COMPETITIVE ANALYSIS OF PORTFOLIO MANAGEMENT SERVICES BY BROKRAGE FIRMS

Submitted By: Hitendra Choudhary IN PARTIAL FULFILLMENT FOR THE AWARD OF PG DEGREE OF

Master of Business Administration 2008-2010 Department of Management Studies Malaviya National Institute of Technology
(Deemed University)

Malaviya Nagar, Jaipur

ACKNOWLEDGEMENTS This project has given me immense insights about the practical aspect of Share broking industry and its working. I got to learn a lot about the online broking and the way they handle their clients and projects. This project also helped me to improve my report making skills and the true meaning of Broking. At the outset, I would like to thank India Infoline Ltd. for giving me the opportunity to work on this project, in an environment which was stimulating and charged with the excitement to do some thing productive. I would like to express my sincere gratitude to Mr Priyesh Singhvi (AVP) and Saransh Jain (Sales Manger), my mentor for his valuable inputs and support through out the project. Further I express sincere thanks to Mr. Kadam Shah ( Regional Manager) and Mr. Avdesh Bharadwaj (HOD, DMS, MNIT) for their

valuable guidance & constant encouragement which inspired me to complete this project successfully.
Lastly, I would like to thank all my colleagues in the Office who assisted me day in and day out and made me feel like one of them. It was truly a delightful experience working with all of them.

Hitendra Choudhary (0680770) Department of Management Studies,

MNIT, Jaipur

TABLE OF CONTENTS
1. ABSTARCT 2. INDIAN STOCK MARKET 3. IMPORTANCE OF STOCK MARKET 4. DYNAMICS OF BROKING INDUSTRY 5. COMPANY PROFILE INDIA INFOLINE 6. PROJECT REPORT 1. INTRODUCTION 2. LITERATURE REVIEW

4 5 6 7-8 9-24 25-55 26-27 28-35

3

3. RESEARCH METHODOLOGY 4. RECOMMENDATION 5. CONCLUSION 6. ANNEXURE

36 37 42 44-55

a. Transcripts of interviews b. Questionnaire

7. REFERENCE

56

ABSTRACT
Investing

is simple but not easy.

India, the World's largest democracy, is opening up to the global competition with the advent of liberalization. It has the largest middle-class population in the world having substantial purchasing and investing power. So far in India, most of the middle class earners have been risk-averse and therefore park most of their savings in Fixed Deposits and Other Savings Accounts, though the yield from such investment avenues is very low. However, the recent trend has been such that more people have been attracted towards investment in Mutual Funds and Equities. It is in this light that Portfolio Management Companies have been gaining prominence in India. The trend is only set to go upwards in the years to come, as the Indian middle class becomes more risk friendly.

Managing a portfolio is not an easy task and thats the reason why we need experts for doing this task. These experts are well experienced and definitely have more knowledge about the markets than an individual. In todays world where everyone is so busy that nobody has time even for themselves so to manage their own portfolio is next to impossible. They cannot track the markets every single day and therefore it is really very important to have an expert. When it comes to managing hard-earned money, its very important to make sure that the extra mile is a task best left to the experts and this extra mile when covered by the right people gives the right returns. This report shows a comparative analysis of the Portfolio Management Services of the broking firms. The survey includes a few companies, which have competitive portfolio management service like Kotak Secutities, Sharekhan Securities, Motilal Oswal Securities, India Infoline, Birla Sunlife and JM Morgan Stanely. Interviews of people belonging to this company have been taken to get a clear picture of how these companies are providing their services and how effective they are.

INDIAN STOCK MARKET

The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Limited (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80% of the equity volume traded in India. The NSE and BSE are equal in size in terms of daily traded volume. The average daily turnover at the exchanges has increased from Rs851crore in 1997-98 to Rs1284crore in 1998-99 and further to Rs2273crore in 1999-2000. NSE has around 1500 shares listed with the total market capitalization of around Rs9, 21,500crore. The BSE has over 6000 stocks listed and has a market capitalization of around Rs9, 68,000crore. Most key stocks are traded on both the exchanges and hence the investor could buy on either of the exchanges. Both exchanges have a different settlement cycle, which allows investors to shift their

position on the bourses. The primary index of BSE in BSE Sensex comprises 30 stocks. NSE has the S&P NSE 50 Index (Nifty), which consists of fifty stocks. The BSE Sensex is the older and most widely followed index. Both these indices are calculated on the basis of market capitalization and contain the heavily traded shares from key sectors. The markets are closed on Saturdays and Sundays. Both the exchanges have switched over from the open outcry trading system to a fully automated computerized mode of trading known as BOLT (BSE On Line Trading) and NEAT (National Exchange Automated Trading) system. It facilitates more efficient processing, automatic order matching, faster execution of trades and transparency. The scrip traded on the BSE has been classified into A, B1, B2, C, F, and Z groups. The A group shares represent those, which are in the carry forward system (Badla). The F group represents the dept market (fixed income securities) segment. The Z group scrip is the blacklisted companies. The C group covers the odd lot securities in A, B1, & B2 groups and Rights renunciations. The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other participants in Indian secondary and primary market is the Securities and Exchange Board of India (SEBI) Limited.

IMPORATNCE OF STOCK MARKET The stock market is one of the most important sources for companies to raise money. This allows businesses to go public, or raise additional capital for expansion. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate. The term 'the stock market' is a concept for the mechanism that enables the trading of company stocks (collective shares), other securities, and derivatives. Bonds are still traditionally traded in an informal, over-the-counter market known as the bond market.

Commodities are traded in commodities markets, and derivatives are traded in a variety of markets (but, like bonds, mostly 'over-the-counter'). The size of the worldwide 'bond market' is estimated at $45 trillion. The size of the 'stock market' is estimated as about half that. The world derivatives market has been estimated at about $300 trillion.[1] The major U.S. Banks alone are said to account for about $100 trillion. It must be noted though that the derivatives market, because it is stated in terms of notional outstanding amounts, cannot be directly compared to a stock or fixed income market, which refers to actual value. The stocks are listed and traded on stock exchanges which are entities (a corporation or mutual organization) specialized in the business of bringing buyers and sellers of stocks and securities together. The stock market in the United States includes the trading of all securities listed on the NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, the OTCBB, and Pink Sheets European examples of stock.

DYNAMICS OF BROKING INDUSTRY

How is the future shaping for Indian brokers? There is a new sense of confidence among the domestic brokers as the broking industry is passing through the most exciting times. Those who have survived the earlier bear phase have made their 7

fortunes as the overall revenues have gone up multifold. Hence, some of the leading domestic brokers are attracting talents even from the foreign broking houses as domestic houses are now able to afford the same salary levels and lure people by offering employee stock ownership plans (Esops). Even the smaller brokers have changed their way of marketing and advertising that was never the case earlier. Everyone is focusing on value-added services. Dynamics of domestic stock broking industry is changing and the best is yet to come! What are the challenges before the industry? In coming days, shortage of skilled talent and proper infrastructure will be one of the major challenges. Going forward, technology will play a key role and the domestic broking houses have to upgrade it. Depth of multiple products is also a challenge for the domestic houses. Also on the regulatory front, domestic institutional investors can not give more than five per cent business to any single broker. However, FIIs have no such restrictions resulting in restriction of revenues. As the dynamics of the mutual fund (MF) industry has changed in India, the current restriction also needs to be reconsidered. How is this direct market access (DMA) facility will impact smaller brokers? DMA is mainly for the investors who have large programme trades or arbitrage business. This move will surely make the proprietary trading/arbitrage type businesses more competitive and less attractive. Will falling volumes in last few months affect the business of small brokers? Brokers were painful for the last three months due to falling volumes, so their business will be affected. But for the last two years, most of them have made good money. Hence, there is a headroom for survival. There is also a possibility of consolidation among the retail brokerages. How is the IPO market looking? Though the liquidity is good enough, investment sentiments of the initial public offering (IPO) are not fully back. Since companies are able to manage their liquidity and operations, they are waiting for right time to enter the market for better valuations.. 8

Some more regulatory measures are expected, like 100 per cent payment along with application for IPO. Will it affect IPO market? Such measures are better for the system. What will happen is that genuine buyers will apply and the ratio of oversubscription will come down resulting in better allocations to the long-term investors. Hence, such move is needed for the long-term sustainability of the IPO market. Good issues at an attractive price will in any case not find any difficulty to raise funds in the new system too. What is the view on the secondary market? Though there is good liquidity globally, markets will be range-bound till monsoon and based on that the markets will take further direction. Inflation, oil price and elections are the major challenges for markets to have a strong sustainable rally. Global issues have not settled down completely, hence, the volatility will continue. One has to remain cautious. In terms of volumes, this year will not be in any case like last year, there fore; the return expectations have to be toned down. In such uncertain environment, the theme for investors is hard assets. Oil and gas, mining, manufacturing and engineering are some of the sectors that are expected to outperform. One will see stronger interest when power and real estate corrects as they are good longterm bets. But they are currently very expensive.

INDIA INFOLINE
India Infoline has the most de-risked revenue model with a little over 55 per cent of the total revenues coming from the equity brokerage businessthe least among listed broking

companies. This is probably one reason for the company being the best pick among most mutual fund managers. Thanks to its diversified portfolio, the company bucked the trend and reported a sequential rise of about 25 per cent in its operating income and a marginal one per cent increase in net profit in the March 2008 quarter. The growth in FY08 was largely driven by its institutional broking business, financing income and better utilisation of its branch network, which has grown rapidly in the past few years. Going ahead, its institutional broking and lending businesses are expected to gain more scale and will be the revenue drivers. The company hired four high profile professionals from CLSA a few months earlier to spearhead its foray in institutional broking. Plus, its partnership with New York-based brokerage firm, Auerbach Grayson and Co will increase its access to institutional clients in the US and offer them access to Indian capital markets. Also, its lending portfolio comprising of margin finance and consumer finance products (mortgages, personal loans, business loans and loans against shares) should grow at a higher rate. The company's newly set up subsidiary for wealth management and its move to set up an asset management company should lead to positive results in the respective businesses. The stock looks reasonably priced at 25 times FY09 estimated earnings, but looks more attractively priced (PE of 18.7 times) based on FY10 estimated earnings.

STORY OF GLORY
Incorporated on October 18, 1995 as Probity Research & Services by a group of professionals

10

 Launched Internet portal www.indiainfoline.com in May 1999 Rated as Best of the Web by Forbes Promoted by Mr. Nirmal Jain and Mr. R. Venkataraman Launched 5paisa.com revolutionized brokerage rates Largest distributor of ICICI Prudential Life Insurance Our Rs. 900 million public issue was oversubscribed 7.22 times Listed on NSE and BSE on May 17, 2005 Today, we are one of the fastest growing company in the financial services space

We are a Leading Financial Services Intermediary

BUSINESSES
Equities and commodities broking Portfolio and Wealth Management services Investment banking Distribution of Life Insurance products Distribution of Mutual funds, Fixed Deposits, RBI Bonds and Small Savings among others Distribution of Mortgages and other Loan products

COMPANY STRUCTURE

India Infoline Ltd.

11

India Infoline Investment Services Ltd (Margin Funding & SME)

IIFL (Asia) Pte Ltd (For international operations) Moneyline Credit Ltd (Consumer Finance)

India Infoline Media & Research Services Ltd

India Infoline Commodities Ltd

India Infoline Marketing & Services Ltd

DMCC, Dubai (membership with DGCX)

India Infoline Insurance Services Ltd (Corporate agency) India Infoline Insurance Brokers Ltd (Insurance Broking)

India Infoline Housing Finance Ltd (Home Loans)

India Infoline Distribution Co Ltd (Distribution of Financial Products)

BRANCHES ACROSS INDIA

12

CORPORATE STRUCTURE

Board of Directors Managing Director Executive Director

R. Venkataraman Nirmal Jain

Channels Branches

Products Insurance

Research Content Services News desk/ websites Market/ Institutional

Direct Sales 5paisa

Corporate & Institutional

Commodities PMS Online Media/ SMS

Support Audit Corporate Planning Compliance Marketing Finance Technology

13

Corporate Planning Customer Service Compliance

BUSINESS MODEL
Business Advisory & execution services for the entire descriptio gamut of financial services n Core competen cies
Advisory services powered by world-class research Execution backed by cutting edge technology and personalized service
Equities broking Portfolio Manageme nt services Commodities broking Mutual Funds distribution Mortgages distribution Other Debt products

Service offerings

Research & Content services

Life Insurance agency

Investment Banking services

Personal Loans distribution

BUSINESS REVIEW
EQUITIES BROKING
Market share (currently ~3.5%) on NSE rising consistently Average daily turnover Rs35.3 bn on NSE : up 66% q-q and 279% YoY Commodities broking contributed 1.4% of total revenues Growth driven by higher productivity of retail branches as well as increased traction in institutional business

14

15

INSTITUTIONAL EQUITIES
Research team built up with a blend of industry and equity research experience Launched a daily synopsis on Indian markets titled The Front Page Research focus on original bottom-up ideas Research products have been received well by institutional clients A number of new products in the pipeline

16

FINANCIAL SERVICES DISTRIBUTION

INSURANCE
The largest corporate agency for the largest private sector life Insurance company Currently partner with ICICI Prudential, No1 private sector player Life Insurance mobilization in Q1 Rs 1.14 bn : up 24% q-q and 21% y-y

MUTUAL FUNDS
Distributors for all the leading AMCs. Leveraging pan-India presence Mutual funds income has improved increased focus on equity funds Industry structure will change radically with t he recent SEBI ruling

17

CONSUMER FINANCE
Started distribution of own loan products under the brand name Moneyline Commenced business in August 07 with current portfolio size of Rs941mn Currently present in 10 locations, presence in 32 additional locations by March 08 New Initiatives: Loans against Mutual Funds/ Business Loans/ Auto Loans/ Loans against ESOPS/ Loans for Commercial Vehicles Loans through internet are showing a huge response and our lead conversion is one of the highest in the industry Started distribution of own loan products under the brand name MONEYLINE. Commenced business in August 07 with current portfolio size of Rs941mn Currently present in 10 locations, presence in 32 additional locations by March 08 New Initiatives: Loans against Mutual Funds/ Business Loans/ Auto Loans/ Loans against ESOPS/ Loans for Commercial Vehicles

18

Loans through internet are showing a huge response and our lead conversion is one of the highest in the industry.

19

FINANCIAL REVIEW Latest quarterly results highlights

Performance of Q3FY08 (Oct - Dec, 2007)
Consolidated Revenue at Rs 3.1 bn, up 171% y-y and up 59% q-q EBITDA was Rs 1.23 bn, up 261% y-y and up 84% q-q EBITDA margin at 39.6%, up 33% y-y and up 16% q-q PBT before exceptional items was Rs1.02 bn, up 279% y-y and up 90%q-q

Performance of 9 months ending Dec. 31, 2007 (y-y)

Consolidated Revenue up 127% to Rs 6.39 bn EBITDA up 146% to Rs 2.3 bn EBITDA margins up 8.55% to 36.68% PBT before exceptional items up 144% to Rs1.9 bn

Highlights Average daily trading turnover grows 279% y-y to Rs 35.3 bn and market share on NSE grows to 3.5% Institutional brokerage contribution improves equities volumes and yield Insurance mobilization Rs 1.14bn, up 35% y-y Consumer finance takes off with disbursal of Rs 947 mn Separate subsidiary for Wealth Management

20

Q3 FY08 (OCT- DEC 2007) RESULTS

Rs Mn

Incom e from oper Equities brokerage Financing incom e Online & other m e Life insurance com
21

22

FUTURE PLANS AND STRATEGY

Wealth Management
New initiative- team identified. Plans for aggressive growth. Upper middle class is growing at 10-12% p.a. Strategy will be to deliver value and target mid segment. Leverage our brand, research capability and distribution reach.

23

24

INVESTMENT COMMITTEE OF INDIA INFOLINE

Unlike most of the Portfolio Management firms operating in India, India Infoline has got the concept of an Investment Committee, which takes the decision regarding investment into the portfolios. The members of this committee: Mr. Nirmal Jain :-He is the founder and Chairman of India Infoline Ltd. Being an MBA from IIM Ahmedabad, and a Chartered Accountant (All India Rank 2) and a Cost Accountant; he has had an impeccable professional and academic track record. He started his career in 1989 with Hindustan Lever Limited. During his stint with Hindustan Lever, he handled a variety of responsibilities, including exports and trading in agro- commodities with Rs3bn annual turnover. He then joined hands with two local brokers to set-up their equity research division Inquire in 1994. His work set new standards for equity research in India. In 1995, he founded his own independent financial research company, now known as India Infoline Ltd.

Mr. R. Venkataraman :-He is the co-promoter and Executive Director of India Infoline Ltd. He is a Bachelor in Technology (B. Tech) in Electronics and Electrical Communications Engineering from IIT Kharagpur and an MBA from IIM Bangalore. He has held senior managerial positions in various divisions of ICICI Limited, including ICICI Securities Limited, their investment banking joint venture with J P Morgan of USA and with BZW and Taib Capital Corporation Limited. He has also held the position of Assistant Vice President with G E Capital Services India Limited in their private equity division. He has varied experience of more than 14 years in the financial services sector

25

COMPETITIVE ANALYSIS OF PORTFOLIO MANAGEMENT SERVICES BY BROKRAGE FIRMS

26

INTRODUCTION
In a laypersons language, Portfolio Management Service is like music to investors' ears with the perfect art of varied expertise work over the years with our experience in the stock markets.

Managing money has always been difficult. There is a great deal of requirement of an expertise to evaluate various savings and investment plans. There is simply no time to do it on your own. Until and unless the investments are large it might also turnout to be expensive trying to set up an own investment wing. It might be prudent asking a professional to manage the funds for a small fee. There is a surety that the money will be deployed after scientifically analyzing pros and cons. Portfolio Management Service ensures that your money goes that extra mile or earns that extra return, which dramatically improves the returns structure for the investments made. Portfolio management is the art and science of: Making decisions about investment mix and policy, Matching investments to objectives, Asset allocation for individuals and institutions, Balancing risk vs. performance

PMS is a product wherein a customized investment portfolio is created to suit the investment objectives of a client. In PMS, the portfolio manager handles the responsibility of creating and tracking the portfolio. The PMS provider does the following things like: Idea generation, Order execution and Settlement and performance reporting This service is particularly advisable for investors who cannot afford to give time or dont have those expertises for day-to-day management of their equity portfolio. However, the key of successful portfolio management lies in the execution. A strong portfolio management program can turn any sinking investment around and do the following:

27

Maximize value of investments while minimizing the risk. Allow investors to schedule resources more efficiently. Reduce the number of redundant investments and make it easier to kill loss-making

investments.

28

LITERATURE REVIEW
Portfolio Management - an emerging strategy for excellence YOU earn money in bagfuls, but don't have the time or inclination to manage it If this description fits you, do consider entrusting your money to a professional portfolio management service (PMS). In return for a fee, portfolio managers offer to craft a basket of stocks, bonds or even mutual funds that would fit your personal investment goals and risk preferences. Though a few portfolio managers offer standardised packages for a sum as small as Rs 5-10 lakh, it may take a minimum investment size of Rs 25-50 lakh to fetch you a customised portfolio. Apart from cash, you can also hand over an existing portfolio of stocks, bonds or mutual funds to a PMS that could be revamped to suit your profile. Why not mutual funds? But why should you opt for PMS instead of a mutual fund? Here are a few aspects on which portfolio managers say they score over the standardised products offered by mutual funds: Asset allocation: You may know what stocks, equity funds or bonds you would like to own, but do you know how much of your savings you should allocate to each of these? The decision on asset allocation will be crucial in determining investment returns over the long term. With PMS, an asset allocation plan is tailor-made for you, after a detailed check on your investment goals, savings pattern and appetite for risk. Timing: Have you ever kicked yourself for switching your entire portfolio into equities just before they tanked? If you have, you probably need help with regard to timing of investments. Once you hire a portfolio manager, you can expect assistance on when you should be investing more money into equities and when you should be bailing out. A portfolio manager may also switch a portion of your portfolio into cash, if he perceives a big risk to stock prices. The focus is on preserving value. Flexibility: You are bullish on FMCG stocks, but find that equity funds have marginal exposures to the sector. In a PMS, you can expect the portfolio manager to accommodate your sector preferences when he invests. But don't expect to completely dictate what stocks or sectors your portfolio manager will buy for you, as he will be the best judge of that.

29

Also, portfolio managers do not have to stick to any rigid rules on what proportion of your money will be invested in each sector or stock. They can also use liberal doses of cash or derivative instruments to pep up your returns. Mutual fund managers have their hands tied on these aspects by SEBI regulations. What to expect from PMS Okay, you have fallen for the sales pitch and entrusted your money to a PMS. What can you now expect from this service? More handholding from your portfolio manager than you have been accustomed to from your mutual fund. You can expect to have a personal relationship manager through whom you can interact with the fund manager at any time of your choice. You can also expect frequent (maybe monthly) interaction with the portfolio manager to discuss any concerns that you might have. Expect to be consulted on any major changes in asset allocation or in the investment strategy relating to your portfolio. All administrative matters, including operating a bank account and dealing with settlement and depository transactions, will be handled by the PMS. If you are the type who likes to watch over your money like a baby, the disclosures offered by a PMS may be just right for you. On handing over your money, you will receive a user-ID and password from the PMS, which will grant you online access to your portfolio details. You can use these to check back on your portfolio as often as you like. Keeping track of capital gains (and losses) for the taxman can be a depressing chore, when you have furiously churned your investments through the year. Opting for PMS will free you of this chore, as a detailed statement of the transactions on your portfolio for tax purposes comes as a part of the package. What you pay Most portfolio managers allow you to choose between a fixed and a performance-linked management fee. If you opt for the fixed fee, you may pay between 2-2.5 per cent of portfolio value; this is usually calculated on a weighted average basis. The structure for the performance-linked fee differs across players; usually, this includes a flat fee of 0.5-1.5 per cent. The portfolio manager also gets to share a percentage of your profit usually 15-20 per cent earned over and above a threshold level, which may range between 8 per cent and 15 per cent. Apart from management fees, separate charges will be levied towards brokerage, custodial services and towards meeting tax payments.

30

There are wide variations in fee structure between players and across products. For instance, Birla Sun Life charges only a performance-linked fee for its portfolio services. Way2Wealth has a differential fee structure for its debt and equity dominated portfolios. When you opt for a performance-based fee, the profits are reckoned on the basis of "high watermarking". That is, you pay the fee only on the positive returns on your portfolio. For instance, if you invest Rs 100 in a PMS and its value appreciates to Rs 150 at the end of the year, you pay a fee on the profit of Rs 50. Subsequently, a fee will be levied only on gains over and above the Rs 150 mark. If the value of your portfolio slumps to Rs 70, and climbs back to Rs 110, the Rs 40 you earn will not be reckoned as profit. You will again be charged a fee only if the value of your portfolio recovers to over Rs 150, the previous "high watermark." Who should hire a portfolio manager? Anybody with a nest egg, which meets the minimum investment requirement, can consider using a PMS. However, a PMS may only add significant value in the following cases: Equity bias: Portfolio management services may be ideal for a person who seeks a substantial investment in the stock markets. An equity portfolio also offers greater scope for a manager to add value than does a debt portfolio. Several of the established players in the PMS business focus on equity investments, though some also offer hybrid products. Large surplus to invest: The minimum portfolio size that portfolio managers accept for a customised portfolio ranges from Rs 25 lakh to Rs 5 crore. So consider a PMS only if you have a substantial surplus to invest in stocks. If you don't, evaluate if you can use the services of a financial planner or an advisor, instead of a PMS. If you are willing to handle the paperwork associated with investing, you can get a financial planner or advisor to construct an asset allocation plan and guide you on the choice of investments for a one-time fee of Rs 5,000-15,000. Reasons for having a portfolio manager: There are two important reasons To take maximum advantage of market conditions To protect yourself against downturns

31

There are four steps to the Portfolio Approach: 1. Understand Clients Needs and Goals. As an Investment Advisor's first and most important job is to listen to the client - to understand his or her needs. Take some time to understand specific investment goals-such as saving for retirement or financing a business - and the timeframes available to achieve them. Importantly, consider return expectations and tolerance for risk of the client. This "discovery process" doesn't end here - as time passes, and clients situation changes, ensure that investment strategy devised for the client remains up to date.

2. Create Clients Investment Policy Statement. With an in-depth understanding of clients personal and financial situation, you are able to create clients investment policy statement. This document provides the framework for the management of clients financial assets going forward. It clearly sets out investment objectives, income needs, timeframes, asset mix guidelines, security selection criteria, and review process. It helps keep investment goals and preferences in clear focus. It also provides a benchmark for measuring the progress you're making towards achieving your clients goals. 3. Build Custom-designed Portfolio. Once you've approved the investment policy statement, you can structure clients portfolio. You will get the advice from Research Team , and will have a diversified portfolio that conforms to the guidelines and direction you set in advance. This process means you will implement specific, appropriate investment recommendations, and that will be clear and well thought-out implementation. 4. Manage Clients Portfolio. The last step in the process is to monitor your progress towards your continued success. Review clients portfolio on a regular basis, and recommend appropriate changes to keep it on track.

32

The New Structure S e c o n d a r y M k t

B o r r o w e r

Syndication Client Management Origination Portfolio Manager Credit decision Risk Rating Pricing/Return Portfolio Decision

Loan Trading Hedging & Securitization

s
Servicing

New Approach to Portfolio Management

Buy

Sell, Hedge

Originate to distribute Portfolio Management acts as buyer, seller and manager of risk Support OR profit center? Support in a cross sell environment Hold to be at least SVA neutral

Fundamental shift in viewing exposures from Approved commitments to Economic capital usage Origination versus Ownership of risk Portfolio managers are owners of risk and CAPITAL Given scarcity of capital and unattractive loan products in most markets, pure origination of loan products with no cross sell makes little economic sense

33

Close linkages however exist (especially in loan products) where a residual piece sits in the portfolio. Quality of origination hinges on the risk appetite of the Portfolio Manager Origination would be limited to Portfolio balancing to ensure appropriate weight age achieved through credit swaps, CDOs, secondary markets etc.

Most CIB platforms today are evolving & do not have NIR as an independent financial target. Portfolio Management Philosophy Improve credit / risk and product delivery processes to transform the traditional lending business into an issuer and investor-driven, mark-to-market-based, Originate to Distribute business. Portfolio Management: Role Strat egy DCM Derivatives Portfolio Management Process Origination Process ISSUER INVESTOR Structuring Process Other products

Distributio n Process

Market Clearing Process

The New Structure - Advantages Leads to increased transparency and reduces cross subsidization Balances issuers and investors the universal debt model has traditionally been based on what Issuers need (and not what Investors want) Leads to sharper risk-return discipline while putting the b/s on line

34

 Benchmarks the portfolio to market especially for loan products Focused on Distribution that will reduce Credit Capital and hence increases ROE Key Transfer pricing challenges Portfolio Management is the advocate of shareholder value. Approval of all exposure is contingent on the return, irrespective of where revenues are booked or recognized. Key challenge is to be able price loan products appropriately while ensuring an acceptable return on the entire credit exposure Loans should be priced to be at least SVA or Economic profit neutral Loan structure and pricing should be reflective of the prevailing investor market to provide liquidity to the loan portfolios Maximizing Shareholder Value - SVA Why a new metric? Driven by the growth strategy and the increasing focus on shareholder value creation What is Shareholder Value-Added (SVA)? SVA is a measure of firms profit after subtracting the cost of all capital employed. It is defined as the current period after-tax economic earnings less a charge for the use of capital.* Simply put, it is the portion of the dollar return generated by the business that is in excess of the dollars paid for the use of capital to support the business The economic capital framework creates a common currency for measuring risks and returns Different forms of risk: quantified on a uniform scale Performance is expressed as an after-tax return on economic capital The framework creates incentives to deploy capital toward activities with better risk adjusted returns Credit, Market, Country and Business risks are

35

Measuring return relative to risk

Firm value

Investors Required Return

Return

Risk Growth of Investment Base

Expected Cashflow

Key Challenges to implement this Approach in our Markets Lack of liquidity (both depth and breath) in the secondary loan trading markets Most profitability models are global and need to be customized for regional / emerging markets Not enough volume to sustain an active model in the current environment tendency is to hang onto good quality assets Potential negative impact on client relationships. Need to align all product specialists to a common goal vis a vis clients to avoid different agendas

36

 Teamwork is critical for success. Creates another silo in an already over matrix environment Severe compression in spreads which makes the ultimate hold position uneconomical and the portfolio manager lukewarm to the transaction

RESEARCH METHODOLOGY
Objective: To know more about Portfolio Management Services. To do a competitive analysis on the most of the firms which provide Portfolio Management Services Hypothesis: All Portfolio Management firms provide very good services Sample: The sample consists of the following: Sharekhan securities JM Morgan Stanely Kotak securities limited India Infoline (5 Paisa) Birla Sun Life Motilal Oswal Securities Limited

37

38

RESEARCH ANALYSIS
Name SSKI Product Proprime Brokerage Fee Hedging p.a. Equity /debt Horizon Medium term Approach Bottoms Up Corpus 5lacs Cos All

Initial 0.75% 2.5% then 0.5% chargeable

quarterly AMC Profit sharing 20% shares in profits after a Protech 15% hurdle. Initial 0.75% 0% AMC fees then 0.5% Arbitrage Profit share is Medium long term on Bottoms Up 5lacs All Equity /debt Short term Bottoms Up 5lacs All

only on profit. Initial 0.75% Safe returns Equity /debt then 0.5% (8% return annum pretax) post tax 0.05 per derivative 0.3

on to

effectively 12% delivery

JM Morgan Stanley

Core

0.50%

AMC of 2% Profit sharing NIL AMC of 1.25%

Equity

Long-term

Bottoms up

50lac

All

39

Profit sharing 20% 10% Fee of rest after deducting Name Product Voyager (for the time not using) India Infoline 5P Momentum 0.50% Fixed = 2% flat Equity with 20% profit debt sharing Recurring = 4% flat 5P Focus 0.50% no profit and Long-term Value based 5lacs All sharing Fixed = 2% flat Equity with 20% profit debt sharing Recurring = 4% flat no profit sharing 5P NRI 0.50% Fixed = 2% flat Equity with 20% profit debt sharing and Long-term Value based 5lacs Medium to large cap 40 and Short medium to Value based 5lacs All Brokerage Hedging Horizon Short term Approach Corpus Cos -

Recurring = 4% 5P Growth 0.50% flat no Sharing Fixed = 2% flat Equity with 20% profit Recurring = 4% flat Name Kotak Product Select Brokerage 0.50% no profit Hedging with Equity profit debt flat no and Medium to term no and Long-term Bottoms up 1crore longBottoms up 1crore Small, medium and large Small, medium and no and Long and Bottoms up medium 1crore large cap Small, medium 41 Horizon Approach Corpus 1crore Cos Mid and small sharing Fee 2% 20% sharing 3% Klassic 0.50% profit sharing 2% flat with Equity 20% sharing 3% Core 0.50% flat profit sharing 2% flat with Equity 20% sharing 3% Dividend Yield 0.50% flat profit sharing 2% flat with Equity 20% profit debt profit debt profit debt flat debt and Long-term Value based 5lacs Medium to large cap

and Long and Bottoms up medium

3%

flat

no

and large cap

profit sharing

Birla Sunlife

Recently launched the PMS

0.50%

AMC 1.25% 20% sharing

charges Equity debt of not

and Medium and to term more long

Bottoms up

50lacs Custom option Rs.2.5crore

Small, medium and large cap

profit derivative

portfolio growth than 50% over 15%

42

 Most of the above companies have a very different brokerage to offer. Motilal Oswal Securites Limited has the most expensive brokerage to offer. All the firms have different products through which they invest in all types of companies. Some schemes invest in small cap and mid cap whereas there are some schemes which invest only in large caps and there are some more schemes which invest in all the three types of companies like mid cap small cap and large cap companies. Depending on the risk and the return ratio of customer these schemes are offered to them. The minimum corpus offered by the companies is quite less only in India Infoline and Sharekhan all other companies have a very high minimum corpus. The most amounts of products are offered by India Infoline and Kotak Securites which is also very good because customers have a wide variety to choose from. They have more options open to them which suit their convienience. Almost all the companies believe in hedging which means that they all try to maximize the returns for their customers and minimize their risks. Almost all the companies follow bottoms up approach except for a few companies like the India Infoline. Both the ways are good in their own way depending on how you follow it. The fund managers of all these companies are excellent. They excel in their own way, highly skilled and good at what they are doing. All the companies have their different products to offer which give them different time frame to invest. Some invest for long term and some for medium term again depending on the type of time frame the customer wants.

43

RECOMMENDATIONS
According to me all the companies are good in their own respective way. Some are good at their brokerage whereas some are good at their services; some have good companies in their portfolio whereas some have good fund managers. All the companies are fighting competition in different different ways and all are good in their own way and they all provide the following benefits: Bespoke Advice- The advice designed to achieve your financial objectives. Professional Management - The service provides professional management of equity portfolios with the objective of delivering consistent long-term performance while controlling risk. Continuous Monitoring - Portfolios need to be constantly monitored and periodic changes made to optimize the results. Risk Control - A research team responsible for establishing our investment strategy and providing us real time information to support it, backs our portfolio managers. Hassle Free Operation- Our Portfolio Management Service gives you a customized service. We take care of all the administrative aspects of your portfolio with a monthly reporting on the overall status of the portfolio and performance. Flexibility - We specialize in providing a personal investment management service to achieve your investment objective. Transparency - You will get regular statements and updates from us. Web-enabled access will ensure that you are just a click away from all information relating to your investment. No one company can be recommended as they all are good in their own way and all are competitive in their own way. All the companies are good at providing their services in their own way. The companies are very competitive, if one company takes a step the other company takes two steps and all the benefits go the customer towards the end. Therefore the only benefit that someone achieves is the customers who gain from these competitive firms in terms of service provided by them as well as in cost terms.

44

CONCLUSION
Investing in equities is a very complex process. It involves studying, tracking and understanding factors like the economy both domestic and global, interest rates, the political and legal environment among others. Clearly, this is a full time activity that is best left to experts. A fund manager does precisely that for investors, that too at an affordable cost. Effectively, portfolio management services offer the opportunity to the access the markets in a hassle-free and convenient manner. Secondly, portfolio management services investment offers investors the benefits of diversification. Any financial planner worth his salt will vouch for the importance of holding a well-diversified portfolio. A portfolio created by an expert offers diversification across stocks (a diversified equity fund invests in various stocks) and asset classes (a balanced fund/monthly income plan invests in both equities and debt instruments). Finally, the single most important reason why one should appoint an expert is -- the versatility they afford. Whether you wish to plan for your retirement, children's marriage or even buy a car, a portofolio manager will expose you only to the risk you can face and the return you expect and thus can help you achieve these objectives and more and the most important thing is that these services are offered to clients as different schemes, which are based on differing investment strategies made to reflect the varied risk-return preferences of clients and in todays world where On the other hand, equities serve the broad purpose of achieving capital appreciation. However, achieving financial goals would imply building a portfolio of equities and debt instruments and actively managing the same. Investing is serious business and should be seen as a means for achieving one's financial objectives.

45

ANNEXURE
TRANSCRIPTS
RESPONDENT 1: Mr. Varsheet Jain Company Name: Motilal Oswal Securities Limited Email: varsheetjain@motilaloswal.com Designation: Senior Relationship Manager Asset under management Rs.700crore Entry/ Exit Load NIL Companies preferred No bias towards market capitalization Minimum Portfolio Size: Rs.25Lakhs cash or approved securities per individual or group. Lock in period No lock in period Investment philosophy Value investing with bottoms up approach Investment in only equity Brokerage 0.25% to 0.50 % Value PMS Investment horizon Long-term time horizon Bulls Eye PMS Investment horizon Short to medium term SCHEME 1 Minimum Portfolio Size: Rs.25Lakhs cash or approved securities per individual or group. Investing philosophy - value investing philosophy Hedging - Various derivatives strategies are used to hedge the portfolio based on prevailing market conditions.

46

Fee structure: Management Fees: Base Minimum fees charged based on opening NAV for the quarter or corpus whichever is higher. Rs.25lakhs to Rs.100lakhs: 0.25% per quarter (maximum group members 4) Rs.100lakhs & above: 0.1875% per quarter. Management fees on any infusion and with-drawls within quarter would be charged on weighted basis. Performance based Management Fees: Performance based management fees would be charged based on performance in terms of positive returns on portfolio. Fee structure is as follows: Profits 1% 2% 3% 4% 5% Fees as % of Opening NAV 0.1% 0.2% 0.3% 0.4% 0.5%

SCHEME 2 Minimum Portfolio Size: Rs.25Lakhs cash or approved securities per individual or group. Fee structure: Management Fees: Base Minimum fees charged based on opening NAV for the quarter or corpus amount whichever is higher Rs.25lakhs to Rs.100lakhs: 0.625% per quarter (2.5% p.a.) (Maximum group members 4) Rs.100lakhs & above: 0.5625% per quarter (2.25% p.a.). Management fees on any infusion and with-drawls within quarter would be charged on weighted basis. SCHEME 3 Minimum Portfolio Size: Rs.25Lakhs cash or approved securities per individual or group. Fee structure: 47

Management Fees: Base Minimum fees charged based on opening NAV for the quarter or corpus whichever is higher Rs.25lakhs to Rs.100lakhs: 0.25% per quarter (maximum group members 4) Rs.100lakhs & above: 0.1875% per quarter. Management fees on any infusion and with-drawls within quarter would be charged on weighted basis. Performance based Management Fees: Performance based management fees would be charged based on performance in terms of positive returns on the portfolio. This effectively works out to 20% of profits above 7% p.a. return. Fee structure is as follows: Profits 0 to 7% 8% 10% 15% 20% 25% Fees as % of Opening NAV 0 0.2 0.6 1.6 2.6 3.6 And so on

RESPONDENT 2: Amit Sothani Company Name: ShareKhan Email: amitsothani@sharekhan.com Designation: Executive Advisor Entry/ Exit Load Nil Minimum size of the portfolio Not less than 5lacs Investment horizon - Long-term view (calculated risk with disciplined trading and low turnover) Investment philosophy Bottoms Up approach Brokerage initially 0.75% and then depending on the size of the portfolio becomes 0.5%

48

1. PROPRIME PORTFOLIO The research is only fundamental research. Prefer blue chip companies and relatively medium term profile. Fee structure 2.5% p.a. chargeable quarterly AMC Profit sharing20% shares in profits after a 15% hurdle chargeable at the end of the fiscal year. 2. PROTECH PORTFOLIO Protech has two kinds of products, which are newly launched: Nifty- thrifty (NT) automated index trading Beta- cash and option - (based on 80/ 20 chart)

These two products would meet the needs of today's investors and traders both. For a pre-defined higher level of risk the products would be targeting a higher level of return. The products would use a combination of delivery-based trading and derivatives trading to maximise the returns. Using technical analysis these would also optimise the entry and exit timings. What's more, with the help of money management rules these products would control portfolio risk. Nifty- thrifty (NT) Nifty futures will be bought and sold on the basis of an automated trading system that will generate calls to go long/short. The system has been tested over the last 20 years of data and performance has been very good [details or returns v/s risk are available for interested investors]. The portfolio's exposure will never exceed the value of the portfolio that is there shall be no leveraging. But the strategy will allow them to go short/hedge on Nifty in falling markets, thereby yielding returns irrespective of the market direction. The portfolio will either be long or short at all points of time. Beta- cash and option Stocks in long-term technical uptrend will be identified for trading at various inflection points in their trading cycles. As much as 80% of the portfolio's corpus will be used to conduct delivery-based trading. The balance 20% will be used to create an options book, which is buying calls/puts of the indices/stocks, to increase the beta of the portfolio to over two and to hedge against any pitfalls [details

49

of working are available for interested investors]. The use of timing for delivery and options for a higher beta will attempt to offer a superior rate of return by taking a risk with only 20% of the capital. Here too money management rules will be in place to see that the capital is not eroded. Portfolio rebalancing may be conducted between cash and options segments based on profitability of each segment. Fee structure 0% AMC fees Profit share is only on book profit. Investment into: - Equity and debt both 0.05% on derivatives 0.3% on delivery Lock in period - 3months Reporting time 15days 3. PORTFOLIO ARBITRAGE Fee structure Safe returns (8% post tax return per annum effectively 12% pretax) Lock in period one month Brokerage = no AMC no profit sharing Only brokerage as applicable depending upon the investments made 0.25% (flexible because Intraday) RESPONDENT 3: Tanuj Mishra Company Name: JM Morgan Stanely Email: tanuj.mishra@jmfinancial.in Designation: Senior Relationship Manager Investment philosophy Bottoms up approach Entry and exit load Nil Minimum size of the portfolio Rs.50lacs Types of companies preferred No bias towards market capitalisation 50

1. CORE PORTFOLIO Investment horizon long-term perspective Two schemes under this portfolio: With profit sharing Without profit sharing Fee structure Without profit sharing: AMC of 2% Profit sharing NIL With profit sharing: AMC of 1.25% Profit sharing 20% of the rest after deducting 10% Brokerage 0.50% 2. VOYAGER PORTFOLIO Investment horizon: - Short term They have stopped providing this scheme due to the market volatility and because it is for short-term investments.

RESPONDENT 4: Abhijit Patharkar Company Name: Kotak Securities Email: abhijit.patharkar@kotak.com Designation: Senior Relationship Manager Asset under management Rs.2500crores Entry/ Exit Load Nil Investment philosophy Bottoms up approach Investment in Equity and derivative both but the derivatives do not cross more than 50% Minimum size of the portfolio Rs.1crore This portfolio caters to the high-end customers.

51

They Hedge portfolio their portfolio through investment in futures and options. PMS can be terminated in after 30 days. Brokerage 0.50% Fee structure With profit sharing = 2% flat with 20% profit sharing Without profit sharing = 3% flat no profit sharing 1. SELECT PORTFOLIO Companies preferred Mid cap and small cap companies Stocks in portfolio 10 to 15 stocks Lock in period 12 to 18 months Investment horizon Long and medium term perspective. 2. KLASSIC PORTFOLIO Companies preferred Small, medium and large capitalized companies Stocks in portfolio Up to 20 stocks Investment horizon Medium to long-term perspective. 3. DIVIDEND YIELD PORTFOLIO Companies preferred Small, medium and large capitalization companies Stocks in portfolio 20 to 25 stocks Lock in period 12 to 18 months Investment horizon Long and medium term perspective. 4. CORE PORTFOLIO Companies preferred Small, medium and large capitalization companies Stocks in portfolio 15-20 stocks Lock in period at least 18 months Investment horizon Long-term perspective They may hedge their portfolio may investing into futures and options. Invest in equity and debt and the derivative would not be more than 50%.

52

RESPONDENT 5: Sameer Shah Company Name: India Infoline Email: sameershah@indiainfoline.com Designation: Senior Relationship Manager Entry/ Exit Load Nil Minimum size of the portfolio Not less than Rs.5lacs either cash or shares. Investment philosophy Value based approach Brokerage 0.50% Fee structure Three types Up to Rs.25Lacs = 2% p.a. coupled with 20% of profit as performance fees More than Rs.25Lacs = 1% p.a. coupled with 10% performance fees No performance fees = 3% AMC will be charged upfront Reporting time every 15 days (send the entire statement at the end of the year) USP Own research Experienced research team Committee takes the entire decision Forbes rated 1. 5P MOMENTUM Investment horizon Short term to medium term Investment in deal in equity as well as debt Types of companies all three types Brokerage 0.25% Hedging may be done in futures and options to balance the portfolio 2. 5P GROWTH Investment horizon Long-term perspective

53

Investment in Deal in equity as well as debt Types of companies - Medium to large capitalization companies Brokerage 0.50% 3. 5P FOCUS This portfolio will comprise of always 7 scrip at any point of time Investment horizon Long-term perspective Investment in deal in equity as well as debt but debt is for short term only if the equity market is not favorable. Types of companies All the three kinds of companies. Lock in period One month 5. 5P CUSTOMISED Investment horizon Medium to long-term perspective Investment in Equity or equity related instruments including Mutual Funds, debt and debt related instruments including debt mutual funds, commodities markets, etc. Types of companies Medium to large capitalization companies (blue chipped companies) 6. P N VIJAY WEALTH ENRICHMENT SCHEME Investment horizon Medium to long-term perspective Investment in Equity or equity related instruments. Types of companies Medium to large capitalization companies

RESPONDENT 6: Nilesh Shah Company Name: Birla Sunlife Email: nileshshah@birlasunlife.com Designation: Senior Manager Asset under management Rs.950crores There is no lock in period can make withdrawals whenever required. Entry/ Exit Load Nil Companies preferred - Small, medium and large capitalization companies 54

Minimum size of the portfolio Rs.50lacs Custom option Rs.2.5crore Investment horizon medium term to long term perspective Investment philosophy Bottoms up approach Investment in Equity and derivative both but the derivatives do not cross more than 50% Hedging may hedge the portfolio by using futures and options. Brokerage 0.50% Fee structure With profit sharing = AMC charges 1.25% 20% profit sharing of the portfolio growth over 15%

55

QUESTIONNAIRE Dear Sir/Madam, We are doing a survey on the different kinds of Portfolio Management Services offered by the brokerage companies of Mumbai. We would be very grateful to you if you could give us some of your time. OFFICE - RECORD Name of Respondent: Designation: Email-ID: Phone No.:

56

======================================== ======================================== ================= 1.How many schemes do you offer and which are they?

2.What kind of companies does your company prefer? Mid Caps companies 3.What is the minimum size of your portfolio? 4. What is your investment horizon? Long term
57

A-Group

Mix

Medium term Both 5.What kind of an investment philosophy does your company follow? (Bottoms up, top down, momentum based stocks etc)

6.What type of Fees structure do you follow? Fixed fees Profit sharing 7.Do you hedge your portfolio? Yes No

58

8.If yes then how?

9.How much brokerage does your company charge?

10. Do you try and time the market? Yes 11. No

What do you invest in? Equity Equity and debt

12. If both then what percentage?

59

Thank you for your participation!

REFERENCE

Firms Contacted: My thesis guide Mr. Sharansh Jain helped me out and used their contacts to get these firms to participate in the interview. Websites referred: www.indiainfoline.com www.sharekhan.com http://www.financialexpress.com/fe_full_story.php? content_id=147783 http://en.wikipedia.org/wiki/India http://www.censusindia.net/results/provindia3.html
60

sify.com/sifyimagine/fullstory.php?id=13213758 http://sify.com/sifyimagine/fullstory.php?id=13213758 http://www.forbes.com/facesinthenews/2005/04/21/0421autofacesca n02.html http://www.thehindubusinessline.com/iw/2006/10/08/stories/200610 0800591300.htm www.icicidirect.com http://www.hinduonnet.com/businessline/iw/2000/09/03/stories/0703 g051.htm http://www.hinduonnet.com/businessline/iw/2000/09/03/stories/03g0 51t1.htm http://www.traderji.com/brokers-demat-matters/1854t http://www.traderji.com/brokers-demat-matters/3608-new-c-icicidirect.html

61