Professional Documents
Culture Documents
INTRODUCTION
INTRODUCTION
Managing investments in equities requires time, knowledge, experience and constant
monitoring of stock markets. Portfolio management services (PMS) gives a helping hand to
people who need help to manage their investments. When we invest in PMS, you own
individual securities unlike a mutual fund investor, who owns units of the entire fund. We have
the freedom and flexibility to tailor our portfolio to address personal preferences and financial
goals. (PMS) is a method of investing used by wealthy investors and companies who want
exposure to a variety of products such as equities, fixed income, gold and structured products.
The business of portfolio management has never been an easy one. Juggling the limited choices
at hand with the twin requirements of adequate safety and sizeable returns is a task fraught with
complexities. Given the unpredictable nature of the share market, it requires solid experience
and strong research to make the right decision. In the end it boils down to making the right
move in the right direction at the right time. That's where the expert comes in. Portfolio
management service providers advise clients on buying or selling shares, derivatives or other
type of securities. Depending on the type of PMS, the manager can also buy or sell securities
on behalf of the clients. An entity needs to be registered with the Securities and Exchange
Board of India as a portfolio manager. An investor individually owns the securities in a PMS
portfolio, unlike a mutual fund where investors only own units of the fund and not the actual
securities.
In this project Portfolio Management I basically studied the investment strategies and gains
through knowledge about various options available to the investors. I studied various gains and
insights about the various investment strategies and how an ideal portfolio should be
maintained so as to serve their needs and anticipated gains of investors.
Accordingly I have formulated the questionnaire as so to understand the psychology of the
people and what are the various factors that inspire them to invest in different options available.
For every investor that portfolio evaluation and construction is an important aspect. With the
help of evaluation of the portfolio an investor can check his risk and minimize or maximize
according to its risk appetite and returns that he want to make from the portfolio. Saving is an
important part of the economy of any nation. With savings invested in various options available
to the people, the money acts as the driver for growth of the country. Thus a complete
understanding of factors which are related to investment decision including risk appetite and
liquidity requirements is required.
CHAPTER-2
INDUSTRY PROFILE
History
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years
ago. The earliest records of security dealings in India are meagre and obscure. By 1830's
business on corporate stocks and shares in Bank and Cotton presses took place in Bombay.
Though the trading list was broader in 1839, there were only half a dozen brokers recognized
by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of
commercial enterprise and brokerage business attracted many men into the field and by 1860
the number of brokers increased to 60. In 1860-61 the American Civil War broke out and cotton
supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The
Number of brokers increased to about 200 to 250. However, at the end of the American Civil
War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had
touched Rs 2850 could only be sold at Rs. 87). At the end of the American Civil War, the
brokers who thrived out of Civil War In 1874, found a place in a street (now appropriately
called as Dalal Street) where they would conveniently assemble and transact business. In 1887,
they formally established in Bombay, the "Native Share and Stock Brokers' Association"
(which is alternatively known as The Stock Exchange"). In 1895, the Stock Exchange
acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange
at Bombay was consolidated. A new phase in the Indian stock markets began in the 1970s,
Foreign Exchange Regulation Act (FERA) that led to divestment of foreign equity by the
Multinational companies, which created a surge in retail investing. A new set of economic and
financial sector reforms that began in the early 1990s gave further impetus to the growth of the
stock markets in India. Towards This end, several measures were taken to streamline the
processes and systems including setting up an efficient market infrastructure to enable Indian
finance to grow and further mature.
An INTERNET based stock trading was still in its fancy in INDIA and had the potential to
really benefit the, investor with its ability to offer greater Speed and Transparency, at a much
lower cost. The traditional trading system is where investors have to contact their brokers for
accessing the real time data. And that's the reason why common people were completely out of
the picture in the traditional trading system. Now things have completely changed. Internet has
changed the whole scenario - just click the Mouse button and you are done.
BSE also has a wide range of services to empower investors and facilitate smooth
transactions:
The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line
screen based trading in securities. BOLT is currently operating in 25,000 Trader
alerts.
BSE Training Institute: BTI imparts capital market training and certification, in
collaboration with reputed management institutes and universities. It offers over 40
courses on various aspects of the capital market and financial sector.
The National Stock Exchange of India Limited has genesis in the report of the High Powered
Study Group on Establishment of New Stock Exchanges, which recommended promotion of
a National Stock Exchange by financial institutions (FIs) to provide access to investors from
all across the country on an equal footing. Based on the recommendations, NSE was
promoted by leading Financial Institutions at the behest
of the Government of India and was incorporated in
November 1992 as a taxpaying company unlike other
Stock exchanges in the country.
On its recognition as a stock exchange under the
Securities Contracts (Regulation) Act, 1956 in April
1993, NSE commenced operations in the Wholesale
Debt Market (WDM) segment in June 1994. The
Capital Market (Equities) segment commenced
operations in November 1994 and operations in
Derivatives segment commenced in June 2000. NSE
is mutually-owned by a set of leading financial
institutions, banks, insurance companies and other
financial intermediaries in India but its ownership
and management operate as separate entities.
Our Group
NSCCL- National Securities Clearing Corporation Ltd.
NCCL- National Commodity Clearing Limited
NSETECH- NSE InfoTech Services Limited
IISL- India Index Services & Products Ltd.
NSDL- National Securities Depository Ltd.
10
CHAPTER-3
COMPANY PROFILE
11
OVERVIEW
Founded in 1994, SMC Group is one of Indias leading financial services and investment
solutions providers and has been rated as Indias Best Equity & Best Currency Broker and
Broking house with the largest Distribution Network, (Source: BSE IPF and D&B Equity
Broking Awards 2012, 2011 & 2010 and Bloomberg-UTV Financial Leadership Awards 2012
& 2011). A blend of extensive experience, diverse talent and client focus has made us achieve
this landmark. Over the years, SMC has expanded its operations domestically as well as
internationally. Existing network includes regional offices at Mumbai, Kolkata, Chennai,
Ahmedabad, Jaipur, Hyderabad, Bangalore plus a growing network of 43 branches & 2500+
registered sub-brokers and authorized persons spread across 500+ cities and towns in India.
They offer a diverse range of financial services which includes institutional and retail brokerage
of equity, derivatives, commodities, currency, online trading, depository services, distribution
of IPOs ,mutual funds, fixed deposits & bonds, dedicated desk for NRIs and institutional
clients, insurance broking(both life & general), clearing services, margin financing, investment
banking, portfolio management, wealth advisory & research. They have a workforce of more
than 2500 employees and over 20000 registered associates/ service providers serving the
financial needs of a large base of investors efficiently. They are also amongst the first financial
firms in India to expand operations in the lucrative gulf market, by acquiring license for
broking and clearing member with (DGCX).
12
13
SMC PROMOTERS
Mr. SUBHASH CHANDRA AGGARWAL
He is the Chairman and Director of SMC Global Securities Limited & Co founder of the
SMC Group.
Fellow member of the Institute of Chartered Accountants in India (ICAI)
He has an experience of more than 23 years in stock broking & capital market.
Chairman, Capital Market Committee of the Associated Chambers of Commerce and
Industry of India (ASSOCHAM)
He is a part of an expert group constituted by Ministry of Corporate Affairs to review the
existing Cost Accounting rules and standards.
He has actively participated in conferences and seminars on securities and commodities
market.
It is through his leadership skills that SMC received several accolades
His effort have led to the diversification of group business from stock broking and arbitrage
to commodity broking, IPOs & mutual fund distribution, insurance products, merchant
banking, wealth management & advisory services.
He is the Vice Chairman & Managing Director of SMC Global Securities Limited & Co
founder of the SMC Group.
Fellow member of the Institute of Chartered Accountants in India (ICAI)
He has an experience of more than 23 years in Securities Market.
He has actively participated in conferences and seminars on securities and commodities
market.
14
CORPORATE ETHOS
VISION
To be a global major in providing complete investment solutions, with relentless focus on
investor care, through superior efficiency and complete transparency.
VALUES
15
SMC Approach
CREDENTIALS
Best Equity Broking House in India (Source: BSE IPF - D&B Equity Broking
2012)
Learning and Talent Technology Excellence Award by Star News HR and
16
Sphere, 2010)
Major Volume Driver award from BSE for 3 consecutive years (2006-07, 2005-06
& 2004-2005) 11
Trading member of NSE (Cash, F&O, Currency), BSE (Cash, F&O), NCDEX, MCX,
NMCE, UCX, ICEX, ACE, USE, NSEL, NCDEX SPOT, MCX-SX & DGCX
Clearing Member in NSE (F&O, Currency), BSE (F&O), MCX, NCDEX, NMCE,
ICEX, ACE, USE, NSEL, UCX, NCDEX SPOT, MCX-SX & DGCX
Depository Participant with CDSL, NSDL & Comtrack (SEBI approved Qualified
Corporate Insurance Broker for Life & General Insurance, Registered with IRDA
SWOT ANALYSIS
SWOT analysis is a structured planning method used to evaluate the Strengths, Weaknesses,
Opportunities, and Threats involved in a project or in a business venture. A SWOT analysis can
18
be carried out for a product, place, industry or person. It involves specifying the objective of
the business venture or project and identifying the internal and external factors that are
favourable and unfavourable to achieving that objective. Setting the objective should be done
after the SWOT analysis has been performed. This would allow achievable goals or objectives
to be set for the organization.
Identification of SWOTs is important because they can inform later steps in planning to achieve
the objective. First, the decision makers should consider whether the objective is attainable,
given the SWOTs. If the objective is not attainable a different objective must be selected and
the process repeated.
The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT
analysis may be used in any decision-making situation when a desired end-state (objective) has
been defined. Examples include: non-profit organizations, governmental units, and individuals.
SWOT analysis may also be used in pre-crisis planning and preventive crisis management.
SWOT analysis may also be used in creating a recommendation during a viability study/survey.
SWOT Analysis
Strengths
diversification.
Ongoing activities to support up gradation of operational performance and rise in
productivity
19
performance weakness.
Good co-operation between employees.
Number 1 registrar and transfer agent in India.
Number 1 dealer of investment products in India
Weakness
Opportunity
Threats
20
CHAPTER-4
LITERATURE REVIEW
and
practical
concepts
underpinning
the
process
of
project
portfolio selection. During the literature review, the main academic and practical
areas pertinent to our research question have been identified, examined, and
presented in the next sections:
a. Relevant definitions
21
1. Relevant Definitions
Project Portfolio Selection Process
Project portfolio selection has become increasingly popular during the past
decade. More recent literature has been dedicated to the subject. Both
academics and practitioners literature review reveals that selecting projects and
optimizing the project portfolio that best align with the organizations strategic
priorities is the essential focus of project portfolio selection (see literature
review). As explained previously, this dissertation focuses on the process of
project portfolio selection as project portfolio management or partial element
of project portfolio management. Therefore, the following definition by PMI
(2006) of project portfolio selection process is relevantly applicable and
adaptable:
Project
portfolio
management
or
project
portfolio
selection
is formally
et
al.,
2001a)
claim
that
decision-making,
prioritization
and
or result,
O Portfolio as a collection of projects or programs (whether interdependent or not)
and other work that are grouped together to facilitate the effective management
of that work to meet strategic business objectives; adding that projects and
programs are known as portfolio component
of
project
portfolio.
Both
academic
researchers
and
Literature
in
Project
Portfolio
Management
increasingly
discussed
the
strategy. As
discussed
above,
strategy
is implemented by projects
so if these projects are not aligned with strategy they will not contribute to the
implementation of strategy. Cooper et al. (2000) argued that corporate strategy must
be reflected in the project portfolio and resource allocation to projects.
b.
like
financial
investment,
project
portfolio
requires balanced
(Cooper et al., 2000). The main purpose is balancing risk and return; long and short
term benefits, time-to-completion, competitive impact and others.
In addition, Levine (2005) added some more requirements for the project
portfolio that include:
Appropriate to organizations value and culture;
Directly or indirectly contribute to cash flow;
Most efficiently utilize the resources (capital,
human
resource,
physical);
Projects not only contribute to short term business but also long-term
development.
24
the organization cannot compare one project to the others but a set of
competitive
advantages,
systemic
approach
should
be
25
the
systemic
approach
requires
active
adaptation
of
best
Scorecard,
Weighted
Scoring
Models,
etc.;
and
proactive
objectives
are
directed
at
increasing
the
effective allocation
of
26
Besides, Cooper et al. (2001b) claimed that the portfolio decision process
encompasses or overlaps a number of decision-making processes within the
business; and added that these processes include periodic reviews of all
projects in the total portfolio; making Go/Kill decisions on individual
projects, developing a new product strategy and making strategic decision on
resource allocation. Supporting this discussion, Ullman (2006) argued that the
decision making process entails consciously or unconsciously addressing the
following five key questions:
a. Which is the best alternative?
b. What is the risk that our decision will not turn out as we expect?
c. Do we know enough to make a good decision yet?
d. Is there buy-in for the decision?
e. What do we need to do next to feel confident about our decision,
within the scope of our limited resources?
Apparently, a critical feature facilitating project selection is that agents or actors
with roles and responsibilities but logical frameworks or models make decisions
(Archer and Ghasemzadeh, 1999; Englund & Graham, 1999; and Meredith &
Mantel-Jr, 2000). Depending on the types, sizes and structures of business
organizations, decision agents are key individuals or teams of certain management
members.
For example, in the conceptual framework for the field of entrepreneurship
research, Shane and Venkataraman (2000) laid emphasis on the influence of
individuals
on
the
existing,
discovery
and exploitation
of
entrepreneurial
27
conflicts
(known
as
functional,
task
oriented
and
focused
on
team
or
project
portfolio
management
governance
council.
This
managers share for detailed analysis, preparation and presentation of facts and figures
in the process of selecting projects. Gardiner and Carden (2004) claim that the
selection and nurturing process should be more advantageously
done
when
this
process can get the involvement and participation of people at lower levels
especially in large and mature organizations. Furthermore, the interesting results of
study done by Blomquist & Mller (2006) showed the significant roles and
responsibilities of middle managers in program and portfolio management e.g.
identifying business opportunities, look for synergies between projects, plan
for and select required resources before project execution, etc.
4. Project Categorization Facilitating Project Portfolio Selection
It is advisable to select the right balance and mix of projects to maximize the value of
the portfolio in respect of scope, scarce resources, and contribution to the short-term
and long-term development strategy of the organizations (Cooper et al., 1997a,
1997b; Archer & Ghasemzadeh, 1999; Chien, 2002; and
PMI,
2006).
They
stated that different types of projects that are interrelated and in alignment with
organization strategies should be compared and selected. Hence, it is necessary and
beneficial to classify projects for the purpose of facilitating the process of selecting
and prioritizing projects in project portfolio management (Wheelwright & Clark,
1992; Cooper et al., 1998; Englund & Graham, 1999; Archibald, 2004; and Crawford
et al., 2005).
Based on the degree of change in the product and the degree of change in the
manufacturing, Wheelwright & Clark (1992) categorized projects into five types as
follows:
a. Derivative: ranging from cost-reduced versions of existing products to add-ons or
enhancements for an existing production process,
b.
Breakthrough:
involving
significant
changes
to
existing
products and
processes,
c. Platform: offering fundamental improvements in cost, quality, and performance
over preceding generations,
d. R&D: is the creation of the know-how and know-why of new materials and
technologies
e. Alliances and partnerships: formed to pursue any type of project above.
29
to
establish
system
of
categorizing
projects,
namely geographical
location, industrial sector, stage of the project life cycle, and product of the
project. Similarly, Crawford et al. (2004) recommended the project categorization
model consisting of two separate components:
a. purposes of categorization systems
b. project attributes
Besides, PMI (2006) suggested three activities to categorize projects for project
portfolio selection: identify strategic categories based on the strategic plan, compare
projects and programs to these categorization criteria, and group each project or
program into only one category. Primarily based on the work by Yorker (1999)
and
Crawford
et
al.
(2004),
Archibald
globally agreed project categorization system which is intended for the right
application of project management methods and best practices for each project
30
when adding or deleting new projects, difficulty in use when involving a large
number of projects for comparison; and incapability to identify really good projects.
These tools and techniques are then integrated into their project portfolio selection
framework as follows:Table 3: Selection Tools Integrated in the Selection Framework
Selection stage
Pre-screening
analysis
Screening
profiles)
Portfolio AHP, Constrained Optimization, Scoring Models,
selection
Sensitive Analysis
Matrix
Portfolio adjustment
displays,
sensitivity
analysis,
project
management
science
stream
and
financial
authors presented the limitations and their suggested solutions of the models and
methods that are related to mathematical programming (e.g. goal programming or
multi-objective programming with binary or integer
variables); decision theory (e.g. static or stochastic conditions for decisions made
at one time or several times on selecting projects to form a new portfolio or
adding new projects to an existing portfolio); and finance (e.g. liner or non-linear
optimization of portfolio
Cooper
et
al.
(2001b)
evidently
discussed
the
popularity
and
dominance
(dominating decision process) of tools, techniques, methods and models for project
selection and portfolio management. The results of their survey interestingly
32
show that first, organizations tend to use different combinations of tools, techniques,
methods and models instead of any one alone to better select and manage their
project portfolio (e.g. combination of financial methods and strategic approach);
second, though financial methods are popularly used, they produce poorest
performing
portfolios;
and
techniques
should
collaboratively
take
where
there
are
lacks
of
database,
information
and
discounted cash flow, etc.) as well as financial ratios (e.g. Productivity Index).
Thus, these models rely on available, reliable financial data, which might not
always be the case in organisations (Cooper et al. 2001).
Scoring Models and Checklists: Unlike the models described previously, scoring
models and checklists typically rely on subjective assessments of variables instead
of factual financial data. Hence, domain knowledge is required to assess the
portfolio on a variety of these characteristics, which can be very useful and
efficient in the early phases of portfolio analysis (Cooper et al. 2001).
Probabilistic Financial Models: These models rely on facts again similar to
the models in the first category. However, these models, to which belong, among
others, Monte Carlo simulation, decision tree analysis and options pricing theory,
include the notion of uncertainty and risk (Cooper et al. 2001).
Behavioural Approaches: These models comprised by this category can be
utilised to achieve a consensus amongst a group of participants. This category
includes models such as the Modified Delphi Method, for example (Cooper et al.
2001).
Mathematical Optimisation Procedures: These models aim at finding the
optimal set of portfolio elements in order to maximise a certain objective (e.g.
profit), which is subject to a set of resource constraints. They contain diverse
mathematical approaches based on game theory, probability theory and
mathematical programming (Cooper et al. 2001).
Decision Support Systems: Mathematical Optimisation Procedures do not allow
the decision maker to get involved during the process of finding a solution.
Decision Support Systems try to be more flexible in this regard. A DSS is
essentially a mathematical model that allows management intervention (Cooper
et al. 2001).
Mapping Approaches: This category comprises models that consider certain
34
Parkhe
(1991)
further
distinguished
between
standardised
and
against
one
or
more
fixed
external
variables (Avlonitis
and
35
CHAPTER-5
PORTFOLIO MANAGEMENT
INTRODUCTION
A Portfolio Management refers to the science of analyzing the strengths, weaknesses,
opportunities and threats for performing wide range of activities related to the ones portfolio
for maximizing the return at a given risk. It helps in making selection of Debt Vs Equity,
Growth Vs Safety and various other tradeoffs.
Major tasks involved with Portfolio Management are as follows.
Portfolio: In terms of mutual fund industry, a portfolio is built by buying additional bonds,
mutual funds, stocks, or other investments. If a person owns more than one security, he has an
investment portfolio. The main target of the portfolio owner is to increase value of portfolio by
selecting investments that yield good returns. As per the modern portfolio theory, a diversified
portfolio is one, which includes different types or classes of securities and reduces the
investment risk. It is because any one of the security may yield strong returns in any economic
climate.
Facts about Portfolio
decision regarding the quantity and timing of the buy and sell.
Portfolio Management is goal-driven and target oriented.
There are inherent risks involved in the managing a portfolio.
costs and maintenance costs. The decisions regarding making investments in modifying the
existing application or purchasing new software applications make up an important part of
application portfolio management.
1. Product Portfolio Management: The product portfolio management involves grouping
of major products that are developed and sold by businesses into (logical) portfolios.
These products are organized according to major line-of business or business segment.
The management team actively manages the product portfolios by taking decisions
regarding the development of new products, modifying existing products or
discontinues any other products.
2. Project Portfolio Management: It is also referred as an initiative portfolio
management where initiative portfolio involves a defined beginning and end; precise
and limited collection of desired results or work products; and management team for
executing the initiative and utilizing the resources.
OBJECTIVES OF PMS
38
BENEFITS OF PMS
Transparency: At most times the rationale behind your investments is a matter of concern.
With PMS our Portfolio Managers will always keep you apprised of the reason behind
investment decisions, plus you are always kept up-to-date on the allocation and distribution
of your funds.
Scientific Investment Decisions: PMS provides a scientific and disciplined basis for
investing. Besides, you have the flexibility of making investment decisions after speaking
to our Research Team.
39
Learn while you earn: The Consultative Investment Approach of PMS gives you an
opportunity to learn the nuances, understand the rationale and details behind every
investment decision.
Expertise: Traditional investment options do not provide a team of dedicated investment
consultants. PMS will provide you exclusive access to the Research Desk and their
Proprietary Research Reports. An experienced team of portfolio managers ensure your
portfolio is tracked, monitored, and optimized at all times.
DISADVANTAGES OF PMS
PMS does not disclose the portfolio as much as MFs.
There have also been* cases where PMS Managers have misused the money.
TYPES OF PMS
PMS can be broadly categorized under the following types 1. Discretionary PMS Where the investment is at discretion of the fund manager & client
has no intervention in the investment process.
2. Non-Discretionary or Advisory PMS Under this service, the portfolio manager only
suggests the investment ideas. The choice as well as the timings of the investment decisions
rest solely with the investor. However the execution of the trade is done by the portfolio
manager.
Balanced Investment Strategy: Combines the merits and demerits of both Aggressive and
Defensive investment strategy.
FEES IN A PMS
Portfolio management services either have a fixed, profit-sharing or hybrid fee structure. In a
fixed-fee structure, the manager charges a set fee every quarter or on the corpus. It is levied
irrespective of the returns generated by a portfolio. Then, there is the profit-sharing model,
where the fee paid by an investor is a percentage of profits. This is usually a large chunk,
around 20-25% of profits. A hybrid model combines both, although charges are less.
41
Goals: You should be clear about your goals as an investor. The objective of the
portfolio management should be clear if one wants to accumulate wealth by good
stable funds/stocks.
Know your investments: It is recommended to invest in the stocks/funds of the
businesses and industries that you are aware of. You should know the activities of the
companies and procure knowledge about the sector you are investing in. This way you
would be able to know if the company will continue to be successful. The performance
constantly re-assess that purpose as per the prevailing market and other conditions.
Measuring Return on Investment (ROI): The performance of the portfolio is
measured by the return on investment (ROI). The individuals can successfully formulate
42
general, the higher potential ROI involves higher risk and vice versa.
Measuring Risk: The risk tolerance of the person determines the pace of his/her
returns. The risks and rewards are in essence interrelated to each other where tolerance
of the risks tends to influence or even dictate the rewards. An investor whose goal is to
maintain his/her current assets instead of growing them, he/she will keep only safe and
1. Portfolio Manager is basically a personal stock portfolio management system that enables the
traders to track the sold and bought stocks along with any related dividends by investing
minimal time and effort. Traders can maintain a complete stock trading diary without need to
update a spreadsheet continually. This information is of utmost importance for improving the
trading strategy.
2. Traders can view the performance of their portfolio anytime throughout the year. Traders can
have the knowledge of their current status of their portfolio by analyzing the statistics on open
trades as well as historical trades.
3. With portfolio managers, traders can generate easy to use reports without any hassle and
paperwork. It also allows them to make savings by avoiding the accountant fees.
Advantages of Portfolio Manager
I. Easy to use wizards that allows quick and simplified data entry
II. Auto or manual stock price update and management of multiple Portfolios
III. Ensures data security as the portfolio is stored on individuals PC only.
IV. Tracking of all the stock transactions and related dividends
V. Enables the traders to sell shares for gaining maximum tax benefits
VI. Facility of optional accounts that allows the traders to track total used and available funds
VII. Incorporates the information regarding the trading plan like disaster stops targets etc.
VIII. Allows the traders to maintain Trade diary for storing any extra information
IX. Generates quick and easily available reports.
44
INVESTAR
Investar is a Stock Portfolio Management Software that offers wide range of benefits for
anyone who likes to invest in Indian Stock Market including Portfolio Managers, Broker,
Chartered Accountant, Technical Analyst, Short-Term/Long-Term Trader, Day Trader, student,
and any other individual Investor.
Traders can get new Stock Ideas daily and analyze the fundamentals for selecting the
aspects.
Enables the traders to import transactions effortlessly from the broker and continuously
track the portfolio.
46
Traders can utilize the portfolio technical view for keeping track of the technical
the Chart.
Traders can utilize effective Money Management principles by applying Portfolio Alerts
and Stop Losses.
interrelationships that exist between stock price movements. These so-called covariances
between stocks, could be positive, negative, or zero. An example of two IT services stocks,
reacting favourably to a depreciation in the domestic currencyas their export realizations
would rise in the domestic currencyis one of positive covariance. If however, we compare
one IT services company with another from the metals space, say steel, which has high foreign
debt, then a drop in the share price of the steel company (as the falling rupee would increase the
debt-service payments of the steel firm) and rise in share price of the IT services company,
would provide an example of negative covariance. It follows that we would expect to have zero
covariance between stocks whose movements are not related.
all-or-nothing investment decision, whereas in new product projects, the decision process is an
incremental.
Expected Commercial Value (ECV): This method seeks to maximize the value or commercial
worth of your portfolio, subject to certain budget constraints, and introduces the notion of risks
and probabilities. The ECV method determines the value or commercial worth of each project
to the corporation, namely its expected commercial value. The calculation of the ECV is based
on a decision tree analysis, considers the future stream of earnings from the project, the
probabilities of both commercial success and technical success, along with both
commercialization costs and development costs.
This ECV model has a number of attractive features: it recognizes that the Go/Kill decision
process is an incremental one (the notion of purchasing options); all monetary amounts are
discounted to today (not just to launch date), thereby appropriately penalizing projects that are
years away from launch; and it deals with the issue of constrained resources, and attempts to
maximize the value of the portfolio in light of this constraint. The major weakness of the
method is the dependency on extensive financial and other quantitative data. Accurate estimates
must be available for all projects future stream of earnings; for their commercialization (and
capital) expenditures; for their development costs; and for probabilities of success estimates
that are often unreliable, or at best, simply not available early in the life of a project. A second
weakness is that the method does not look at the balance of the portfolio at whether the
portfolio has the right balance between high and low risk projects, or across markets and
technologies. A third weakness is that the method considers only a single financial criterion for
maximization.
Productivity Index (PI): The productivity index is similar to the ECV method described
above, and shares many of ECVs strengths and weaknesses. The PI tries to maximize the
financial value of the portfolio for a given resource constraint.
The Productivity Index is the following ratio:
PI = ECV * Pts/ R&D
Here, the definition of expected commercial value is different than that used above. In the
Productivity Index, the expected commercial value (ECV) is a probability-adjusted NPV. More
specifically, it is the probability-weighted stream of cash flows from the project, discounted to
the present, and assuming technical success, less remaining R&D costs. There are various ways
to adjust the NPV for risks or probabilities: via employing a risk adjusted discount rate used; or
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by applying probabilities to uncertain estimates in calculating the NPV; or via Monte Carlo
simulation to determine NPV.
This risk-adjusted NPV is then multiplied by Pts, the probability of technical success, and
divided by R&D, the R&D expenditure remaining to be spent on the project (note that R&D
funds already spent on the project are sunk costs and hence are not relevant to the prioritization
decision). Projects are rank ordered according to this productivity index in order to arrive at the
preferred portfolio, with projects at the bottom of the list placed on hold.
SCORING MODELS AS PORTFOLIO TOOLS
Scoring models have long been used for making Go/Kill decisions at gates. But they also have
applicability for project prioritization and portfolio management. Projects are scored on each of
a number of criteria by management. Typical main criteria include:
Strategic alignment
Product advantage
Market attractiveness
Ability to leverage core competencies
Technical feasibility
Reward vs. risk.
The Project Attractiveness Score is the weighted addition of the item ratings, and becomes the
basis for developing a rank ordered list of projects (using the six criteria listed above; projects
are ranked until there are no more resources, in this case measured by FTE people).
Scoring models generally are praised in spite of their limited popularity. Research into project
selection methods reveals that scoring models produce a strategically aligned portfolio and one
that reflects the businesss spending priorities; and they yield effective and efficient decisions,
and result in a portfolio of high value projects
Visual charts are favoured in order to display balance in new product project portfolios. These
visual representations include portfolio maps or bubble diagrams an adaptation of the four
quadrant BCG (star; cash cow; dog; wildcat) diagrams which have seen service since the 1970s
as strategy models as well as more traditional pie charts and histograms.
A casual review of portfolio bubble diagrams will lead some to observe that these new models
are nothing more than the old strategy bubble diagrams of the 70s! Not so. Recall that the
BCG strategy model, and others like it (such as the McKinsey/GE model), plot business units
on a market attractiveness versus business position grid. Note that the unit of analysis is the
SBU an existing business, whose performance, strengths and weaknesses are all known. By
contrast, todays new product portfolio bubble diagrams, while they may appear similar, plot
individual new product projects future businesses or what might be.
Timing a key issue in the quest for balance. One does not wish to invest strictly in short
term projects, nor totally in long term ones. Another timing goal is for a steady stream
of new product launches spread out over the years constant new news, and no
sudden log-jam of product launches all in one year. A histogram captures the issue of
timing and portrays the distribution of resources to specific projects according to years
of launch.
Another timing issue is cash flow. Here the desire is to balance ones projects in such a
way that cash inflows are reasonably balanced with cash outflows in the business. Some
companies produce a timing histogram which portrays the total cash flow per year from
all projects in the portfolio over the next few years (not shown).
A project type is yet another vital concern. What is your spending on genuine new
products versus product renewals (improvements and replacements), or product
extensions, or product maintenance, or cost reductions and process improvements? And
what should it be? Pie charts effectively capture the spending split across project types
actual versus desired splits. Markets, products and technologies provide another set of
dimensions across which managers seek balance. The question faced is: do you have the
appropriate split in R&D spending across your various product lines? Or across the
markets or market segments in which you operate? Or across the technologies you
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posses? Pie charts are again appropriate for capturing and displaying this type of data.
Strategic fit: The first is: are all your projects consistent with your businesss
strategy? For example, if you have defined certain technologies or markets as key
areas to focus on, do your projects fit into these areas are they in bounds or out of
bounds?
Spending breakdown: The second is: does the breakdown of your spending reflect
your strategic priorities? In short, when you add up the areas where you are
spending money, are these totally consistent with your stated strategy?
moves to setting aside funds envelopes or buckets of money destined for different
types of projects
Bottom Up Strategic Criteria Built into Project Selection Tools: Not only are scoring
models effective ways to maximize the value of the portfolio, they can also be used to ensure
strategic fit. One of the multiple objectives considered in a scoring model, along with
profitability or likelihood of success, can be to maximize strategic fit, simply by building into
the scoring model a number of strategic questions. In the scoring model displayed, two major
factors out of five are strategic; and of the 19 criteria used to prioritize projects, six, or almost
one-third, deal with strategic issues. Thus, projects which fit the businesss strategy and boast
strategic leverage are likely to rise to the top of the list. Indeed, it is inconceivable how any off
strategy projects could make the active project list at all: this scoring model naturally weeds
them out.
Top Down Strategic Approach Strategic Buckets Model: While strategic fit can be
achieved via a scoring model, a top down approach is the only method designed to ensure that
the eventual portfolio of projects truly reflects the stated strategy for the business: that where
the money is spent mirrors the businesss strategy. The Strategic Buckets model operates from
the simple principle that implementing strategy equates to spending money on specific projects.
Thus, setting portfolio requirements really means setting spending targets. The method
begins with the businesss strategy, and requires the senior management of the business to make
forced choices along each of several dimensions choices about how they wish to allocate their
scarce money resources. This enables the creation of envelopes of money or buckets.
Existing projects are categorized into buckets; then one determines whether actual spending is
consistent with desired spending for each bucket. Finally projects are prioritized within buckets
to arrive at the ultimate portfolio of projects one that mirrors managements strategy for the
business. Sounds simple, but the details are a little more complex: Senior management first
develops the vision and strategy for the business. This includes defining strategic goals and the
general plan of attack to achieve these goals a fairly standard business strategy exercise.
Next, they make forced choices across key strategic dimensions. That is, based on this strategy,
the management of the business allocates R&D and new product marketing resources across
categories on each dimension. Some common dimensions are:
Strategic goals: Management is required to split resources across the specified strategic
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goals. For example, what percent should be spent on Defending the Base? On
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Set portfolio
objective
Formulate an
investment
strategy
Have a game
plan for portfolio
revision
Evaluate
Performance
55
The general idea behind CAPM is that investor needs to be compensated in two ways: time
value of money and risk. The Time value of money is represented by the risk free (rf) rate in
the formula and compensates the investors for placing money in any investment over a period
of time. The other half of the formula represents risk and calculates the amount of
compensation the investor needs for taking on additional risk. This is calculated by taking a
risk measure (beta) that compares the returns of the assets to the market over a period of time
and to the market premium (Rm-rf). The CAPM says that the expected return of a security or
a portfolio equals the rate on a risk free security plus a risk premium. If this expected return
does not meet or beat the required return, then the investment should not be undertaken.
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Assumptions of CAPM
All Investors:
1) Aim to maximize economic utility
2) Are rational and risk free
3) Are price takers, i.e., they cannot influences prices.
4) Can lend and borrow unlimited under the risk free rate of interest.
5) Trade without transaction or taxation costs.
6) Deals with securities that are all highly divisible into small parcels.
7) Assume all information is at the same time available to all investors.
8) Perfect competitive Markets.
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As a general rule of Thumb, however, most investors hold 15-20 stocks at the very least in
their portfolio.
The table below gives a general guide to the plans that are appropriate for
Primary Need
Asset creation
Asset creation &
Protection
Childrens education,
Asset creation and
protection
Planning for retirement
& asset protection
Life Insurance
Product
Wealth Creation Plan
Wealth creation and
mortgage protection
plans
Education insurance,
Mortgage protection &
wealth creation plans
Retirement solution &
mortgage protection
Health plans
Health Insurance
First, history shows that not all classes of assets move up and down at the same time.
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One year, Stocks of large companies may generate the best returns, while in another it
Risk tolerance level is your willingness to bear the risk potentially losing some or all
of your money in exchange for higher potential returns. For example, an aggressive
investor, or one with a high risk tolerance, is more likely to risk losing money on order
to get better result. Its important to be truthful to yourself when considering your risk
tolerance level because the last thing you want to do is prematurely sell your
investment in a panic.
Investment time horizon is the expected number of months or years you will be
investing for retirement that is 35 years away, you would afford to take more risk
because you can ride out the down periods. On the other hand, you want less risk if
you are a retiree or if you are saving for a short- term goal.
return of 5% in 6 years.
2. Increase your monthly contribution. For example you save Rs. 10, 00, 00 by adding
Rs. 15, 000 per month to an investment portfolio that has a combined average annual
return of 5% in 5 years.
Now that you understand what portfolio rate of return need to be at, you could more
realistically decided your asset allocation. For example; if you are shooting for a 5% rate of
return, you could construct a conservative portfolio. However, if you are shooting for a 12%
rate of return, you will have to be more aggressive.
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Mutual Funds
Use management expertise to provide returns as per the common investment policy
Customized portfolio as per the risk profile of investors and hence accordingly
individualized investment decisions
Mutual Funds
Common policy and strategy for all
PMS
Customized policy and strategy for
each investor
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One-size-fits-all philosophy
investments decisions
Will have say in investments
through agreed Investment Policy
Transactions
usually
in
huge
Statement
Transaction volume depends on
volumes
than of MFs)
Prices more or less remain the same
waived
transactions
However, capital gains at the sell of
No further taxation
investors
willing
to
investments
make
fairly
large
and
hence
need
customized services
Dont trade as MFs
NAV values
Market price of units is below the
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CHAPTER-6
RESEARCH METHODOLOGY
RESEARCH OBJECTIVES:
To compare performance of different stocks in a Portfolio.
To compare the return of a portfolio using different investment ways.
To develop a new investment way in portfolios.
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SCOPE OF STUDY
Portfolio Management is a process encompassing many activities of investment in assets and
securities. It is a dynamic and flexible concept and involves regular and systematic analysis,
judgment and action. The objective of this service is to help the unknown and investors with
the expertise of professional in investment portfolio management. It involves construction of
a portfolio based upon the investors objectives, constraints preferences for risk and returns
and tax liability. The portfolio is reviewed and adjusted from time to time in tune with the
market conditions. The evolution of portfolio is to be done in terms of targets set for risks
and returns. The changes in the Portfolio are to be effected to meet the changing condition.
Portfolio construction refers to the allocation of surplus fund in hand among a variety of
financial asset open for investment. Portfolio theory concerns itself with the principles
governing such allocation. The modern view of investment is oriented more go towards the
assembly of proper combination of individual securities to form investment portfolio. A
combination of securities held together will give a beneficial result if they grouped in a
manner to secure higher returns after taking into consideration the risk elements.
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The modern theory is the view that by diversification risk can be reduced. Diversification can
be made by the investors either by having a large numbers of shares of companies in different
regions, in different industries or those producing different types of product lines. Modern
theory believes in the perspective of combination of securities under constraints of risk and
returns
AREA OF STUDY
The investors have the stock markets to invest and it offers a lot of various securities to invest
into, the investor with the help of an effective portfolio mix will be able to diversify his
investment and thus will maximize the returns on his investment and minimize the risk of the
investment. The need of the study is to have an investment and portfolio combination which
will effectively and efficiently manage the investment of the investors for a better return and
lower risk. The main objective of investment portfolio management is to maximize the
returns from the investment and to minimize the risk involved in investment. Moreover, risk
in price or inflation erodes the value of money and hence investment must provide a
protection against inflation. Portfolio management services helps investors to make a wise
choice between alternative investment with pit any post trading hassles this service renders
optimum returns by proper selection of continues change of one plan to another plane with
the same scheme, any portfolio management must specify the objectives like maximum
returns, and risk capital appreciation, safety etc. in their offer.
DATA COLLECTION
Stock Selection criteria: In this project I have taken stocks from five different sectors that
are IT, Steel, Telecom, Banking and Pharmaceuticals.
My focus in this part of the analysis was not just on the stocks of a particular sector
but rather it was also on the optimum diversification of my Portfolio so that in any
SECTOR
Heavy Electricals
COMPANY
BHEL
Banking
ICICI Bank
Pharmaceuticals
Sun Pharma
Telecom
Bharti Airtel
IT
Wipro
MEASURES OF ANALYSIS
CALCULATION OF BETA & STANDARD DEVIATION OF INDIVIDUAL STOCKS:
The beta is a measure of a stocks price volatility in relation to the rest of the market. In other
words it explains how does the stocks price move relative to the overall market.
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The number is calculated using regression analysis. The whole market, which for this purpose
is considered the NIFTY 50, is assigned a beta of 1. There is no single index used to calculate
beta, although the NIFTY 50 is probably the most common proxy for the market as a whole.
Stocks that have a beta greater than 1 have greater price volatility than the overall
market and are more risky.
Stocks with a beta of 1 fluctuate in price at the same rate as the market.
Stocks with a beta of less than 1 have less price volatility than the market and are less
risky.
The beta of a portfolio is the weighted sum of the individual asset betas, according to the
proportions of the investments in the portfolio.
Portfolio beta describes relative volatility of an individual securities portfolio, taken as a
whole, as measured by the individual stock betas of the securities making it up.
Standard deviation is a statistical measurement that sheds light on historical volatility. For
example, a volatile stock will have a high standard deviation while the deviation of a stable
blue chip stock will be lower. A large dispersion tells us how much the return on the fund is
deviating from the expected normal returns.
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CHAPTER-7
DATA ANALYSIS OF A PORTFOLIO
USING VARIOUS MODELS
69
70
71
72
73
Stock
3:
SUN PHARMA
74
75
76
77
78
Stock5: WIPRO
79
80
81
82
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COVARIANCE
AND
CORRELATION
BETWEEN
DIFFERENT
STOCKS
Covariance calculations can give an investor insight into how two stocks might move together
in the future. Looking at historical prices, we can determine if the prices tend to move with
each other or opposite each other. This allows us to predict the potential price movement of a
two-stock portfolio.
Covariance measures how two variables move together. It measures whether the two move in
the same direction (a positive covariance) or in opposite directions (a negative covariance).
In the stock market, a strong emphasis is placed on reducing the risk amount taken on for the
same amount of return. When constructing a portfolio, an analyst will select stocks that will
work well together. This usually means that these stocks do not move in the same direction.
Covariance can tell how the stocks move together, but to determine the strength of the
relationship, we need to look at the correlation.
While both measures reveal whether two variables are positively or inversely related, the
correlation provides additional information by telling you the degree to which both variables
move together.
The correlation will always have a measurement value between -1 and 1, and adds a strength
value on how the stocks move together.
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85
SHARPE RATIO
The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a
result of excess risk. Although one portfolio or fund can reap higher returns than its peers, it is
only a good investment if those higher returns do not come with too much additional risk. The
greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative
Sharpe ratio indicates that a risk-less asset would perform better than the security being
analyzed.
The ex-ante Sharpe ratio formula is:
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BETA
STD DEVIATION
BHEL
0.776
14.59
ICICI Bank
1.782
9.11
Sun Pharma
-0.171
5.8
Bharti Airtel
-0.243
8.2
Wipro
-0.155
8.52
COVARIANCE
CORRELATION
BHEL/ICICI
1.929
0.335
BHEL/Sun Pharma
1.138
0.310
BHEL/AIRTEL
0.678
0.131
BHEL/ WIPRO
0.538
0.100
ICICI/Sun Pharma
-0.644
-0.281
ICICI/AIRTEL
-0.065
-0.020
ICICI/ WIPRO
-0.059
-0.018
-0.517
-0.250
-0.307
-0.143
AIRTEL / WIPRO
0.564
0.186
Portfolio's beta gives a measure of its overall market risk. In my portfolio the overall
beta for the portfolio is 0.3978, which is less than the beta for individual securities.
Hence diversification reduces volatility, or systematic risk.
Portfolio standard deviation is the standard deviation of a portfolio of investments. It
is a measure of variability of the expected returns from a portfolio. Owing to the
diversification benefits; standard deviation of a portfolio of investments should be
lower than the weighted average of the standard deviations of the individual
investments.
In my Portfolio the portfolio standard deviation is 4.36%. The less than perfect
correlation has reduced the standard deviation from 9.24% to 4.36% which indicates a
reduction in risk: the benefit of diversification.
Weighted expected return using CAPM Model for my portfolio is 13.22. This shows
that by investing in this portfolio that I have created, an investor can expect a return of
13.22% which is quite good.
The Co variance and Correlation figures shown in the table above indicate that the
portfolio is well diversified as many stock pairs show negative and low degree of
correlation. This usually means that these stocks do not move in the same direction and
hence the portfolio is well diversified.
Portfolios Sharpe Ratio is 1.031 which means that the better is the risk-adjusted
performance of the portfolio.
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LIMITATIONS
Portfolio management service is a huge business today. There is stiff competition which makes
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it difficult for the investor to choose a good manager. However, this can be sorted out by taking
his previous history and performance into account. One limitation faced, is the authority given
to the manager to have control over your investments. When we ourselves, manage and trade,
it's a different scenario altogether. However, trusting a portfolio management advisor is
difficult and risky as well. There are many known cases of churning, where the consultant
shifts investment from one fund to another. Some investors restrict this practice by limiting the
commission to the consultant depending on his performance; however, if there is a loss, it
wouldn't matter much to them. All in all, the professional brokers are very efficient and the
process and detailing is strong, since the amount invested is big.
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CONCLUSIONS
91
results
If stocks do not move in the same direction then the portfolio is well diversified.
A Sharpe Ratio of 1 or better is considered good, 2 and better is very good, and 3 and
better is considered excellent.
SUGGESTIONS
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Start early: the younger you are, the less likely you are to have burdensome financial
obligations: a spouse, children and mortgage, for example. That means you can allocate
a small portion of your investment portfolio to higher risk investments, which may
return higher yields. If you start investing as early as possible, your stocks will have
Keep Costs to a Minimum: Invest with a discount brokerage firm. Another reason to
consider index funds when beginning to invest is that they have low fees. Because
you'll be investing for the long-term, don't buy and sell regularly in response to market
ups and downs. This saves you commission expenses and management fees, and may
prevent cash losses when the price of your stock declines.
Discipline and Regular Investing: Make sure that you put money into your
investments on a regular, disciplined basis. This may not be possible if you lose your
job, but once you find new employment, continue to put money into your portfolio.
Tax Considerations: You pay taxes on the amount of money withdrawn from a tax
deferred retirement account.
The Bottom Line: Disciplined, regular, diversified investment in a tax free and smart
portfolio management can build a significant nest egg for retirement. A portfolio with
tax liability, dividends and the sale of profitable stock can provide cash to supplement
employment or business income. Managing your assets by re-allocation and keeping
costs, such as commissions and management fees, low, can produce maximum returns.
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BIBLIOGRAPHY
NEWS PAPERS
The economic times
Business standard
Mint
WEBSITES
www.wikipedia.com
www.investopedia.com
www.moneycontrol.com
www.portfoliomanagment.com
www.managmentparadise.com
www.rbi.org
www.scribd.com
www.smctradeonline.com
www.nseindia.net
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Annexure
http://www.nseindia.com/products/content/equities/indices/cnx_nifty.html
http://www.stableinvestor.com/2012/10/huge-returns-given-by-nifty-50stocks.html
http://www.topstockresearch.com/HISTORY/INDIAN_STOCKS/CEMENT_
AND_CEMENT_PRODUCTS/ACC_LtdFiveYearChart.html#charts
http://en.wikipedia.org/wiki/CNX_Nifty
https://www.scribd.com/doc/56171089/A-Study-of-Best-Performing-Scriptsof-Nifty-in-Last-5-Year-in-Banking-Sector
http://www.nseindia.com/content/indices/ind_cnx_nifty.pdf
http://moneyexcel.com/8790/nifty-50-performance-last-15-years
http://www.moneycontrol.com/nifty/nse/nifty-live
http://www.moneyworks4me.com/best-index/nse-stocks/top-nifty50companies-list/page/3
http://www.motilaloswal.com/Broking/Markets/Index-Weightage
http://ournifty.com/nse-nifty-stocks-weight-how-to-use.html
http://ournifty.com/50-stocks-nse-nifty-index-list-along-their-short-termtrend.html
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