportunity of buying cyclical stocks is that they offer an extra level of
protection against detrimental events. Just listen to the business stations and you
will hear portfolios managers talking about "drugs," "defense" and "tobacco." These
really are just baskets of stocks that these managers are recommending based upon
where the business cycle is and where they think it is going. However, the products
16

and services of these companies are in constant demand. A defensive portfolio is

prudent for most investors. A lot of these companies offer a dividend as well which
helps minimize downside capital losses.

The Income Portfolio

An income portfolio focuses on making money through dividends or other types of
distributions tostakeholders. These companies are somewhat like the safe defensive
stocks but should offer higher yields. An income portfolio should generate positive
cash flow. Real estate investment trusts (REITs) andmaster limited partnerships (MLP)
are excellent sources of income producing investments. These companies return a
great majority of their profits back to shareholders in exchange for favorable tax
status. REITs are an easy way to invest in real estate without the hassles of owning
real property. Keep in mind, however, that these stocks are also subject to the
economic climate.

The Speculative Portfolio

A speculative portfolio is the closest to a pure gamble. A speculative portfolio
presents more risk than any others discussed here. Finance gurus suggest that a
maximum of 10% of one's investable assets be used to fund a speculative portfolio.
Speculative "plays" could be initial public offerings (IPOs) or stocks that are rumored
to be takeover targets. Technology or health care firms that are in the process of
researching a breakthrough product, or a junior oil company which is about to
release its initial production results, would also fall into this category.
Another classic speculative play is to make an investment decision based upon a
rumor that the company is subject to a takeover. One could argue that the
widespread popularity of leveraged ETFs in today's markets represent speculation.
Again, these types of investments are alluring: picking the right one could lead to
huge profits in a short amount of time. Speculation may be the one portfolio that, if
done correctly, requires the most homework. Speculative stocks are typically trades,
and not your classic "buy and hold" investment.

The Hybrid Portfolio

Building a hybrid type of portfolio means venturing into other investments, such as
bonds, commodities, real estate and even art. Basically, there is a lot of flexibility in
the hybrid portfolio approach. Traditionally, this type of portfolio would contain blue

chip stocks and some high grade government or corporate bonds. REITs and MLPs

may also be an investable theme for the balanced portfolio. A common fixed income
investment strategy approach advocates buying bonds with various maturity dates,
and is essentially a diversification approach within the bond asset class itself.
Basically, a hybrid portfolio would include a mix of stocks and bonds in a relatively
fixed allocation proportions. This type of approach offers diversification benefits
across multiple asset classes as equities and fixed income securities tend to have a
negative correlation with one another.

17

The Bottom Line

At the end of the day, investors should consider all of these portfolios and decide on
the right allocation across all five. Here, we have laid the foundation by defining five
of the more common types of portfolios. Building an investment portfolio does
require more effort than a passive, index investing approach. By going it alone, you
will be required to monitor your portfolio(s) and rebalance more frequently, thus
racking up commission fees. Too much or too little exposure to any portfolio type
introduces additional risks. Despite the extra required effort, defining and building a
portfolio will increase your investing confidence, and give you control over your
finances.

ROLE OF

PORTFOLIO MANAGEMENT SERVICES

In the beginning of the nineties India embarked on a programme of economic

liberalization and globalization. This reform process has made the Indian capital
markets active. The Indian stock markets are steadily moving towards capital
efficiency, with rapid computerization, increasing market transparency, better
infrastructure, better customer service, closer integration and higher volumes.
Large institutional investors with their diversified portfolios dominate the markets. A
large number of mutual funds have been set up in the country since 1987. With this
development, investment securities have gained considerable momentum.
Along with the spread of securities investment among ordinary investors, the
acceptance of quantitative techniques by the investment community changed the
investment scenario in India. Professional
portfolio management,
backed by competent research, began to be practiced by mutual funds, investment
consultants and big brokers. The Securities and Exchange Board of India, the stock
market regulatory body in India, is supervising the whole process with a view to
making
portfolio management a responsible professional service to be
rendered by experts in the field. With the advent of computers the whole process of
portfolio management has become quite easy. The computer can
absorb large volumes of data, perform the computations accurately and quickly give
out the results in a desired form.

18

The trend towards liberalization and globalization of the economy has promoted free
flow capital across international borders. Portfolios now include not only domestic
securities but also foreign securities. Diversification has become international.
Another significant development in the field of
portfolio management is
the introduction of derivatives securities such as options and futures. The trading in
derivative securities, their valuation, etc. has broadened the scope of
portfolio management.

Portfolio management is a dynamic concept,

having systematic approach that helps it to achieve efficiency in investment.

DIFFERENCE BETWEEN PORTFOLIO MANAGEMENT

SERVICES (PMS) AND MUTUAL FUNDS
While the concept of Portfolio Management Services and Mutual Funds
remains the same of collecting money from investors, pooling them and
investing the funds in various securities. There are some differences between
them described as follows:
In the case of portfolio management, the target investors are high networth investors, while in the case of mutual funds the target investors
include the retail investors.
In case of portfolio management, the investments of each investor are
managed separately, while in the case of MFs the funds collected under a

19

scheme are pooled and the returns are distributed in the same proportion, in
which the investors/ unit holders make the investments.
The investments in portfolio management are managed taking the risk
profile of individuals into account. In mutual fund, the risk is pooled
depending on the objective of a scheme.
In case of portfolio management, the investors are offered the advantage of
personalized service to try to meet each individual clients investment
objectives separately while in case of mutual funds investors are not offered
any such advantage of personalized services.

ROLE OF MERCHANT BANKERS IN RESPECT TO PORTFOLIO

MANAGEMENT
Merchant Banking is the institution, which covers a wide range of activities
such as customer services, portfolio management, credit syndication,
insurance, etc. Merchant bankers are the persons who are engaged in
business of issue management by making arrangements regarding selling,
buying or subscribing securities as a manager, consultant, and advisor or by
rendering corporate advisory services.
20

Let us have a look on the role played by Merchant bankers in relation to

Portfolio Management:
Portfolio refers to investment in different kinds of securities such as shares,
debentures, etc. it is not merely a collection of un-related assets but a
carefully blended asset combination within a unified framework. Portfolio
management refers to maintaining proper combination of securities in a
manner that they give maximum return with minimum risk.
Merchant Bankers provide portfolio management services to their clients.
Today the investor is very prudent and he is interested in safety, liquidity,
and profitability of his investment, but he cannot study and choose the
appropriate securities, he requires expert guidance. Merchant bankers have
a role to play in this regard. They have to conduct regular market and
economic surveys to know the following needs:
Monetary and fiscal policies of the government.
Financial statements of various corporate sectors in which the investments
have to be made by the investors.
Secondary market position i.e., how the share market is moving.
Changing pattern of the industry.
The competition faced by the industry with similar type of industries.
The Merchant bankers have to analyze the surveys and help the prospective
investors in choosing the shares. The portfolio managers will generally have
to classify the investors based on capacity and risk they can take and
arrange appropriate investment. Thus portfolio management plans
successful investment strategies for investors. Merchant bankers also help
NRI-Non Resident Indians in selecting right type of securities and offering
expertise guidance in fulfilling government regulations. By this service to NRI
account holders, Merchant bankers can mobilize more resources for the
corporate sector.
PORTFOLIO MANAGEMENT BY CORPORATES
Investors, whose objective is maximization of their wealth, own Corporates.
Corporate ownership pattern in India shows that the bulk owners are the
financial institutions and mutual funds, LIC, GIC, and other corporates,
leaving aside, the FFIs, FIIs and NRIs. The ownership of individual
shareholders does not exceed an average to 20-30%. The interest of financial
and non-financial institutions and corporates do not coincide with that of
individual shareholders who are the true savers of the household sectors
while the former categories are only intermediaries.
Corporate Managers secure funds from banks, and financial institutions, next
only to promoters and hence their interest stands prominent in the minds of
the portfolio managers in the corporate business. In case of listed corporate
securities, there is no direct dialogue between Corporate Managers and the
individual investors, except through the daily price quotation of the scrip on
the exchanges. The share price reflects the investors perception of that
21

company, relative to others in the field.

The companies generally keep continuous contact and dialogue with
financing bankers and financial institutions and not with other categories of
investors, in matter of operations. The role of individual investors and
remaining categories of investors can have their say only in the Annual
general body meetings or other extra ordinary general body meetings, called
by the corporate management.
The Government and SEBI regulations, the Company law and the Listing
Agreement with the Stock Exchange also guide the performance of
corporates and their operations. The prudential norms for raising resources,
allocation of funds and declaration of dividends, etc., are governed by the
Law and Government notifications from time-to-time.
PORTFOLIO INVESTMENT BY FOREIGN INSTITUTIONAL INVESTORS
A country with a developing economy cannot depend exclusively on its own
domestic savings to propel its economy's rapid growth. The domestic savings
of India presently are 25% of its GDP. But this can provide only a 2 to 3%
growth of its economy on annual basis. The country has to maintain an 8 to
10% growth for a period of two decades to reach the level of advanced
nations and to wipe out widespread poverty of its people. The gap is to be
covered by inflow of foreign investment along with advanced technology. As
per the Development Goals and Strategy of the 10th Plan, which is currently
under implementation:
"The strategy to achieve a high annual growth target of 8.00% combines
accelerated capital accumulation to raise the average investment rate from
24.23% to 28.41% with an increase in capital-use efficiency to reduce the
ratio of incremental capital to output from 4.00 to about 3.55. Private sector
development, infrastructure development, and increased foreign investment
and trade are key to increasing efficiency"
The regular inflow of external capital investment is indispensable to sustain
our economic growth at the planned level and this is well recognized by the
plan document itself. When remittances are made by Foreign Institutional
Investors for portfolio investments, such remittances are on trading account,
as securities can be bought, as well as sold back through approved stock
exchanges. This may be trading transaction, but net amount at any time
(purchases minus sales) is a significant figure and this adds to the foreign
exchange reserves of the country.
MANAGEMENT OF INVESTMENT PORTFOLIOS
Investment Management or Portfolio Management deals with the manner in
which investors analyze, select and evaluate investments in terms of their
risks and expected returns. It is both an art and a science.
The art aspect derives from the notion that some investors, by whatever
means, have the ability to consistently pick up investments that outperform
22

other investments on a risk/expected-return basis. Although many

techniques have been developed to assist investors in the selection of
investments, the concept of market efficiency maintains that for most
investors, the ability to consistently select high-return/low risk investments
may be difficult to do. An efficient market is one where prices reflect a given
body of information. In such a situation, one investment should not
persistently dominate another in terms of risk and expected return. In other
words, markets are said to be efficient if there is a free flow of information
and market absorbs this information quickly. James Lorie has defined the
efficient security market as, the ability of the capital market to function, so
that the prices of securities react rapidly to new information. Such efficiency
will produce prices that are appropriate in terms of current knowledge, and
investors will be less likely to make unwise investments.
This brings to the science aspect of portfolio/investment management. If
markets are reasonably efficient in a risk/expected-return sense, investors
objective should be to choose their preferred levels of risk and expected
return and to diversify as easily as possible to meet their investment goal. As
a consequence, portfolio management has become very analytical. Various
techniques are today available which enable investors to identify the
diversified portfolio that has the highest expected return at their preferred
level of risk.
ASPECTS OF PORTFOLIO MANAGEMENT
Basically, portfolio management involves:
A proper investment decision-making of what to buy and sell
Proper money management in terms of investment in a basket of assets to
satisfy the asset preferences of the investors.
Reduce the risk and increase the returns.
Investment Strategy:
In India there are large number of savers, barring the 37% of population who
are below the poverty line. In a poor country like this, it is surprising that
saving rate is high as 24% of GDP per annum and investment at 26% of GDP.
But the return in the form of output growth is as low as5 to 7% per annum.
One may ask why is it that high levels of investment could not generate
comparable rates of growth of output? The answer is poor investment
strategy; involving high capital output ratios, low productivity of capital, and
high rates of obsolescence of capital. The use of capital in India is wasteful
and inefficient, despite the fact that India is labour rich and capital poor.
Thus the portfolio managers in India lack the expertise and experience,
which will enable them to have proper strategy for investment management.
Secondly, the average Indian household saves around 60% in the financial
form and 40% in the physical form. Of those in the financial form, nearly 42%
is held in cash and bank deposits, as per RBI data and they have return less
than inflation rates. Besides a proportion of 35% of financial savings is held
23

in the form of insurance, pension funds, etc. while another 12% is in

government instruments and certificates like post office deposits, public
provident fund, national saving scheme, etc. the real returns on insurance
and pension funds are low and many times lower than average inflation
rates. With the removal of many tax concessions from investments in Post
Office Savings, certificates, etc. they also become less attractive to small and
medium investors. The only investment, satisfying all their objectives is
capital market instruments. These objectives are income, capital
appreciation, safety, liquidity, and hedge against inflation and investment.
Objectives of Investors:
The return on equity investments in the capital market particularly if proper
investment strategy is adopted would satisfy the above objectives and real
returns would be higher than any other saving instruments.
All investment involves risk taking. However, some risk free investments are
available like bank deposits or post-office deposits whose returns are called
risk free returns of about 5-12%. So, the returns on more risky investments
are higher than that having risk premium. Risk is variability of return and
uncertainty of payment of interest and repayment of principal. Risk is
measured by standard deviation of the returns over the mean for a given
period. Risk varies directly with the return. The higher the risk taken, the
higher is the return, under normal market conditions.
Risk and Beta:
Risk is of two components systematic market related risk and unsystematic
risk. The former cannot be eliminated or managed with the help of Beta (),
which is explained as follows:
= % change of Scrip return
% change of Market return
If = 1, the risk of the company is the same as that of the market and if >
1, the companys risk is more than market risk and if < 1, the reverse is
the position.

24

ROLE OF 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 nondiscretionary portfolio manager is the one who manages the funds in
accordance with the directions of the client.

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.
25

 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.
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.

26

SCOPE OF

PORTFOLIO MANAGEMENT SERVICES

Portfolio management is a continuous process. It is a dynamic

activity. The following are the basic operations of a

portfolio

management:
Monitoring the performance of portfolio by incorporating the latest market
conditions.
Identification of the investors objective, constraints and preferences.
Making an evaluation of portfolio income (comparison with targets and
achievements).
Making revision in the portfolio.
Implementation of strategies in tune with the investment objectives.
ELEMENTS OF PORTFOLIO MANAGEMENT
Portfolio management is an on-going process involving the following basic
tasks:
Identification of the investors objectives, constraints and preferences,
which will help formulate the investment policy.
Strategies are to be developed and implemented in tune with the
investment policy formulated. This will help the selection of asset classes
and securities in each class depending upon their risk-return attributes.
Review and monitoring of the performance of the portfolio by continuous
overview of the market conditions, companies performance and investors
circumstances.
Finally, the evaluation of the portfolio for the results to compare with the

27

targets and needed adjustments have to be made in the portfolio to the

emerging conditions and to make up for any shortfalls in achievement vis-vis targets.
The collection of data on the investors preferences, objectives, etc., is the
foundation of portfolio management. This gives an idea of channels of
investment in terms of asset classes to be selected and securities to be
chosen based upon the liquidity requirements, time horizon, taxes, asset
preferences of investors, etc. these are the building blocks for the
construction of a portfolio.
According to these objectives and constraints, the investment policy can be
formulated. The policy will lay down the weights to be given to different
asset classes of investment such as equity share, preference shares,
debentures, company deposits, etc., and the proportion of funds to be
invested in each class and selection of assets and securities in each class are
made on this basis. The next stage is to formulate the investment strategy
for a time horizon for income and capital appreciation and for a level of risk
tolerance. The investment strategies developed by the portfolio managers
have to be correlated with their expectation of the capital market and the
individual sectors of industry. Then a particular combination of assets is
chosen on the basis of investment strategy and managers expectations of
the market.
OBJECTIVES OF PORTFOLIO MANAGEMENT
The objective of portfolio management is to maximize the return and
minimize the risk. These objectives are categorized into:
1. Basic Objectives.
2. Subsidiary Objectives.
1. Basic Objectives
The basic objectives of a portfolio management are further divided into two
kinds viz., (a) maximize yield (b) minimize risk. The aim of the portfolio
management is to enhance the return for the level of risk to the portfolio
owner. A desired return for a given risk level is being started. The level of risk
of a portfolio depends upon many factors. The investor, who invests the
savings in the financial asset, requires a regular return and capital
appreciation.
2. Subsidiary Objectives
The subsidiary objectives of a portfolio management are expecting a
reasonable income, appreciation of capital at the time of disposal, safety of
the investment and liquidity etc. The objective of investor is to get a
reasonable return on his investment without any risk. Any investor desires
regularity of income at a consistent rate. However, it may not always be
28

possible to get such income. Every investor has to dispose his holding after a
stipulated period of time for a capital appreciation. Capital appreciation of a
financial asset is highly influenced by a strong brand image, market
leadership, guaranteed sales, financial strength, large pool of reverses,
retained earnings and accumulated profits of the company. The idea of
growth stocks is the right issue in the right industry, bought at the right time.
A portfolio management desires the safety of the investment. The portfolio
objective is to take the precautionary measures about the safety of the
principal even by diversification process. The safety of the investment calls
for careful review of economic and industry trends. Liquidity of the
investment is most important, which may not be neglected by any
investor/portfolio manager. An investment is to be liquid, it must have
termination and marketable facility at any time.

PORTFOLIO MANAGEMENT PROCESS

INTER RELATIONSHIP AMONG VARIOUS PHASES OF PORTFOLIO MANAGEMENT
1. SPECIFICATION OF INVESTMENT OBJECTIVES AND CONSTRAINTS:
The first step in the portfolio management process is to specify the
investment policy that consists of investment objectives, constraints and
preferences of investor. The investment policy can be explained as follows:
OBJECTIVES
Return requirements: Return is the primary motive that drives investment.
It is the reward for undertaking the investment. The commonly stated
investment goals are income, growth and stability. Since income and growth
represent two ways through which income is generated and stability implies
containment or elimination of risk. But investment objectives may be more
clearly expressed in terms of returns and risk. However, return and risk go
29

hand in hand. An investor would primarily be interested in a higher return (in

the form of income or capital appreciation) and lower level of risk. So he has
to bear higher level of risk in order to earn high return. How much risk he
would be willing to bear to earn a high return depends on his risk disposition.
The investment objective should state the investor the preference of return
in relation to risk.
Specification of investment objectives can be done in following two ways:
Maximize the expected rate of return, subject to the risk exposure being
held within a certain limit (the risk tolerance level).
Minimize the risk exposure, with out sacrificing a certain expected rate of
return (the target rate of return).
An investor should start by defining how much risk he can bear or how much
he can afford to lose, rather than specifying how much money he wants to
make. The risk he wants to bear depends on two factors:
a) Financial situation
b) Temperament
To assess financial situation one must take into consideration: position of the
wealth, major expenses, earning capacity, etc and a careful and realistic
appraisal of the assets, expenses and earnings forms a base to define the
risk tolerance.
After appraisal of the financial situation assess the temperamental tolerance
of risk. Risk tolerance level is set either by ones financial situation or
financial temperament which ever is lower, so it is necessary to understand
financial temperament objectively. One must realize that risk tolerance
cannot be defined too rigorously or precisely. For practical purposes it is
enough to define it as low, medium or high. This will serve as a valuable
guide in taking an investment decision. It will provide a useful perspective
and will prevent from being a victim of the waves and manias that tend to
sweep the market from time to time.
Risk tolerance: Risk refers to the possibility that the actual outcome of an
investment will differ from its expected outcome. More specifically, most of
the investors are concerned about the actual outcome being less than the
expected outcome. The wider the range of possible outcomes, the greater is
the risk. It all depends on the investor, how much risk he is able to bear. If he
is willing to bear high risk, he is expected to get high return and if he is
willing to bear low risk, he will get low return.
CONSTRAINTS AND PREFERENCES
Liquidity: Liquidity refers to the speed with which an asset can be sold,
without suffering any loss to its actual market price. For example, money
market instruments are the most liquid assets, whereas antiques are among
the least liquid.
30

 Investment horizon: the investment horizon is the time when the

investment or part of it is planned to liquidate to meet a specific need. For
example, the investment horizon for ten years to fund the childs college
education. The investment horizon has an important bearing on the choice of
assets.
Taxes: The post tax return from an investment matters a lot. Tax
considerations therefore have an important bearing on investment decisions.
So, it is very important to review the tax shelters available and to
incorporate the same in the investment decisions.
Regulations: While individual investors are generally not constrained much
by laws and regulations, institutional investors have to conform to various
regulations. For example, mutual funds in India are not allowed to hold more
than 10 percent of equity shares of a public limited company.
Unique circumstances: Almost every investor faces unique circumstances.
For example, an endowment fund may be prevented from investing in the
securities of companies making alcoholic and tobacco products.
2. SELECTION OF ASSET MIX: Based on the objectives and constraints,
selection of assets is done. Selection of assets refers to the amount of
portfolio to be invested in each of the following asset categories:
Cash: The first major economic asset that an individual plan to invest in is
his or her own house. Their savings are likely to be in the form of bank
deposits and money market mutual fund schemes. Referred to broadly as
cash, these instruments have appeal, as they are safe and liquid.
Bonds: Bonds or debentures represent long-term debt instruments. They
are generally of private sector companies, public sector bonds, gilt-edged
securities, RBI saving bonds, national saving certificates, Kisan Vikas Patras,
bank deposits, public provident fund, post office savings, etc.
Stocks: Stocks include equity shares and units/shares of equity schemes of
mutual funds. It includes income shares, growth shares, blue chip shares,
etc.
Real estate: The most important asset for individual investors is generally a
residential house. In addition to this, the more affluent investors are likely to
be interested in other types of real estate, like commercial property,
agricultural land, semi-urban land, etc.
Precious objects and others: Precious objects are items that are generally
small in size but highly valuable in monetary terms. It includes gold and
silver, precious stones, art objects, etc. Other assets includes like that of
financial derivatives, insurance, etc.
Conventional wisdom on Asset Mix: The conventional wisdom on the asset
mix is embodied in two propositions:
Other things being equal, an investor with greater tolerance for risk should
tilt the portfolio in favor of stocks, whereas an investor with lesser tolerance
31

for risk should tilt the portfolio in favor of bonds. This is because, in general,
stocks are riskier than bonds hence earn higher return than bonds.
Other things being equal, an investor with a longer investment horizon
should tilt his portfolio in favor of stocks whereas an investor with a shorter
investment horizon should tilt the portfolio in favor of bonds. This is because
the expected rate of return from stocks is very sensitive to the length of the
investment period; the risk from stock diminishes as investment period
lengthens.
The fallacy of Time Diversification: The notion or the idea of time
diversification is fallacious. Even though the uncertainty about the average
rate of return diminishes over a longer period, it also compounds over a
longer time period. Unfortunately, the latter effect dominates. Hence the
total return becomes more uncertain as the investment horizon lengthens.
3. FORMULATION OF PORTFOLIO STRATEGY: After selection of asset mix,
formulation of appropriate portfolio strategy is required. There are two types
of portfolio strategies, active portfolio strategy and passive portfolio strategy.
ACTIVE PORTFOLIO STRATEGY: Most investment professionals follow an
active portfolio strategy and aggressive investors who strive to earn superior
returns after adjustment for risk. The four principal vectors of an active
strategy are:
Market Timing
Sector Rotation
Security Selection
Use of a specialized concept
Market timing: This involves departing from the normal (or strategic or long
run) asset mix to reflect ones assessment of the prospects of various assets
in the near future. Suppose an investors investible resources for financial
assets are 100 and his normal (or strategic) stock-bond mix is 50:50. In short
and intermediate run however he may be inclined to deviate from long-term
asset mix. If he expects stocks to out perform bonds, on a risk-adjusted
basis, in the near future, he may perhaps step up the stock component of his
portfolio to say 60 to 70 percent. Such an action, of course, would raise the
beta of his portfolio. On the other hand, if he expects the bonds to
outperform stocks, on a risk-adjusted basis, in the near future, he may set up
the bond component of his portfolio to 60 to 70 percent. This will naturally
lower the beta of his portfolio. Market timing is based on an explicit or
implicit forecast of general market movements. The advocates of market
timing employ a variety of tools like business cycle analysis, advance-decline
analysis, moving average analysis, and econometric models. The forecast of
the general market movement derived with the help of one or more of these
tools are tempered by the subjective judgment of the investor. Often, of
course, the investor may go largely by his market sense.
32

 Sector Rotation: The concept of sector rotation can be applied to stocks as

well as bonds. It is however, used more commonly with respect to stock
component of portfolio where it essentially involves shifting the weightings
for various industrial sectors based on their assessed outlook. For example if
it is assumed that cement and pharmaceutical sectors would do well
compared to other sectors in the forthcoming period, one may overweight
these sectors, relative to their position in market portfolio. With respect to
bonds, sector rotation implies a shift in the composition of the bond portfolio
in terms of quality, coupon rate, term to maturity and so on. For example, if
there is a rise in the interest rates, there may be shift in long term bonds to
medium term or even short-term bonds. But we should remember that a
long-term bond is more sensitive to interest rate variation compared to a
short-term bond.
Security Selection: Security selection involves a search for under priced
securities. If an investor resort to active stock selection, he may employ
fundamental and or technical analysis to identify stocks that seems to
promise superior returns and overweight the stock component of his portfolio
on them. Likewise, stocks that are perceived to be unattractive will be under
weighted relative to their position in the market portfolio. As far as bonds are
concerned, security selection calls for choosing bonds that offer the highest
yield to maturity at a given level of risk.
Use of a specialized Investment Concept: A fourth possible approach to
achieve superior returns is to employ a specialized concept or philosophy,
particularly with respect to investment in stocks. As Charles D. Ellis words
says, a possible way to enhance returns is to develop a profound and valid
insight into the forces that drive a particular group of companies or
industries and systematically exploit that investment insight or concept.
Some of the concepts of investment practitioners are as follows:

Growth stocks
Value stocks
Asset-rich stocks
Technology stocks
Cyclical stocks

The advantage of cultivating a specialized investment concept or philosophy

is that it will help you to:
a) Focus efforts on a certain kind of investment that reflects ones abilities
and talents
b) Avoid the distractions of pursuing other alternatives
c) Master an approach through sustained practice and continual self-critique.
As against these merits, the great disadvantage of focusing on a specialized
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concept is that it may become obsolete. The changes in market may cast a
shadow over the validity of the basic premise underlying the investment
philosophy.
PASSIVE PORTFOLIO STRATEGY: The passive strategy rests on the tenet that
the capital market is fairly efficient with respect to the available information.
The passive strategy is implemented according to the following two
guidelines:
Create a well-diversified portfolio at a predetermined level of risk.
Hold the portfolio relatively unchanged over time, unless it becomes
inadequately diversified or inconsistent with the investors risk-return
preferences.
4. SELECTION OF SECURITIES: The following factors should be taken into
consideration while selecting the fixed income avenues:
SELECTION OF BONDS (fixed income avenues)
Yield to maturity: The yield to maturity for a fixed income avenue
represents the rate of return earned by the investors if he invests in the fixed
income avenue and holds it till its maturity.
Risk of default: To assess the risk of default on a bond, one may look at the
credit rating of the bond. If no credit rating is available, examine relevant
financial ratios (like debt-to-equity ratio, times interest earned ratio, and
earning power) of the firm and assess the general prospects of the industry
to which the firm belongs.
Tax Shield: In yesteryears, several fixed income avenues offered tax shield,
now very few do so.
Liquidity: If the fixed income avenue can be converted wholly or
substantially into cash at a fairly short notice, it possesses liquidity of a high
order.
SELECTION OF STOCK (Equity shares)
Three board approaches are employed for the selection of equity shares:
Technical analysis
Fundamental analysis
Random selection
Technical analysis looks at price behavior and volume data to determine
whether the share will move up or down or remain trend less.
Fundamental analysis focuses on fundamental factors like the earnings level,
growth prospects, and risk exposure to establish the intrinsic value of a
share. The recommendation to buy, hold, or sell is based on a comparison of
the intrinsic value and the prevailing market price.
Random selection approach is based on the premise that the market is
efficient and securities are properly priced.
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5. PORTFOLIO EXECUTION: The next step is to implement the portfolio plan

by buying or selling specified securities in given amounts. This is the phase
of portfolio execution which is often glossed over in portfolio management
literature. However, it is an important practical step that has a significant
bearing on the investment results. In the execution stage, three decision
need to be made, if the percentage holdings of various asset classes are
currently different from the desired holdings.
6. PORTFOLIO REVISION: In the entire process of portfolio management,
portfolio revision is as important stage as portfolio selection. Portfolio
revision involves changing the existing mix of securities. This may be
effected either by changing the securities currently included in the portfolio
or by altering the proportion of funds invested in the securities. New
securities may be added to the portfolio or some existing securities may be
removed from the portfolio. Thus it leads to purchase and sale of securities.
The objective of portfolio revision is similar to the objective of selection i.e.
maximizing the return for a given level of risk or minimizing the risk for a
given level of return.
The need for portfolio revision has aroused due to changes in the financial
markets since creation of portfolio. It has aroused because of many factors
like availability of additional funds for investment, change in the risk attitude,
change investment goals, the need to liquidate a part of the portfolio to
provide funds for some alternative uses. The portfolio needs to be revised to
accommodate the changes in the investors position.
Portfolio Revision basically involves two stages:
Portfolio Rebalancing: Portfolio Rebalancing involves reviewing and revising
the portfolio composition (i.e. the stock- bond mix). There are three basic
policies with respect to portfolio rebalancing: buy and hold policy, constant
mix policy, and the portfolio insurance policy.
Under a buy and hold policy, the initial portfolio is left undisturbed. It is
essentially a buy and hold policy. Irrespective of what happens to the
relative values, no rebalancing is done. For example, if the initial portfolio
has a stock-bond mix of 50:50 and after six months it happens to be say
70:50 because the stock component has appreciated and the bond
component has stagnated, than in such cases no changes are made.
The constant mix policy calls for maintaining the proportions of stocks and
bonds in line with their target value. For example, if the desired mix of stocks
and bonds is say 50:50, the constant mix calls for rebalancing the portfolio
when relative value of its components change, so that the target proportions
are maintained.

The portfolio insurance policy calls for increasing the exposure to stocks
when the portfolio appreciates in value and decreasing the exposure to
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stocks when the portfolio depreciates in value. The basic idea is to ensure
that the portfolio value does not fall below a floor level.
Portfolio Upgrading: While portfolio rebalancing involves shifting from
stocks to bonds or vice versa, portfolio-upgrading calls for re-assessing the
risk return characteristics of various securities (stocks as well as bonds),
selling over-priced securities, and buying under-priced securities. It may also
entail other changes the investor may consider necessary to enhance the
performance of the portfolio.

7. PORTFOLIO EVALUATION: Portfolio evaluation is the last step in the process

of portfolio management. It is the process that is concerned with assessing
the performance of the portfolio over a selected period of time in terms of
return and risk. Through portfolio evaluation the investor tries to find out how
well the portfolio has performed. The portfolio of securities held by an
investor is the result of his investment decisions. Portfolio evaluation is really
a study of the impact of such decisions. This involves quantitative
measurement of actual return realized and the risk born by the portfolio over
the period of investment. It provides a mechanism for identifying the
weakness in the investment process and for improving these deficient areas.
The evaluation provides the necessary feedback for designing a better
portfolio next time.
The portfolio insurance policy calls for increasing the exposure to stocks
when the portfolio appreciates in value and decreasing the exposure to
stocks when the portfolio depreciates in value. The basic idea is to ensure
that the portfolio value does not fall below a floor level.
Portfolio Upgrading: While portfolio rebalancing involves shifting from
stocks to bonds or vice versa, portfolio-upgrading calls for re-assessing the
risk return characteristics of various securities (stocks as well as bonds),
selling over-priced securities, and buying under-priced securities. It may also
entail other changes the investor may consider necessary to enhance the
performance of the portfolio.

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ROLE OF MERCHANT BANKERS IN RESPECT TO PORTFOLIO

MANAGEMENT
Merchant Banking is the institution, which covers a wide range of activities
such as customer services, portfolio management, credit syndication,
insurance, etc. Merchant bankers are the persons who are engaged in
business of issue management by making arrangements regarding selling,
buying or subscribing securities as a manager, consultant, and advisor or by
rendering corporate advisory services.
Let us have a look on the role played by Merchant bankers in relation to
Portfolio Management:
Portfolio refers to investment in different kinds of securities such as shares,
debentures, etc. it is not merely a collection of un-related assets but a
carefully blended asset combination within a unified framework. Portfolio
management refers to maintaining proper combination of securities in a
manner that they give maximum return with minimum risk.
Merchant Bankers provide portfolio management services to their clients.
Today the investor is very prudent and he is interested in safety, liquidity,
and profitability of his investment, but he cannot study and choose the
appropriate securities, he requires expert guidance. Merchant bankers have
a role to play in this regard. They have to conduct regular market and
economic surveys to know the following needs:
Monetary and fiscal policies of the government.
Financial statements of various corporate sectors in which the investments
have to be made by the investors.
Secondary market position i.e., how the share market is moving.
Changing pattern of the industry.
The competition faced by the industry with similar type of industries.
The Merchant bankers have to analyze the surveys and help the prospective
investors in choosing the shares. The portfolio managers will generally have
to classify the investors based on capacity and risk they can take and
arrange appropriate investment. Thus portfolio management plans
37

successful investment strategies for investors. Merchant bankers also help

NRI-Non Resident Indians in selecting right type of securities and offering
expertise guidance in fulfilling government regulations. By this service to NRI
account holders, Merchant bankers can mobilize more resources for the
corporate sector.

MERCHANT BANKING SERVICES PROVIDED BY UNION BANK

Merchant banking primarily involves financial advice and services for large corporations
and wealthy individuals. MERCHANT BANKING ACTIVITIES:
The Major Merchant Banking activities which the Bank offers to its clients are:
Issue Management - Management of Public Issues i.e. IPOs, FPOs, Right
Issues, etc. as Book Running Lead Manager
Bankers to the Issue
Payment of Dividend Warrants / Interest Warrants / Refund Orders
Debenture Trustee
Underwriting
Monitoring Agency
Besides promoting / marketing the above Merchant Banking Business in the Bank
through specialized Capital Market Services Branches, Merchant Banking Cells and
identified branches, the Merchant Banking Division also looks after the following
activities:
Marketing of Merchant Banking Business
Monitoring / Supporting Capital Market Service Branches
Refund Paid / Payable
MERCHANT BANKERS ASSIGNMENTS:
At present, the Bank is holding following Licenses from SEBI:
Merchant Banker
Banker to the Issue
Underwriting
Debenture Trustee

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1. Bankers to the Issue (Collecting Banker):

Being a licensed Banker to Issue registered with SEBI, enables us to provide Escrow
Collecting Bank/services and refund Bank services related to Initial Public Offering
(IPO), Follow on Public Offering (FPO) and Right Issue.
The process of collections, needs a high degree of close co-ordination between various
capital market intermediaries such as the Book Running Lead Manager, the Syndicate
Members, the Registrar and most importantly the issuer Company. Our large network
of branches and strong bonds with various capital market constituents enable us to offer
better solutions for clients.
2. Payment Of Dividend Warrants / Interest Warrants (Paying Banker):
The Merchant Banking Division has also got enabled a functionality of a new system in
CBS branches for payment assignments, which is similar to Demand Draft Payable
Account under Finacle. The product has the following unique features that ensure that
the payment account of the corporate remains reconciled at any point of time: Facility
for upfront uploads of the instruments issued by the companies into Core Banking
system
o Online payment of the instruments by CBS branches
o Validation of instruments details by the system
o Online status update of paid instruments by the system
o Online MIS on paid/unpaid instruments at any point of time
o Facility to cancel lost instruments and to re-upload duplicate
instruments issued in lieu thereof
o MIS on cancelled instruments
o 100% reconciliation of the corporate dividend / refund order payable by
a/c by the system without
manual intervention
Facility to provide MIS on paid / outstanding instruments in ASCII format, which can be
suitably converted by the corporate for updating their in-house database
This new facility will help in solving the major problem in handling these assignments
i.e. reconciliation of accounts. This will also help in reducing the cost of reconciliation,
postage and handling cost.
3. Payment of Refund Orders:
The detailed guidelines / procedures to be followed. Powers of the Branches /
Charges etc. for handling the assignments of Bankers to the Issue/ Payment
of Dividend warrants / Refund Orders etc. are available in the circulars of the
Division at the Banks website.
4. Underwriting:
Underwriting is a contingent liability and this is one sphere of Merchant banking where
outlay of funds on the part of the bank may be involved. As such, it is necessary to be
very careful in accepting / recommending such business. Proposals that pose clear risk
of devolvement should be declined at the outset unless there is sub underwriting tie up
directly or indirectly with promoters and their related investment companies or a firm
commitment of buy back on reasonable terms.

39

Major aspects which need close scrutiny before underwriting can be considered are the
project and its viability, project location, promoters and their track record, product and its
marketability, past performance of existing companies in the same line, Government
Policy, projected financial performance, capital market conditions, underwriting / sub
underwriting / buy back arrangements, etc.
5. Debenture Trustee:
In terms of SEBI guidelines, all debenture issues (public/rights) of the companies with
the maturity period exceeding 18 months are required to have "Debenture Trustee" and
its name must be stated in the prospectus of the issue.
We are registered with SEBI for handling of the debenture trustee assignments
registration No.IND000000023.
Dissemination of information on Debentures in default

UNION KBC BANK PLANS ENTRY INTO WEALTH

MANAGEMENT BUSINESS
NEW DELHI: State-owned Union Bank of India plans to enter the wealth
management business in partnership with a foreign player to increase its feebased income, after recently receiving Sebi nod for entering into the mutual
fund sector.
"Once the asset management business is in place, we will start the process
of looking for the internationally reputed player for our proposed wealth
management business," Union Bank of India Chairman and Managing
Director M V Nair told PTI.
Possibly after next 5-6 months, the bank will start scouting for a partner to
offer the best in class wealth management products and services, he said.
Last week, Union Bank of India got the approval from the market watchdog
Sebi to enter the mutual fund arena.
The bank had tied up with the Belgian financial firm KBC Asset Management
to enter the MF business in November, 2008.
After getting shareholders' approval, the bank moved the Sebi for approval in
early 2009.
Union Bank holds 51 per cent stake in the JV, which has a capital base of Rs
50 crore, while the balance is with the Belgian firm.
On overseas expansion plan, Nair said the bank plans to set up a subsidiary
in the United Kingdom and a branch in Australia and Belgium, and is
expected to get regulatory approval for the same in the next six months.
"We hope to get approval from the respective regulators in the next six
months," he said.
40

The bank has already got nod from the Reserve Bank of India for setting up
operation in these countries.
The bank plans to open a branch in Antwerp (Belgium), Sydney (Australia). At
the same time, a subsidiary in the UK which can cater to the customers in
the European region.
Currently, the Mumbai-based bank has representative offices in Sydney
(Australia) and London (UK).
Besides, the bank has a full-fledged branch in Hong Kong. The branch carries
out normal commercial banking operations such as acceptance of deposits,
trade finance, External Commercial Borrowing (ECBs) and syndicated loans.

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 clients funds.
The portfolio manager can invest in money or capital market.
Purchase and sale of securities will be at a prevailing market price
POWERS OF SEBI
The Securities and Exchange Board of India 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.,
41

3. SEBI has full authority in the event of violation of any provision to suspend
or cancel the license.
4. No exemptions will be given under any circumstances to portfolio
manager.

FAQ'S ON PORTFOLIO MANAGEMENT SERVICES

What is the difference between a discretionary and a non-discretionary Portfolio
Management Services?
The discretionary portfolio manager will independently manage the funds of each client in accordance
with the needs of the client. The non-discretionary portfolio manager will provide advisory services
enabling the client to take decision with regards to his portfolio.
Do you guarantee the initial corpus and any return thereon?
Returns cannot be guaranteed as per regulations governing Portfolio Management Services in India.
However our objective is to out perform the benchmark indices. We believe, over long term, Equity
performance will track corporate performance. Therefore historical trends indicate that well managed
portfolio in Indian equities can yield 15-18% p.a. returns. (based on market trends & discretion of
portfolio manage).
How can I check the NAV positions and transactions?
You can check your portfolio anytime by logging on to our websitewww.karvy.com & then click on
PMS link. You will also get a monthly statement of transactions & holdings.
What if I terminate from the PMS before one year?
You can terminate from PMS at any time; charges as agreed would be applicable.

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What would the Portfolio Manager do in case of falling markets?

Based on our assessment of the fall, we will accordingly decide on the necessary course of action. In
the first instance, depending on the anticipated extent of the correction, we may increase the
percentage of cash in the portfolio. Since our focus is always to invest in those companies which are
available at an attractive valuation, we believe that in the long term, any stock will always seek its fair
valuation which is unaffected by corrections in the market. If however, we see signs of a trend reversal;
our focus may change to increasing the cash component and restrict investments to defensive sectors
which have low beta relative to the markets.
What are the advantages of investing in PMS vis a vis Mutual Fund?
You have greater control over the asset allocation, whereas it is automatic in MF. The portfolio can be
customized to suit your risk- return profile. The Portfolio manager has relatively greater flexibility to
move in and out of cash as and when required depending on the market view. Typically, charges are
lower and more transparent in PMS vis--vis a Mutual Fund. Holdings not impacted by entry/exit of big
investors.

CONCLUSION
What Is a Well-Diversified Investment Portfolio?
To achieve full diversification, as the scope of your definition of the
securities market increases, you need to hold an increasing number of
representative individual securities.
If one means the market for the largest U.S. companies, then the S&P 500 is
one of several competing indexes and represents about 70% of total U.S.
equity market capitalization. If one means the entire investable U.S. equities
market, then the Wilshire 5000 is one of several that could be used. A global
index would have many more stocks and would cover an even broader
economic base. Therefore, the number of stocks to be well diversified would
depend on what one means by the market. Within the meaning of finance
literature, the full equity securities market portfolio is the global equities
market and includes all investment styles and all countries.
In addition, to the numbers of different securities and their weighting, Evans
and Archer indicated that you need to ensure that your securities selection
process is random, if you wish to be fully diversified.

43

Your diversified investment portfolio construction methods should not biased

toward one or another decision factor, such as being skewed toward a single
industry or a subset of all industries.
Unless you buy the entire global market through an index fund or exchangetraded fund, your random selection of a subset of the whole market might be
a method such as a toss of the darts at a capitalization-weighted stock
page. This would mean that each security would have an equal chance of
being selected for inclusion on a capitalization-weighted portfolio basis.
Unless this random selection condition is met, the goal of constructing a
highly-diversified portfolio would be disrupted, because you introduced a bias
or skew through your selection methods.

BIBLIOGRAPHY

http://www.theskilledinvestor.com/wp/conclusion-to-what-is-a-welldiversified-investment-portfolio-165.htm

http://www.answers.com/search?q=union+bank+amc

http://www.unionkbcmf.com/AboutUs.aspx

http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/1132/11/
11_chapter%207.pdf

http://capitalmarket.webtutorials4u.com/home/2010/04/types-ofportfolio-management-2/

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