INDEX

SRNO.

TOPICS

1.

PORTFOLIO MANAGEMENT - INTRODUCTION

2.

TYPES OF PORTFOLIO MANAGEMENT

3.

PORTFOLIO MANAGEMENT PROCESS

4.

RISK RETURN ANALYSIS

5.

PORTFOLIO THEORIES

6.

PAGE NO

PERSONS INVOLVED IN PORTFOLIO MANAGEMENT

CONCLUSION

BIBLOGRAPHY

CHAPTER: 1
PORTFOLIO MANAGEMENT

INTRODUCTION
Stock exchange operations are peculiar in nature and most of the Investors feel
insecure in managing their investment on the stock market because it is difficult for an
individual to identify companies which have growth prospects for investment. Further
due to volatile nature of the markets, it requires constant reshuffling of portfolios to
capitalize on the growth opportunities. Even after identifying the growth oriented
companies and their securities, the trading practices are also complicated, making it a
difficult task for investors to trade in all the exchange and follow up on post trading
formalities.

Investors choose to hold groups of securities rather than single security that offer the
greater expected returns. They believe that a combination of securities held together will
give a beneficial result if they are grouped in a manner to secure higher return after taking
into consideration the risk element. That is why professional investment advice through
portfolio management service can help the investors to make an intelligent and informed
choice between alternative investments opportunities without the worry of post trading
hassles.

MEANING OF PORTFOLIO MANAGEMENT

Portfolio management in common parlance refers to the selection of securities and
their continuous shifting in the portfolio to optimize returns to suit the objectives of an
investor. This however requires financial expertise in selecting the right mix of securities
in changing market conditions to get the best out of the stock market. In India, as well as
in a number of western countries, portfolio management service has assumed the role of a
specialized service now a days and a number of professional merchant bankers compete
aggressively to provide the best to high net worth clients, who have little time to manage
their investments. The idea is catching on with the boom in the capital market and an
increasing number of people are inclined to make profits out of their hard-earned savings.
Portfolio management service is one of the merchant banking activities recognized by
Securities and Exchange Board of India (SEBI). The service can be rendered either by
merchant bankers or portfolio managers or discretionary portfolio manager as define in
clause (e) and (f) of Rule 2 of Securities and Exchange Board of India(Portfolio
Managers)Rules, 1993 and their functioning are guided by the SEBI.
According to the definitions as contained in the above clauses, a portfolio manager
means any person who is pursuant to contract or arrangement with a client, advises or
directs or undertakes on behalf of the client (whether as a discretionary portfolio manager
or otherwise) the management or administration of a portfolio of securities or the funds of
the client, as the case may be. A merchant banker acting as a Portfolio Manager shall also
be bound by the rules and regulations as applicable to the portfolio manager.
Realizing the importance of portfolio management services, the SEBI has laid down
certain guidelines for the proper and professional conduct of portfolio management
services. As per guidelines only recognized merchant bankers registered with SEBI are
authorized to offer these services.
Portfolio management or investment helps investors in effective and efficient
management of their investment to achieve this goal. The rapid growth of capital markets
in India has opened up new investment avenues for investors.
3

The stock markets have become attractive investment options for the common man.
But the need is to be able to effectively and efficiently manage investments in order to
keep maximum returns with minimum risk.
Hence this is the study on PORTFOLIO MANAGEMENT & INVESTMENT
DECISION so as to examine the role, process and merits of effective investment
management and decision.

DEFINITIONS OF PORTFOLIO
1) InvestorsWords.com
A collection of investments (all) owned by the same individual or organization.
These investments often include stocks, which are investments in individual
businesses; bonds, which are investments in debt that are designed to earn interest;
and mutual funds, which are essentially pools of money from many investors that are
invested by professionals or according to indices.
2) Financial Dictionary and WikiAnswers.com
A collection of various company shares, fixed interest securities or money-market
instruments. People may talk grandly of 'running a portfolio' when they own a couple
of shares but the characteristic of a serious investment portfolio is diversity. It should
show a spread of investments to minimize risk - brokers and investment advisers
warn against 'putting all your eggs in one basket'.

3) YourDictionary.com
a) All the securities held for investment as by an individual, bank, investment
company, etc.
b) A list of such securities.

DEFINITIONS OF PORTFOLIO MANAGEMENT

1) Investorswords.com
The process of managing the assets of a mutual fund, including choosing and
monitoring appropriate investments and allocating funds accordingly.
2) Investor Glossary
Determining the mix of assets to hold in a portfolio is referred to as portfolio
management. A fundamental aspect of portfolio management is choosing assets
which are consistent with the portfolio holder's investment objectives and risk
tolerance. The ultimate goal of portfolio management is to achieve the optimum
return for a given level of risk. Investors must balance risk and performance in
making portfolio management decisions. Portfolio management strategies may be
either active or passive. An investor who prefers passive portfolio management will
likely choose to invest in low cost index funds with the goal of mirroring the market's
performance. An investor who prefers active portfolio management will choose
managed funds which have the potential to outperform the market. Investors are
generally charged higher initial fees and annual management fees for active portfolio
management.
3) Financial Dictionary
Managing a large single portfolio or being employed by its owner to do so.
Portfolio managers have the knowledge and skill which encourage people to put their
investment decisions in the hands of a professional (for a fee).

DEFINITION OF DISCRETIONARY PORTFOLIO MANAGEMENT

BusinessDictionary.com
Investment account arrangement in which an investment manager makes the
buy-sell decisions without referring to the account owner (client) for every
transaction. The manager, however, must operate within the agreed upon limits to
achieve the client's stated investment objectives.
DEFINITIONS OF PROJECT PORTFOLIO MANAGEMENT
1) Internet.com Webopedia
PPM, short for project portfolio management, refers to a software package that
enables corporate and business users to organize a series of projects into a single
portfolio that will provide reports based on the various project objectives, costs,
resources, risks and other pertinent associations. Project portfolio management
software allows the user, usually management or executives within the company, to
review the portfolio which will assist in making key financial and business decisions
for the projects.
2) Bitpipe.com
Project portfolio management organizes a series of projects into a single portfolio
consisting

of

reports

that

capture

project

objectives,

costs,

timelines,

accomplishments, resources, risks and other critical factors. Executives can then
regularly review entire portfolios, spread resources appropriately and adjust projects
to produce the highest departmental returns. Also called as Enterprise Project
management and PPM

MEANING OF PORTFOLIO MANAGERS

Portfolio manager means any person who enters into a contract or arrangement with a
client. Pursuant to such arrangement he advises the client or undertakes on behalf of such
client management or administration of portfolio of securities or invests or manages the
clients funds.
A discretionary portfolio manager means a portfolio manager who exercises or may
under a contract relating to portfolio management, exercise any degree of discretion in
respect of the investment or management of portfolio of the portfolio securities or the
funds of the client, as the case may be. He shall independently or individually manage the
funds of each client in accordance with the needs of the client in a manner which does not
resemble the mutual fund.
A non discretionary portfolio manager shall manage the funds in accordance with the
directions of the client.
A portfolio manager by virtue of his knowledge, background and experience is
expected to study the various avenues available for profitable investment and advise his
client to enable the latter to maximize the return on his investment and at the same time
safeguard the funds invested.

SCOPE OF PORTFOLIO MANAGEMENT:

Portfolio management is an art of putting money in fairly safe, quite profitable and
reasonably in liquid form. An investors attempt to find the best combination of risk and
return is the first and usually the foremost goal. In choosing among different investment
opportunities the following aspects risk management should be considered:
a) The selection of a level or risk and return that reflects the investors tolerance for
risk and desire for return, i.e. personal preferences.
b) The management of investment alternatives to expand the set of opportunities
available at the investors acceptable risk level.
The very risk-averse investor might choose to invest in mutual funds. The more risktolerant investor might choose shares, if they offer higher returns. Portfolio management
in India is still in its infancy. An investor has to choose a portfolio according to his
preferences. The first preference normally goes to the necessities and comforts like
purchasing a house or domestic appliances. His second preference goes to some
contractual obligations such as life insurance or provident funds. The third preference goes
to make a provision for savings required for making day to day payments. The next
preference goes to short term investments such as UTI units and post office deposits
which provide easy liquidity. The last choice goes to investment in company shares and
debentures. There are number of choices and decisions to be taken on the basis of the
attributes of risk, return and tax benefits from these shares and debentures. The final
decision is taken on the basis of alternatives, attributes and investor preferences.
For most investors it is not possible to choose between managing ones own portfolio.
They can hire a professional manager to do it. The professional managers provide a
variety of services including diversification, active portfolio management, liquid securities
and performance of duties associated with keeping track of investors money.

NEED FOR PORTFOLIO MANAGEMENT:

Portfolio management is a process encompassing many activities of investment in
assets and securities. It is a dynamic and flexible concept and involves regular and
systematic analysis, judgment and action. The objective of this service is to help the
unknown and investors with the expertise of professionals in investment portfolio
management. It involves construction of a portfolio based upon the investors objectives,
constraints, preferences for risk and returns and tax liability. The portfolio is reviewed and
adjusted from time to time in tune with the market conditions. The evaluation of portfolio
is to be done in terms of targets set for risk and returns. The changes in the portfolio are to
be effected to meet the changing condition.
Portfolio construction refers to the allocation of surplus funds in hand among a variety
of financial assets open for investment. Portfolio theory concerns itself with the principles
governing such allocation. The modern view of investment is oriented more go towards
the assembly of proper combination of 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.
The modern theory is the view that by diversification risk can be reduced.
Diversification can be made by the investor either by having a large number of shares of
companies in different regions, in different industries or those producing different types of
product lines. Modern theory believes in the perspective of combination of securities
under constraints of risk and returns.

OBJECTIVES OF PORTFOLIO MANAGEMENT:

The major objectives of portfolio management are summarized as below:-

1) Security/Safety of Principal: Security not only involves keeping the principal

sum intact but also keeping intact its purchasing power intact.

2) Stability of Income: So as to facilitate planning more accurately and

systematically the reinvestment consumption of income.

3) Capital Growth: This can be attained by reinvesting in growth securities or

through purchase of growth securities.

4) Marketability: i.e. is the case with which a security can be bought or sold. This is
essential for providing flexibility to investment portfolio.

5) Liquidity i.e. Nearness to Money: It is desirable to investor so as to take

advantage of attractive opportunities upcoming in the market.

6) Diversification: The basic objective of building a portfolio is to reduce risk of loss

of capital and / or income by investing in various types of securities and over a
wide range of industries.

7) Favorable Tax Status: The effective yield an investor gets form his investment
depends on tax to which it is subject. By minimizing the tax burden, yield can be
effectively improved.

10

BASIC PRINCIPLES OF PORTFOLIO MANAGEMENT:

There are two basic principles for effective portfolio management which are given
below:I. Effective investment planning for the investment in securities by considering
the following factors-

a) Fiscal, financial and monetary policies of the Govt. of India and the
Reserve Bank of India.
b) Industrial

and

economic

environment

and

its

impact

on

industry.

Prospect in terms of prospective technological changes, competition in the

market, capacity utilization with industry and demand prospects etc.

II. Constant Review of Investment: It requires to review the investment in securities

and to continue the selling and purchasing of investment in more profitable manner.
For this purpose they have to carry the following analysis:

a) To assess the quality of the management of the companies in which investment

has been made or proposed to be made.

b) To assess the financial and trend analysis of companies Balance Sheet and Profit
and Loss Accounts to identify the optimum capital structure and better
performance for the purpose of withholding the investment from poor companies.

c) To analyze the security market and its trend in continuous basis to arrive at a
conclusion as to whether the securities already in possession should be
disinvested and new securities be purchased. If so the timing for investment or
dis-investment is also revealed.

11

CHAPTER 2
TYPES OF PORTFOLIO MANAGEMENT

There are various types of portfolio management:

Investment Management
IT Portfolio Management
Project Portfolio Management

1. INVESMENT MANAGEMENT:
Investment management is the professional management of various securities
(shares, bonds etc.) and assets (e.g., real estate), to meet specified investment goals for
the benefit of the investors. Investors may be institutions (insurance companies, pension
funds, corporations etc.) or private investors (both directly via investment contracts and
more commonly via collective investment schemes e.g. mutual funds or Exchange
Traded Funds).
The term asset management is often used to refer to the investment management of
collective investments, (not necessarily) whilst the more generic fund management may
refer to all forms of institutional investment as well as investment management for
private investors. Investment managers who specialize in advisory or discretionary
management on behalf of (normally wealthy) private investors may often refer to their
services as wealth management or portfolio management often within the context of
so-called "private banking".
Fund manager (or investment adviser in the U.S.) refers to both a firm that
provides investment management services and an individual who directs fund
management decisions.

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2. IT PORTFOLIO MANAGEMENT:
IT portfolio management is the application of systematic management to large
classes of items managed by enterprise Information Technology (IT) capabilities.
Examples of IT portfolios would be planned initiatives, projects, and ongoing IT services
(such as application support). The promise of IT portfolio management is the
quantification of previously mysterious IT efforts, enabling measurement and objective
evaluation of investment scenarios.

The concept is analogous to financial portfolio management, but there are significant
differences. IT investments are not liquid, like stocks and bonds (although investment
portfolios may also include illiquid assets), and are measured using both financial and
non-financial yardsticks (for example, a balanced scorecard approach); a purely financial
view is not sufficient.
At its most mature, IT Portfolio management is accomplished through the creation of
two portfolios:
(i) Application Portfolio - Management of this portfolio focuses on comparing
spending on established systems based upon their relative value to the organization.
The comparison can be based upon the level of contribution in terms of IT
investments profitability. Additionally, this comparison can also be based upon the

13

non-tangible factors such as organizations level of experience with a certain

technology, users familiarity with the applications and infrastructure, and external
forces such as emergence of new technologies and obsolesce of old ones.

(ii) Project Portfolio - This type of portfolio management specially address the issues
with spending on the development of innovative capabilities in terms of potential
ROI and reducing investment overlaps in situations where reorganization or
acquisition occurs. The management issues with the second type of portfolio
management can be judged in terms of data cleanliness, maintenance savings, and
suitability of resulting solution and the relative value of new investments to replace
these projects.

3. PROJECT PORTFOLIO MANAGEMENT:

Project portfolio management organizes a series of projects into a single portfolio
consisting of reports that capture project objectives, costs, timelines, accomplishments,
resources, risks and other critical factors. Executives can then regularly review entire
portfolios, spread resources appropriately and adjust projects to produce the highest
departmental returns.
Project management is the discipline of planning, organizing and managing resources
to bring about the successful completion of specific project goals and objectives.
A project is a finite endeavor (having specific start and completion dates) undertaken
to create a unique product or service which brings about beneficial change or added
value. This finite characteristic of projects stands in contrast to processes, or operations,
which are permanent or semi-permanent functional work to repetitively produce the same
product or service. In practice, the management of these two systems is often found to be
quite different, and as such requires the development of distinct technical skills and the
adoption of separate management.

14

CHAPTER: 3
PORTFOLIO MANAGEMENT PROCESS

(A) THERE ARE THREE MAJOR ACTIVITIES INVOLVED IN AN EFFICIENT

PORTFOLIO MANAGEMENT WHICH ARE AS FOLLOWS:a) Identification of assets or securities, allocation of investment and also identifying
the classes of assets for the purpose of investment.

b) They have to decide the major weights, proportion of different assets in the
portfolio by taking in to consideration the related risk factors.

c) Finally they select the security within the asset classes as identify.

The above activities are directed to achieve the sole purpose of maximizing return and
minimizing risk on investment.
It is well known fact that portfolio manager balances the risk and return in a portfolio
investment. With higher risk higher return may be expected and vice versa.

(B)

INVESTMENT DECISION:

Given a certain sum of funds, the investment decisions basically depend upon the
following factors:I. Objectives of Investment Portfolio: This is a crucial point which a Finance
Manager must consider. There can be many objectives of making an investment.
The manager of a provident fund portfolio has to look for security and may be
satisfied with none too high a return, where as an aggressive investment company
be willing to take high risk in order to have high capital appreciation.

15

How the objectives can affect in investment decision can be seen from the fact
that the Unit Trust of India has two major schemes : Its capital units are meant for
those who wish to have a good capital appreciation and a moderate return, where as
the ordinary unit are meant to provide a steady return only. The investment manager
under both the scheme will invest the money of the Trust in different kinds of
shares and securities. So it is obvious that the objectives must be clearly defined
before an investment decision is taken.
II. Selection of Investment: Having defined the objectives of the investment, the next
decision is to decide the kind of investment to be selected. The decision what to buy
has to be seen in the context of the following:-

a) There is a wide variety of investments available in market i.e. Equity shares,

preference share, debentures, convertible bond, Govt. securities and bond, capital
units etc. Out of these what types of securities to be purchased.

b) What should be the proportion of investment in fixed interest dividend securities

and variable dividend bearing securities? The fixed one ensures a definite return
and thus a lower risk but the return is usually not as higher as that from the
variable dividend bearing shares.
c) If the investment is decided in shares or debentures, then the industries showing a
potential in growth should be taken in first line. Industry-wise-analysis is
important since various industries are not at the same level from the investment
point of view. It is important to recognize that at a particular point of time, a
particular industry may have a better growth potential than other industries. For
example, there was a time when jute industry was in great favour because of its
growth potential and high profitability, the industry is no longer at this point of
time as a growth oriented industry.

16

d) Once industries with high growth potential have been identified, the next step is to
select the particular companies, in whose shares or securities investments are to
be made.

17

FUNDAMENTAL ANALYSIS:

(A) FUNDAMENTAL ANALYSIS OF GROWTH ORIENTED COMPANIES:

One of the first decisions that an investment manager faces is to identify the industries
which have a high growth potential. Two approaches are suggested in this regard. They
are:
a) Statistical Analysis of Past Performance:
A statistical analysis of the immediate past performance of the share price indices of
various industries and changes there in related to the general price index of shares of all
industries should be made. The Reserve Bank of India index numbers of security prices
published every month in its bulletin may be taken to represent the behaviour of share
prices of various industries in the last few years. The related changes in the price index of
each industry as compared with the changes in the average price index of the shares of all
industries would show those industries which are having a higher growth potential in the
past few years. It may be noted that an Industry may not be remaining a growth Industry
for all the time. So he shall now have to make an assessment of the various Industries
keeping in view the present potentiality also to finalize the list of Industries in which he
will try to spread his investment.
b) Assessing the Intrinsic Value of an Industry/Company:
After an investment manager has identified statistically the industries in the share of
which the investors show interest, he would assess the various factors which influence the
value of a particular share. These factors generally relate to the strengths and weaknesses
of the company under consideration, Characteristics of the industry within which the
company fails and the national and international economic scene. It is the job of the
investment manager to examine and weigh the various factors and judge the quality of the
share or the security under consideration. This approach is known as the intrinsic value
approach.

18

The major objective of the analysis is to determine the relative quality and the quantity of
the security and to decide whether or not is security is good at current markets prices. In
this, both qualitative and quantitative factors are to be considered.

(B)

INDUSTRY ANALYSIS

First of all, an assessment will have to be made regarding all the conditions and factors
relating to demand of the particular product, cost structure of the industry and other
economic and Government constraints on the same. As we have discussed earlier, an
appraisal of the particular industrys prospect is essential and the basic profitability of
any company is dependent upon the economic prospect of the industry to which it
belongs. The following factors may particularly be kept in mind while assessing to
factors relating to an industry.

(i)

Demand and Supply Pattern for the Industries Products and Its Growth
Potential: The main important aspect is to see the likely demand of the products of
the industry and the gap between demand and supply. This would reflect the future
growth prospects of the industry. In order to know the future volume and the value of
the output in the next ten years or so, the investment manager will have to rely on the
various demand forecasts made by various agencies like the planning commission,
Chambers of Commerce and institutions like NCAER, etc.
The management expert identifies fives stages in the life of an industry. These are
Introduction, development, rapid growth, maturity and decline. If an industry has

19

already reached the maturity or decline stage, its future demand potential is not likely
to be high.

(i) Profitability: It is a vital consideration for the investors as profit is the measure of
performance and a source of earning for him. So the cost structure of the industry as
related to its sale price is an important consideration. In India there are many industries
which have a growth potential on account of good demand position. The other point to
be considered is the ratio analysis, especially return on investment, gross profit and net
profit ratio of the existing companies in the industry. This would give him an idea about
the profitability of the industry as a whole.

(ii) Particular Characteristics of the Industry: Each industry has its own characteristics,
which must be studied in depth in order to understand their impact on the working of
the industry. Because the industry having a fast changing technology become obsolete
at a faster rate. Similarly, many industries are characterized by high rate of profits and
losses in alternate years. Such fluctuations in earnings must be carefully examined.
(iii) Labour Management Relations in the Industry: The state of labour-management
relationship in the particular industry also has a great deal of influence on the future
profitability of the industry. The investment manager should, therefore, see whether the
industry under analysis has been maintaining a cordial relationship between labour and
management.
Once the industrys characteristics have been analyzed and certain industries with growth
potential identified, the next stage would be to undertake and analyze all the factors
which show the desirability of various companies within an industry group from
investment point of view.

20

(C)

COMPANY ANALYSIS:

To select a company for investment purpose a number of qualitative factors have to be

seen. Before purchasing the shares of the company, relevant information must be
collected and properly analyzed. An illustrative list of factors which help the analyst
in taking the investment decision is given below. However, it must be emphasized that
the past performance and information is relevant only to the extent it indicates the future
trends. Hence, the investment manager has to visualize the performance of the company
in future by analyzing its past performance.

1) Size and Ranking: A rough idea regarding the size and ranking of the company
within the economy, in general, and the industry, in particular, would help the
investment manager in assessing the risk associated with the company. In this
regard the net capital employed, the net profits, the return on investment and the
sales volume of the company under consideration may be compared with similar
data of other company in the same industry group. It may also be useful to assess
the position of the company in terms of technical knowhow, research and
development activity and price leadership.

2) Growth Record: The growth in sales, net income, net capital employed and
earnings per share of the company in the past few years must be examined. The
following three growth indicators may be particularly looked in to (a) Price
earnings ratio, (b) Percentage growth rate of earnings per annum and (c)
Percentage growth rate of net block of the company. The price earnings ratio is an
important indicator for the investment manager since it shows the number the
times the earnings per share are covered by the market price of a share.
Theoretically, this ratio should be same for two companies with similar features.
However, this is not so in practice due to many factors. Hence, by a comparison
of this ratio pertaining to different companies the investment manager can have an
idea about the image of the company and can determine whether the share is
under-priced or over-priced. An evaluation of future growth prospects of the
21

company should be carefully made. This requires the analysis of the existing
capacities and their utilization, proposed expansion and diversification plans and
the nature of the companys technology.

The existing capacity utilization levels can be known from the quantitative
information given in the published profit and loss accounts of the company. The
plans of the company, in terms of expansion or diversification, can be known
from the directors reports the chairmans statements and from the future capital
commitments as shown by way of notes in the balance sheets. The nature of
technology of a company should be seen with reference to technological
developments in the concerned fields, the possibility of its product being
superseded of the possibility of emergence of more effective method of
manufacturing.
Growth is the single most important factor in company analysis for the purpose of
investment management. A company may have a good record of profits and
performance in the past; but if it does not have growth potential, its shares cannot
be rated high from the investment point of view.

(D)

FINANCIAL ANALYSIS:

An analysis of financial for the past few years would help the investment manager in
understanding the financial solvency and liquidity, the efficiency with which the funds
are used, the profitability, the operating efficiency and operating leverages of the
company. For this purpose certain fundamental ratios have to be calculated.
From the investment point of view, the most important figures are earnings per share,
price earnings ratios, yield, book value and the intrinsic value of the share. The five
elements may be calculated for the past ten years or so and compared with similar ratios
computed from the financial accounts of other companies in the industry and with the
average ratios of the industry as a whole. The yield and the asset backing of a share are
important considerations in a decision regarding whether the particular market price of
the share is proper or not.
22

Various other ratios to measure profitability, operating efficiency and turnover efficiency
of the company may also be calculated. The return on owners investment, capital
turnover ratio and the cost structure ratios may also be worked out. To examine the
financial solvency or liquidity of the company, the investment manager may work out
current ratio, liquidity ratio, debt equity ratio, etc. These ratios will provide an overall
view of the company to the investment analyst. He can analyze its strengths and
weakness and see whether it is worth the risk or not.
(i) Quality of Management: This is an intangible factor. Yet it has a very important
bearing on the value of the shares. Every investment manager knows that the shares
of certain business houses command a higher premium than those of similar
companies managed by other business houses. This is because of the quality of
management, the confidence that the investors have in a particular business house,
its policy vis--vis its relationship with the investors, dividend and financial
performance record of other companies in the same group, etc.

This is perhaps the reason that an investment manager always gives a close look to
the management of the company whose shares he is to invest. Quality of
management has to be seen with reference to the experience, skill and integrity of
the persons at the helm of the affairs of the company. The policy of the
management regarding relationship with the share holders is an important factor
since certain business houses believe in generous dividend and bonus distributions
while others are rather conservative.

(ii) Location and labour management relations: The locations of the companys
manufacturing facilities determine its economic viability which depends on the
availability of crucial inputs like power, skilled labour and raw materials etc.
Nearness to market is also a factor to be considered.
In the past few years, the investment manager has begun looking into the state of
labour management relations in the company under consideration and the area
where it is located.
23

(iii) Pattern of Existing Stock Holding: An analysis of the pattern of the existing stock
holdings of the company would also be relevant. This would show the stake of
various parties associated with the company. An interesting case in this regard is
that of the Punjab National Bank in which the L.I.C. and other financial institutions
had substantial holdings. When the bank was nationalized, the residual company
proposed a scheme whereby those shareholders, who wish to opt out, could receive
a certain amount as compensation in cash. It was only at the instant and bargaining
strength of institutional investors that the compensation offered to the shareholders,
who wish to opt out of the company, was raised considerably.

(iv) Marketability of the Shares: Another important consideration for an investment

manager is the marketability of the shares of the company. Mere listing of the share
on the stock exchange does not automatically mean that the share can be sold or
purchased at will. There are many shares which remain inactive for long periods
with no transactions being affected.
To purchase or sell such scripts is a difficult task. In this regard, dispersal of share
holding with special reference to the extent of public holding should be seen. The
other relevant factors are the speculative interest in the particular scrip, the
particular stock exchange where it is traded and the volume of trading.

Fundamental analysis thus is basically an examination of the economics and financial

aspects of a company with the aim of estimating future earnings and dividend prospect. It
included an analysis of the macro economic and political factors which will have an
impact on the performance of the firm. After having analyzed all the relevant information
about the company and its relative strength vis--vis other firm in the industry, the
investor is expected to decide whether he should buy or sell the securities.

24

(C)

TIMING OF PURCHASES:-

The timing of dealings in the securities, specially shares is of crucial importance,

because after correctly identifying the companies one may lose money if the timing is bad
due to wide fluctuation in the price of shares of that companies.
The decision regarding timing of purchases is particularly difficult because of certain
psychological factors. It is obvious that if a person wishes to make any gains, he should
buy cheap and sell dear, i.e. buy when the share are selling at a low price and sell when
they are at a higher price. But in practical it is a difficult task.
When the prices are rising in the market i.e. there is bull phase, everybody joins in
buying without any delay because every day the prices touch a new high. Later when the
bear face starts, prices tumble down every day and everybody starts counting the losses.
The ordinary investor regretted such situation by thinking why he did not sell his shares
in previous day and ultimately sell at a lower price. This kind of investment decision is
entirely devoid of any sense of timing.
In short we can conclude by saying that Investment management is a complex
activity which may be broken down into the following steps:
1) Specification Of Investment Objectives And Constraints:
The typical objectives sought by investors are current income, capital appreciation,
and safety of principle.

The relative importance of these objectives should be

specified further the constraints arising from liquidity, time horizon, tax and special
circumstances must be identified.
2) Choice Of The Asset Mix :
The most important decision in portfolio management is the asset mix decision
very broadly; this is concerned with the proportions of stocks (equity shares and
units/shares of equity-oriented mutual funds) and bonds in the portfolio.
The appropriate stock-bond mix depends mainly on the risk tolerance and
investment horizon of the investor.

25

ELEMENTS OF PORTFOLIO MANAGEMENT:

Portfolio management is on-going process involving the following basic tasks:

Identification of the investors objectives, constraints and preferences.
Strategies are to be developed and implemented in tune with investment policy
formulated.
Review and monitoring of the performance of the portfolio.
Finally the evaluation of the portfolio

Techniques Of Portfolio Management:

As of now the under noted technique of portfolio management: are in vogue in our
country.
1) Equity Portfolio: It is influenced by internal and external factors the internal
factors affect the inner working of the companys growth plans are analyzed with
referenced to Balance sheet, profit & loss a/c (account) of the company.
Among the external factor are changes in the government policies, Trade cycles,
Political stability etc.
2) Equity Stock Analysis: Under this method the probable future value of a share of
a company is determined it can be done by ratios of earning per share of the
company and price earnings ratio
EARNING PER SHARE = _ PROFIT AFTER TAX__
NO. OF EQUITY SHARES

PRICE EARNING RATIO = _MARKET PRICE (PER SHARE) _

EARNING PER SHARE

26

One can estimate trend of earning by EPS, which reflects trends of earning quality of
company, dividend policy, and quality of management.
Price Earnings ratio indicate a confidence of market about the company future, a high
rating is preferable.
The following points must be considered by portfolio managers while analyzing the
securities.
1) Nature of the industry and its product: Long term trends of industries,
competition within, and outside the industry, Technical changes, labour relations,
sensitivity, to Trade cycle.

2) Industrial analysis of prospective earnings, cash flows, working capital,

dividends, etc.

3) Ratio analysis: Ratios such as debt equity ratio, current ratio, net worth, profit
earnings ratio, returns on investment, are worked out to decide the portfolio.

The wise principle of portfolio management suggests that Buy when the market is
low or BEARISH, and sell when the market is rising or BULLISH.
Stock market operation can be analyzed by:
a) Fundamental approach: - Based on intrinsic value of shares.
b) Technical approach: - Based on Dow Jones Theory, Random Walk Theory, etc.

Prices are based upon demand and supply of the market.

Objectives are maximization of wealth and minimization of risk.

Diversification reduces risk and volatility.

Variable returns, high illiquidity; etc.

27

CHAPTER - 4
RISK RETURN ANALYSIS
RISK ON PORTFOLIO:
The expected returns from individual securities carry some degree of risk. Risk on the
portfolio is different from the risk on individual securities. The risk is reflected in the
variability of the returns from zero to infinity. Risk of the individual assets or a portfolio is
measured by the variance of its return. The expected return depends on the probability of
the returns and their weighted contribution to the risk of the portfolio. These are two
measures of risk in this context one is the absolute deviation and other standard deviation.
Most investors invest in a portfolio of assets, because as to spread risk by not putting
all eggs in one basket. Hence, what really matters to them is not the risk and return of
stocks in isolation, but the risk and return of the portfolio as a whole. Risk is mainly
reduced by Diversification.

Following are the some of the types of Risk:

1) Interest Rate Risk: This arises due to the variability in the interest rates from time
to time. A change in the interest rate establishes an inverse relationship in the price
of the security i.e. price of the security tends to move inversely with change in rate
of interest, long term securities show greater variability in the price with respect to
interest rate changes than short term securities.

Interest rate risk vulnerability for different securities is as under:

TYPES

RISK EXTENT

Cash Equivalent

Less vulnerable to interest rate risk.

Long Term Bonds

More vulnerable to interest rate risk.

28

2) Purchasing Power Risk: It is also known as inflation risk also emanates from the
very fact that inflation affects the purchasing power adversely. Nominal return
contains both the real return component and an inflation premium in a transaction
involving risk of the above type to compensate for inflation over an investment
holding period. Inflation rates vary over time and investors are caught unaware
when rate of inflation changes unexpectedly causing erosion in the value of
realized rate of return and expected return.
Purchasing power risk is more in inflationary conditions especially in respect of
bonds and fixed income securities. It is not desirable to invest in such securities
during inflationary periods. Purchasing power risk is however, less in flexible
income securities like equity shares or common stock where rise in dividend
income off-sets increase in the rate of inflation and provides advantage of capital
gains.

3) Business Risk: Business risk emanates from sale and purchase of securities
affected by business cycles, technological changes etc. Business cycles affect all
types of securities i.e. there is cheerful movement in boom due to bullish trend in
stock prices whereas bearish trend in depression brings down fall in the prices of
all types of securities during depression due to decline in their market price.

4) Financial Risk: It arises due to changes in the capital structure of the company. It
is also known as leveraged risk and expressed in terms of debt-equity ratio. Excess
of risk vis--vis equity in the capital structure indicates that the company is highly
geared. Although a leveraged companys earnings per share are more but
dependence on borrowings exposes it to risk of winding up for its inability to
honor its commitments towards lender or creditors. The risk is known as leveraged
or financial risk of which investors should be aware and portfolio managers should
be very careful.

5) Systematic Risk or Market Related Risk: Systematic risks affected from the
entire market are (the problems, raw material availability, tax policy or
29

government policy, inflation risk, interest risk and financial risk). It is managed by
the use of Beta of different company shares.

6) Unsystematic Risks: The unsystematic risks are mismanagement, increasing

inventory, wrong financial policy, defective marketing etc. this is diversifiable or
avoidable because it is possible to eliminate or diversify away this component of
risk to a considerable extent by investing in a large portfolio of securities. The
unsystematic risk stems from inefficiency magnitude of those factors different
form one company to another.
RISK RETURN ANALYSIS:
All investment has some risk. Investment in shares of companies has its own risk or
uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or
depreciation of share prices, losses of liquidity etc
The risk over time can be represented by the variance of the returns while the return
over time is capital appreciation plus payout, divided by the purchase price of the share.

Normally, the higher the risk that the investor takes, the higher is the return. There is,
however, a risk less return on capital of about 12% which is the bank, rate charged by the
R.B.I or long term, yielded on government securities at around 13% to 14%. This risk
30

less return refers to lack of variability of return and no uncertainty in the repayment or
capital. But other risks such as loss of liquidity due to parting with money etc., may
however remain, but are rewarded by the total return on the capital.
Risk-return is subject to variation and the objectives of the portfolio manager are to
reduce that variability and thus reduce the risk by choosing an appropriate portfolio.
Traditional approach advocates that one security holds the better, it is according to the
modern approach diversification should not be quantity that should be related to the
quality of scripts which leads to quality of portfolio.
Experience has shown that beyond the certain securities by adding more securities
expensive.
RETURNS ON PORTFOLIO:
Each security in a portfolio contributes return in the proportion of its investments in
security. Thus the portfolio expected return is the weighted average of the expected return,
from each of the securities, with weights representing the proportions share of the security
in the total investment. Why does an investor have so many securities in his portfolio? If
the security ABC gives the maximum return why not he invests in that security all his
funds and thus maximize return? The answer to this questions lie in the investors
perception of risk attached to investments, his objectives of income, safety, appreciation,
liquidity and hedge against loss of value of money etc. this pattern of investment in
different asset categories, types of investment, etc., would all be described under the
caption of diversification, which aims at the reduction or even elimination of nonsystematic risks and achieve the specific objectives of investors.

31

CHAPTER: 5
PORTFOLIO THEORIES
I. DOW JONES THEORY:
The DOW JONES THEORY is probably the most popular theory regarding the
behavior of stock market prices. The theory derives its name from Charles H. Dow, who
established the Dow Jones & Co. and was the first editor of the Wall Street Journal a
leading publication on financial and economic matters in the U.S.A. Although Dow never
gave a proper shape to the theory, ideas have been expanded and articulated by many of
his successors.
The Dow Jones theory classifies the movement of the prices on the share market into
three major categories:
1. Primary Movements,
2. Secondary Movements and
3. Daily Fluctuations.
1) Primary Movements: They reflect the trend of the stock market and last from
one year to three years, or sometimes even more. If the long range behavior of
market prices is seen, it will be observed that the share markets go through
definite phases where the prices are consistently rising or falling. These phases
are known as bull and bear phases.
P3
P2
P1

T3
T2

T1
Graph 1

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During a bull phase, the basic trend is that of rise in prices. Graph 1 above shows
the behavior of stock market prices in bull phase.
You would notice from the graph that although the prices fall after each rise, the
basic trend is that of rising prices. As can be seen from the graph that each trough
prices reach, is at a higher level than the earlier one. Similarly, each peak that the
prices reach is on a higher level than the earlier one. Thus P2 is higher than P1 and T2
is higher than T1. This means that prices do not rise consistently even in a bull phase.
They rise for some time and after each rise, they fall. However, the falls are of a lower
magnitude then earlier. As a result, prices reach higher levels with each rise.
Once the prices have risen very high, the bear phase in bound to start i.e., price
will start falling. Graph 2 shows the typical behavior of prices on the stock exchange
in the case of a
P3

P2
T1

P1
T2
T3

Graph 2
Bear phase. It would be seen that prices are not falling consistently and, after each
fall, there is a rise in prices. However, the rise is not much as to take the prices higher
than the previous peak. It means that each peak and trough is now lower than the
previous peak and trough.
The theory argues that primary movements indicate basic trends in the market. It
states that if cyclical swings of stock market prices indices are successively higher,
33

the market trend is up and there is a bull market. On the contrary, if successive highs
and low are successively lower, the market is on a downward trend and we are in bear
market. This theory thus relies upon a behavior of the indices of share market prices
in perceiving the trend in the market.
2) Secondary Movements: We have seen that even when the primary trend is
upward, there are also downward movements of prices. Similarly, even where the
primary trend is downward, there is upward movement of prices also. These
movements are known as secondary movements and are shorter in duration and
are opposite in direction to the primary movements. These movements normally
last from three weeks to three months and retrace 1/3 to 2/3 of the previous
advance in a bull market of previous fall in the bear market.

3) Daily Movements: There are irregular fluctuations which occur every day in the
market. These fluctuations are without any definite trend. Thus is the daily share
market price index for a few months are plotted on the graph it will show both
upward and downward fluctuations. These fluctuations are the result of
speculative factor. An investment manger really is not interested in the short run
fluctuations in share prices since he is not a speculator. It may be reiterated that
anyone who tries to gain from short run fluctuations in the stock market, can
make money only be sheer chance. The investment manager should scrupulously
keep away from the daily fluctuations of the market. He is not a speculator and
should always resist the temptation of speculating. Such a temptation is always
very attractive but must always be resisted. Speculation is beyond the scope of the
job of an investment manager.

Timing of investment decisions on the basis of Dow Jones Theory:

Ideally speaking the investment manage would like to purchase shares at a time when
they have reached the lowest trough and sell them at a time when they reach the highest
peak. However, in practice, this seldom happens. Even the most astute investment
manager can never know when the highest peak or the lowest through have been reached.
34

Therefore, he has to time his decision in such a manner that he buys the shares when they
are on the rise and sells then when they are on the fall. It means that he should be able to
identify exactly when the falling or the rising trend has begun.
This is technically known as identification of the turn in the share market prices.
Identification of this turn is difficult in practice because of the fact that, even in a rising
market, prices keep on falling as a part of the secondary movement. Similarly even in a
falling market prices keep on rising temporarily. How to be certain that the rise in prices
or fall in the same in due to a real turn in prices from a bullish to a bearish phase or vice
versa or that it is due only to short run speculative trends?
Dow Jones Theory identifies the turn in the market prices by seeing whether the
successive peaks and troughs are higher or lower than earlier.

II. RANDOM WALK THEORY:

The first specification of efficient markets and their relationship to the randomness of
prices for things traded in the market goes to Samuelson and Mandelbrot. Samuelson
has proved in 1965 that if a market has zero transaction costs, if all available
information is free to all interested parties, and if all market participants and
potential participants have the same horizons and expectations about prices, the
market will be efficient and prices will fluctuate randomly.
According to the Random Walk Theory, the changes in prices of stock show
independent behavior and are dependent on the new pieces of information that are
received but within themselves are independent of each other. Whenever a new price of
information is received in the stock market, the market independently receives this
information and it is independent and separate from all the other prices of information. For
example, a stock is selling at Rs. 40 based on existing information known to all investors.
Afterwards, the news of a strike in that company will bring down the stock price to Rs. 30
the next day. The stock price further goes down to Rs. 25. Thus, the first fall in stock price
from Rs. 40 to Rs. 30 is caused because of some information about the strike. But the
35

second fall in the price of a stock from Rs. 30 to Rs. 25 is due to additional information on
the type of strike. Therefore, each price change is independent of the other because each
information has been taken in, by the stock market and separately disseminated. However,
independent pieces of information, when they come together immediately after each other
show that the price is falling but each price fall is independent of the other price fall.
The basic essential fact of the Random Walk Theory is that the information on stock
prices is immediately and fully spread over that other investors have full knowledge of the
information. The response makes the movement of prices independent of each other. Thus,
it may be said that the prices have an independent nature and therefore, the price of each
day is different. The theory further states that the financial markets are so competitive that
there is immediate price adjustment. It is due to the effective communication system
through which information can be disturbed almost anywhere in the country. This speed of
information determines the efficiency of the market.
III. CAPITAL ASSETS PRICING MODEL (CAPM): CAPM provides a conceptual
framework for evaluating any investment decision. It is used to estimate the
expected return of any portfolio with the following formula:
E (Rp) = Rf +Bp (E( Rm) Rf )
Where,
E(Rp)

Expected return of the portfolio

Rf

Risk free rate of return

Bp

Beta portfolio i.e. market sensitivity index

E(Rm)

Expected return on market portfolio

[E(Rm)-Rf] = Market risk premium

The above model of portfolio management can be used effectively to:-

36

Estimate the required rate of return to investors on companys common stock.

Evaluate risky investment projects involving real Assets.

Explain why the use of borrowed fund increases the risk and increases the rate of
return.

Reduce the risk of the firm by diversifying its project portfolio.

IV. MOVING AVERAGE: It refers to the mean of the closing price which changes
constantly and moves ahead in time, there by encompasses the most recent days and
deletes the old one.

V. MODERN PORTFOLIO THEORY: Modern Portfolio Theory quantifies the

relationship between risk and return and assumes that an investor must be
compensated for assuming risk. It believes in the maximization of return through a
combination of securities. The theory states that by combining securities of low
risks with securities of high risks success can be achieved in making a choice of
investments. There can be various combinations of securities. The modern theory
points out that the risk of portfolio can be reduced by diversification. Harry
Markowitz and William Sharpe have developed this theory.

VI. MARKOWITZ THEORY: Markowitz has suggested a systematic search for

optimal portfolio. According to him, the portfolio manager has to make
probabilistic estimates of the future performances of the securities and analyse these
estimates to determine an efficient set of portfolios. Then the optimum set of
portfolio can be selected in order to suit the needs of the investors. The following
are the assumptions of Markowitz Theory:
Investors make decisions on the basis of expected utility maximization.
In an efficient market, all investors react with full facts about all securities
in the market.
Investors utility is the function of risk and return on securities.

37

 The security returns are co-related to each other by combining the different
securities.
The combination of securities is made in such a way that the investor gets
maximum return with minimum of risk.
An efficient portfolio exists, when there is lowest level of risk for a
specified level of expected return and highest expected return for a specified
amount of portfolio risk.
The risk of portfolio can be reduced by adding investments in the portfolio.

VII.

SHARPES THEORY: William Sharpe has suggested a simplified method of

diversification of portfolios. He has made the estimates of the expected return and
variance of indexes which are related to economic activity. Sharpes Theory
assumes that securities returns are related to each other only through common
relationships with basic underlying factor i.e. market return index. Individual
securities return is determined solely by random factors and on its relationship to
this underlying factor with the following formula:
Ri = ai + Bi I + ei

Where, Ri refers to expected return on security

ai = the intercept of a straight line or alpha coefficient
Bi = slope of straight-line or beta coefficient
I = level of market return index
ei = error, i.e. residual risk of the company.

38

RULES TO BE FOLLOWED BEFORE INVESTMENT IN PORTFOLIOS

1) Compile the financials of the companies in the immediate past 3 years such as
turnover, gross profit, net profit before tax, compare the profit earning of
company with that of the industry average nature of product manufacture service
render and it future demand ,know about the promoters and their back ground,
dividend track record, bonus shares in the past 3 to 5 years ,reflects companys
commitment to share holders the relevant information can be accessed from the
RDC (Registrant of Companies) published financial results financed quarters,
journals and ledgers.

2) Watch out the highs and lows of the scripts for the past 2 to 3 years and their
timing cyclical scripts have a tendency to repeat their performance, this
hypothesis can be true of all other financial,

3) The higher the trading volume higher is liquidity and still higher the chance of
speculation, it is futile to invest in such shares whos daily movements cannot be
kept track, if you want to reap rich returns keep investment over along horizon
and it will offset the wild intraday trading fluctuations, the minor movement of
scripts may be ignored, we must remember that share market moves in phases
and the span of each phase is 6 months to 5 years.

39

CHAPTER 6
PERSONS INVOLVED IN PORTFOLIO MANAGEMENT

1) INVESTOR:
Are the people who are interested in investing their funds?
2) PORTFOLIO MANAGERS:
Is a person who is in the wake of a contract agreement with a client, advices or directs
or undertakes on behalf of the clients, the management or distribution or management of
the funds of the client as the case may be.
3) DISCRETIONARY PORTFOLIO MANAGER:
Means a manager who exercise under a contract relating to a portfolio management
exercise any degree of discretion as to the investment or management of portfolio or
securities or funds of clients as the case may be. The relationship between an investor and
portfolio manager is of a highly interactive nature.
The portfolio manager carries out all the transactions pertaining to the investor under
the power of attorney during the last two decades, and increasing complexity was
witnessed in the capital market

and its trading procedures in this context

a key

(uninformed) investor formed ) investor found himself in a tricky situation , to keep

track of market movement ,update his knowledge, yet stay in the capital market and
make money , therefore in looked forward to resuming help from portfolio manager to
do the job for him . The portfolio management seeks to strike a balance between risks
and return.
The generally rule in that greater risk more of the profits but S.E.B.I. in its
guidelines prohibits portfolio managers to promise any return to investor.
Portfolio management is not a substitute to the inherent risks associated with equity
investment.
40

A PORTFOLIO MANAGER
Only those who are registered and pay the required license fee are eligible to operate
as portfolio managers. An applicant for this purpose should have necessary infrastructure
with professionally qualified persons and with a minimum of two persons with experience
in this business and a minimum net worth of Rs. 50lakhs. The certificate once granted is
valid for three years. Fees payable for registration are Rs 2.5lakhs every for two years and
Rs.1lakhs for the third year. From the fourth year onwards, renewal fees per annum are
Rs 75000. These are subjected to change by the S.E.B.I.

The S.E.B.I. has imposed a number of obligations and a code of conduct on them. The
portfolio manager should have a high standard of integrity, honesty and should not have
been convicted of any economic offence or moral turpitude. He should not resort to
rigging up of prices, insider trading or creating false markets, etc. their books of accounts
are subject to inspection to inspection and audit by S.E.B.I... The observance of the code
of conduct and guidelines given by the S.E.B.I. are subject to inspection and penalties for
violation are imposed. The manager has to submit periodical returns and documents as
may be required by the SEBI from time-to- time.

41

FUNCTIONS OF PORTFOLIO MANAGERS:

Advisory role: Advice new investments, review the existing ones,

identification of objectives, recommending high yield securities etc.

Conducting market and economic service: This is essential for

recommending good yielding securities they have to study the current fiscal policy,
budget proposal; individual policies etc further portfolio manager should take in to
account the credit policy, industrial growth, foreign exchange possible change in
corporate laws etc.

Financial analysis: He should evaluate the financial statement of company in

order to understand, their net worth future earnings, prospectus and strength.

Study of stock market : He should observe the trends at various stock

exchange and analysis scripts so that he is able to identify the right securities for
investment

Study of industry: He should study the industry to know its future prospects,
technical changes etc, required for investment proposal he should also see the
problems of the industry.

Decide the type of port folio: Keeping in mind the objectives of portfolio a
portfolio manager has to decide whether the portfolio should comprise equity
preference

shares,

debentures,

convertibles,

non-convertibles

or

partly

convertibles, money market, securities etc or a mix of more than one type of
proper mix ensures higher safety, yield and liquidity coupled with balanced risk
techniques of portfolio management.

A portfolio manager in the Indian context has been Brokers (Big brokers) who on the
basis of

their experience, market trends, Insider trader, helps the limited knowledge

persons.
The ones who use to manage the funds of portfolio, now being managed by the
portfolio of Merchant Banks, professionals like MBAs CAs And many financial
institutions have entered the market in a big way to manage portfolio for their clients.

42

According to S.E.B.I. rules it is mandatory for portfolio managers to get them selfs
registered.
Registered merchant bankers can acts as portfolio managers. Investors must look
forward, for qualification and performance and ability and research base of the portfolio
managers.
NEED AND ROLE OF PORTFOLIO MANAGER:
With the development of Indian Securities market and with appreciation in market
price of equity share of profit making companies, investment in the securities of such
companies has become quite attractive. At the same time, the stock market becoming
volatile on account of various facts, a layman is puzzled as to how to make his
investments without losing the same. He has felt the need of an expert guidance in this
respect. Similarly non resident Indians are eager to make their investments in Indian
companies. They have also to comply with the conditions specified by the RESERVE
BANK OF INDIA under various schemes for investment by the non residents. The
portfolio manager with his background and expertise meets the needs of such investors by
rendering service in helping them to invest their fund/s profitably.

PORTFOLIO MANAGERS OBLIGATION:

The portfolio manager has number of obligations towards his clients, some of them
are:

He shall transact in securities within the limit placed by the client himself with
regard to dealing in securities under the provisions of Reserve Bank of India Act,
1934.

He shall not derive any direct or indirect benefit out of the clients funds or
securities.

He shall not pledge or give on loan securities held on behalf of his client to a
third person without obtaining a written permission from such clients.

43

While dealing with his clients funds, he shall not indulge in speculative
transactions.

He may hold the securities in the portfolio account in his own name on behalf of
his clients only if the contract so provides. In such a case, his records and his
report to his clients should clearly indicate that such securities are held by him on
behalf of his client.

He shall deploy the money received from his client for an investment purpose as
soon as possible for that purpose.

He shall pay the money due and payable to a client forthwith.

He shall not place his interest above those of his clients.

He shall not disclose to any person or any confidential information about his
client, which has come to his knowledge.

44

CONCLUSION

From the above discussion it is clear that portfolio functioning is based on market risk, so
one can get the help from the professional portfolio manager or the Merchant banker if
required before investment because applicability of practical knowledge through
technical analysis can help an investor to reduce risk. In other words Security prices are
determined by money manager and home managers, students and strikers, doctors and
dog catchers, lawyers and landscapers, the wealthy and the wanting. This breadth of
market participants guarantees an element of unpredictability and excitement. If we were
all totally logical and could separate our emotions from our investment decisions then,
the determination of price based on future earnings would work magnificently. And since
we would all have the same completely logical expectations, price would only change
when quarterly reports or relevant news was released.

I believe the future is only the past again, entered through another gate Sir Arthur
wing Pinero. 1893.

If price are based on investors expectations, then knowing what a security should sell
for become less important than knowing what other investors expect it to sell for. There
are two times of a mans life when he should not speculate; when he cant afford it and
when he can Mark Twin, 1897.

A Casino make money on a roulette wheel, not by knowing what number will come
up next, but by slightly improving their odds with the addition of a 0 and 00. Yet
many investors buy securities without attempting to control the odds. If we believe that
this dealings is not a Gambling we have to start up it with intelligent way.

45

I can conclude from this project that portfolio management has become an important
service for the investors to identify the companies with growth potential. Portfolio
managers can provide the professional advice to the investors to make an intelligent and
informed investment.

Portfolio management role is still not identified in the recent time but due it
expansion of investors market and growing complexities of the investors the services of
the portfolio managers will be in great demand in the near future.

Today the individual investors do not show interest in taking professional help but
surely with the growing importance and awareness regarding portfolios managers
people will definitely prefer to take professional help.

46

BIBLIOGRAPHY

REFERENCE BOOKS:
Security Analysis and Portfolio Management - Dr. P.K.BANDGAR
Investment Analysis and Portfolio Management

WEBLIOGRAPHY
SOURCES:
www.google.com
www.yahoo.com
www.wikipedia.com

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