A REPORT ON

EQUITY PORTFOLIO MANAGEMENT

BY

Sandeep Sindhu (12912303910)

A Report submitted in partial fulfilment of the Requirements of MBA Program of Delhi Institute of Advanced Studies

Submitted to:

Mr. Rakesh Sharma Company Guide

Prof. Shilki Bhatia Faculty DIAS, Rohini

DECLARATION

This is to certify that project titled Equity Portfolio Management And The Risks Involed. is a bonafide work done by Mr. Sandeep Sindhu, Enrollment No: 12912303910, Batch 2010-12 in partial fulfillment of the requirements for the award of the degree MBA and submitted to Delhi Institute of Advanced Studies, Rohini. I also declare that this project is a result of my own efforts and has not been copied from anyone and I have taken only citations from the literary resources which are mentioned in the reference section. This work was not submitted earlier at any other University or Institute for the award of the degree.

ACKNOWLEDGEMENT

A project is like a fruit grown out of hard labor and meticulous guidance. The project covered by me is not full but just a part of the topic given to me. I had tried my best to cover as much as is required for this topic. I would like to convey my deep sense of gratitude to my company guide Mr. Rakesh Sharma, Relationship Manager, Bonanza Portfolio Ltd., for imparting his invaluable suggestions and guidance. I am heartily thankful to Professor Shilki Bhatia, Faculty Guide Delhi Institute of Advanced Studies, Rohini, for encouraging me & boosting my morale to move ahead my very first step in the world so called Corporate. I extend my heart-felt thanks to all the employees staff & other Sippers of Bonanza Portfolio Ltd. for giving me such a wonderful opportunity and support to show my abilities. Im grateful to the all the respondents for sparing me their valuable time and for their amicable and friendly treatment. Even though being busy person, they remained humble and polite throughout the survey.

At last but not the least Im grateful to all those who helped me a lot from the very beginning of this project. Thank you. Sandeep Sindhu

Table of content
1. 2 3 4 5 6 7 8 9 10 11 12

Purpose of the study Objectives of the study Methodology Limitations Summary Literature Review Company Profile Portfolio Management Data Interpretation Findings Conclusion Bibliography

5 5 6 7 8 9 35 38 53 69 73 74

Purpose of the study

The purpose of the study is to know the fluctuations in the share price of sample companies. The purpose of the study is to help the unknown investors for investing in securities. To update the portfolio reviewed and adjusted from time to time in tune with market condition. To analyze the risk and return on securities. To test portfolio strategies before taking decisions.

Objectives of the study

To provide basic idea of different stock market investment instruments to investor.

To provide knowledge to investor about various type of risk associated with various investment instruments.

To provide investor knowledge about P\E, Beta that would help them in selection of script and creation of portfolio.

To help investor in learning about derivative instrument future for the purpose of speculation and hedging.

Methodology

Research problem: To identified the Stock Market Investment Avenue and methods to help investor in selection of script to create portfolio. And the measures of hedging the portfolio with the use of derivative instrument future.

Research design: Research design is exploratory as the basic objective is to identified the stocks and methods to create and protect portfolio.

Data collection:

Primary data : - Primary data are collected by my regularly tracking the stock price of various script selected

Secondary data :- Secondary data are collected from various journals , websites and financial newspaper.

LIMITATIONS OF THE PROJECT

The time duration given to complete the report was not sufficient. The report is basically is made between the horizon of two months and the situation of market is very dynamic so the conclusion or the return might not reflect the true picture.

To predict stock market it is just impossible.

Summary

Bonanza Portfolio Ltd. is an esteemed Depository Participant of NSDL registered with SEBI. It is a stock broking firm and India based provider of investment banking and corporate finance. The topic for the project is investment strategies using portfolio management and the risks involved. The report has two fold objectives which are Portfolio diversification and management of clients need and giving clients a complete framework for managing their portfolio and informing risk in the market from identification to resolution. In the context of the decreasing confidence of investors in the stock market after the big crash that occurred years back and decreasing popularity of the portfolio management services. This project does a study regarding the same and produces some findings for the same. The methodology adopted for the project consists of designing of questionnaire, thereby analyzing the primary and secondary data thus collected.

As the report also includes investment strategies of investors according to the market development so a questionnaire has been prepared for the same laying stress on certain attributes like investors preference to invest (equity, debt, mutual funds etc.) and investors as well as brokers and analysts decision of time of buying or selling of stocks as well as entry and exit time from the stock market. Responses from the questionnaire reveals that Investors prefer to invest in equity due to higher returns, long term investments are preferred and investors are willing to exit from the investment when they get higher returns compared to when their targets are met. There are following types of risks like credit risk, market risk, liquidity risk, capital risk, interest rate risk. There are different kinds of portfolio risk measures. One of the risk measures used in the project is standard deviation and portfolio variance. The report has three portfolio recommendations based on the risk classes. Stocks with high beta and standard deviation were added to aggressive investor, stocks with lower standard deviation and beta value to moderate risk investor, and stocks with medium beta values were added moderate risk investors. It also consist of a sectoral portfolio. A particular sector is taken which has good potential and can able to give good returns.

Literature Review

Journey of Indian stock market Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meager and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as "The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

Growth Pattern of the Indian Stock Market

Sr. No. 1 2 3

As on 31st December No. of Stock Exchanges No. of Listed Cos. No. of Stock Issues of Listed Cos. Capital of Listed Cos. (Cr. Rs.) Market value of Capital of Listed Cos. (Cr. Rs.) Capital per Listed Cos. (4/2) (Lakh Rs.) Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value of Capital per Listed Cos. (Lakh Rs.)

1946 7 1125 1506

1961 7 1203 2111

1971 8 1599 2838

1975 8 1552 3230

1980 9 2265 3697

1985 14 4344 6174

1991 20 6229 8967

1995 22 8593 11784

270

753

1812

2614

3973

9723

32041

59583

971

1292

2675

3273

6750

25302

110279

478121

24

63

113

168

175

224

514

693

86

107

167

211

298

582

1770

5564

358

170

148

126

170

260

344

803

10

ANALYSIS OF INVESTMENT

WHAT IS INVESTMENT?
Investment is the activity, which is made with the objective of earning some sort of positive returns in the future. It is the commitment of the funds to earn future returns and it involves sacrificing the present investment for the future return. Every person makes the investment so that the funds he has increases as keeping cash with himself is not going to help as it will not generate any returns and also with the passage of time the time value of the money will come down. As the inflation will rise the purchasing power of the money will come down and this will result that the investor who does not invest will become more poor as he will not have any funds whose value have been increased. Thus every person whether he is a businessman or a common man will make the investment with the objective of getting future returns.

TYPES OF INVESTMENT:There are basically three types of investments from which the investors can choose. The three kinds of investment have their own risk and return profile and investor will decide to invest taking into account his own risk appetite. The main types of investments are: -

11

Economic investments:These investments refer to the net addition to the capital stock of the society. The capital stock of the society refers to the investments made in plant, building, land and machinery which are used for the further production of the goods. This type of investments are very important for the development of the economy because if the investment are not made in the plant and machinery the industrial production will come down and which will bring down the overall growth of the economy.

Financial Investments:This type of investments refers to the investments made in the marketable securities which are of tradable nature. It includes the shares, debentures, bonds and units of the mutual funds and any other securities which is covered under the ambit of the Securities Contract Regulations Act definition of the word security. The investments made in the capital market instruments are of vital important for the country economic growth as the stock market index is called as the barometer of the economy.

General Investments:These investments refer to the investments made by the common investor in his own small assets like the television, car, house, motor cycle. These types of investments are termed as the household investments. Such types of investment are important for the domestic economy of the country. When the demand in the domestic economy boost the over all productions and the manufacturing in the industrial sectors also goes up and this causes rise in the employment activity and thus boost up the GDP growth rate of the country. The organizations like the Central Statistical Organization (CSO) regularly takes the study of the investments made in the household sector which shows that the level of consumptions in the domestic markets.

12

CHARACTERISICS OF INVESTMENT
Certain features characterize all investments. The following are the main characteristics features if investments: -

1.Return: All investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of deriving a return. The return may be received in the form of yield plus capital appreciation. The difference between the sale price & the purchase price is capital appreciation. The dividend or interest received from the investment is the yield. Different types of investments promise different rates of return. The return from an investment depends upon the nature of investment, the maturity period & a host of other factors.

2.Risk: Risk is inherent in any investment. The risk may relate to loss of capital, delay in repayment of capital, nonpayment of interest, or variability of returns. While some investments like government securities & bank deposits are almost risk less, others are more risky. The risk of an investment depends on the following factors. The longer the maturity period, the longer is the risk. The lower the credit worthiness of the borrower, the higher is the risk. The risk varies with the nature of investment. Investments in ownership securities like equity share carry higher risk compared to investments in debt instrument like debentures & bonds.

3. Safety: The safety of an investment implies the certainty of return of capital without loss of money or time. Safety is another features which an investors desire for his investments. Every investor expects to get back his capital on maturity without loss & without delay.

4. Liquidity: An investment, which is easily saleable, or marketable without loss of money & without loss of time is said to possess liquidity. Some investments like company deposits, bank deposits,
13

P.O. deposits, NSC, NSS etc. are not marketable. Some investment instrument like preference shares & debentures are marketable, but there are no buyers in many cases & hence their liquidity is negligible. Equity shares of companies listed on stock exchanges are easily marketable through the stock exchanges.

An investor generally prefers liquidity for his investment, safety of his funds, a good return with minimum risk or minimization of risk & maximization of return.

14

IMPORTANCE
In the current situation, investment is becomes necessary for everyone & it is important & useful in the following ways:

1. Retirement planning: Investment decision has become significant as people retire between the ages of 55 & 60. Also, the trend shows longer life expectancy. The earning from employment should, therefore, be calculated in such a manner that a portion should be put away as a savings. Savings by themselves do not increase wealth; these must be invested in such a way that the principal & income will be adequate for a greater number of retirement years. Increase in working population, proper planning for life span & longevity have ensured the need for balanced investments.

2. Increasing rates of taxation: Taxation is one of the crucial factors in any country, which introduce an element of compulsion, in a persons saving. In the form investments, there are various forms of saving outlets in our country, which help in bringing down the tax level by offering deductions in personal income. For examples: Unit linked insurance plan, Life insurance, National saving certificates, Development bonds, Post office cumulative deposit schemes etc.

15

3. Rates of interest: It is also an important aspect for sound investment plan. It varies between investment & another. This may vary between risky & safe investment, they may also differ due different benefits schemes offered by the investments. These aspects must be considered before actually investing. The investor has to include in his portfolio several kinds of investments stability of interest is as important as receiving high rate of interest.

4. Inflation: Since the last decade, now a days inflation becomes a continuous problem. In these years of rising prices, several problems are associated coupled with a falling standard of living. Before funds are invested, erosion of the resource will have to be carefully considered in order to make the right choice of investments. The investor will try & search outlets, which gives him a high rate of return in form of interest to cover any decrease due to inflation. He will also have to judge whether the interest or return will be continuous or there is a likelihood of irregularity. Coupled with high rate of interest, he will have to find an outlet, which will ensure safety of principal. Beside high rate of interest & safety of principal an investor also has to always bear in mind the taxation angle, the interest earned through investment should not unduly increase his taxation burden otherwise; the benefit derived from interest will be compensated by an increase in taxation.

16

5. Income: For increasing in employment opportunities in India., investment decisions have assumed importance. After independence with the stage of development in the country a number of organization & services came into being.

For example: The Indian administrative services, Banking recruitment services, Expansion in private corporate sector, Public sector enterprises, Establishing of financial institutions, tourism, hotels, and education.

More avenues for investment have led to the ability & willingness of working people to save & invest their funds.

6. Investment channels: The growth & development of country leading to greater economic activity has led to the introduction of a vast array of investment outlays. Apart from putting aside saving in savings banks where interest is low, investor have the choice of a variety of instruments. The question to reason out is which is the most suitable channel? Which media will give a balanced growth & stability of return? The investor in his choice of investment will give a balanced growth & stability of return? The investor in his choice of investment will have try & achieve a proper mix between high rates of return to reap the benefits of both.

For example: Fixed deposit in corporate sector Unit trust schemes.

17

INVESTMENTS AVENUES:There are various investments avenues provided by a country to its people depending upon the development of the country itself. The developed countries like the USA and the Japan provide variety of investments as compared to our country. In India before the post liberalization era there were limited investments avenues available to the people in which they could invest. With the opening up of the economy the number of investments avenues have also increased and the quality of the investments have also improved due to the use of the professional activity of the players involved in this segment. Today investment is no longer a process of trial and error and it has become a systematized process, which involves the use of the professional investment solution provider to play a greater role in the investment process.

Earlier the investments were made without any analysis as the complexity involved the investment process were not there and also there was no availability of variety of instruments. But today as the number of investment options have increased and with the variety of investments options available the investor has to take decision according to his own risk and return analysis.

18

An investor has a wide array of Investment Avenue. They are as under:

Investment

Equity

Fixed Income

Shares

securities

Mutual Fund

Deposits

Schemes
Tax Sheltered Life Insurance

Schemes
Real Estate Precious

Objects

Financial Derivatives

19

EQUITY SHARES: -

Types of Equity Instruments: Ordinary Shares

Ordinary shareholders are the owners of a company, and each share entitles the holder to ownership privileges such as dividends declared by the company and voting rights at meetings. Losses as well as profits are shared by the equity shareholders. Without any guaranteed income or security, equity shares are a risk investment, bringing with them the potential for capital appreciation in return for the additional risk that the investor undertakes in comparison to debt instruments with guaranteed income.

Preference Shares
Unlike equity shares, preference shares entitle the holder to dividends at fixed rates subject to availability of profits after tax. If preference shares are cumulative, unpaid dividends for years of inadequate profits are paid in subsequent years. Preference shares do not entitle the holder to ownership privileges such as voting rights at meetings.

Equity Warrants
These are long term rights that offer holders the right to purchase equity shares in a company at a fixed price (usually higher than the current market price) within a specified period. Warrants are in the nature of options on stocks.

20

Classification in terms of Market Capitalisation

Market capitalisation is equivalent to the current value of a company i.e. current market price per share times the number of outstanding shares. There are Large Capitalisation companies, MidCap companies and Small-Cap companies. Different schemes of a fund may define their fund objective as a preference for Large or Mid or Small-Cap companies' shares. Large Cap shares are more liquid and hence easily tradable. Mid or Small Cap shares may be thought of as having greater growth potential. The stock markets generally have different indices available to track these different classes of shares.

Classification in terms of Anticipated Earnings

In terms of the anticipated earnings of the companies, shares are generally classified on the basis of their market price in relation to one of the following measures: * Price/Earnings Ratio is the price of a share divided by the earnings per share, and indicates what the investors are willing to pay for the company's earning potential. Young and/or fast growing companies usually have high P/E ratios. Established companies in mature industries may have lower P/E ratios. The P/E analysis is sometimes supplemented with ratios such as Market Price to Book Value and Market Price to Cash Flow per share. Dividend Yield for a stock is the ratio of dividend paid per share to current market price. Low P/E stocks usually have high dividend yields. In India, at least in the past, investors have indicated a preference for the high dividend paying shares. What matters to fund managers is the potential dividend yields based on earnings prospects. Based on companies' anticipated earnings and in the light of the investment management experience the world over, stocks are classified in the following groups: Cyclical Stocks are shares of companies whose earnings are correlated with the state of the economy. Their earnings (and therefore, their share prices) tend to go up during upward economic cycles and vice versa. Cement or Aluminium producers fall into this category, just as an example. These companies may command relatively lower P/E ratios, and have higher dividend pay-outs.

21

Growth Stocks are shares of companies whose earnings are expected to increase at rates that exceed normal market levels. They tend to reinvest earnings and usually have high P/E ratios and low dividend yields. Software or information technology company shares are an example of this type. Fund managers try to identify the sectors or companies that have a high growth potential.

Value Stocks are shares of companies in mature industries and are expected to yield low growth in earnings. These companies may, however, have assets whose values have not been recognised by investors in general. Fund managers try to identify such currently undervalued stocks that in their opinion can yield superior returns later. A cement company with a lot of real estate and a company with good brand names are examples of potential value shares.

22

FIXED INCOME SECURITIES

Many instruments give regular income. Debt instruments may be secured by the assets of the borrowers as generally in case of Corporate Debentures, or be unsecured as is the case with Indian Financial Institution Bonds. A debt security is issued by a borrower and is often known by the issuer category, thus giving us Government Securities and Corporate Securities or FI bonds. Debt instruments are also distinguished by their maturity profile. Thus, instruments issued with short-term maturities, typically under one year, are classified as Money Market Securities. Instruments carrying longer than one-year maturities are generally called Debt Securities. Most debt securities are interest-bearing. However, there are securities that are discounted securities or zero-coupon bonds that do not pay regular interest at intervals but are bought at a discount to their face value. A large part of the interest-bearing securities are generally Fixed Income-paying, while there are also securities that pay interest on a Floating Rate basis.

A Review of the Indian Debt Market

The Wholesale Debt Market segment deals in fixed income securities and is fast gaining ground in an environment that has largely focused on equities. The Wholesale Debt Market (WDM) segment of the Exchange commenced operations on June 30, 1994. This provided the first formal screen-based trading facility for the debt market in the country.

This segment provides trading facilities for a variety of debt instruments including Government Securities, Treasury Bills and Bonds issued by Public Sector Undertakings/ Corporates/ Banks like Floating Rate Bonds, Zero Coupon Bonds, Commercial Papers, Certificate of Deposits, Corporate Debentures, State Government loans, SLR and Non-SLR Bonds issued by Financial Institutions, Units of Mutual Funds and Securitized debt by banks, financial institutions, corporate bodies, trusts and others.

23

Large investors and a high average trade value characterize this segment. Till recently, the market was purely an informal market with most of the trades directly negotiated and struck between various participants. The commencement of this segment by NSE has brought about transparency and efficiency to the debt market, along with effective monitoring and surveillance to the market.

24

Business Growth in WDM Segment

Year 20052006 20042005 20032004 20022003 20012002 20002001 19992000 19981999 19971998 19961997 19951996 19941995

Market Number Capitalisation of (Rs.crores) Trades 1,553,448 1,461,734 1,215,864 864,481 756,794 580,835 494,033 411,470 343,191 292,772 207,783 158,181 60,159 124,308 189,518 167,778 144,851 64,470 46,987 16,092 16,821 7,804 2,991 1,021

Net Traded Value (Rs.crores) 458,434.94 887,293.66 1,316,096.24 1,068,701.54 947,191.22 428,581.51 304,216.24 105,469.13 111,263.28 42,277.59 11,867.68 6,781.15

Average Average Daily Value Trade Size (Rs.crores) (Rs.crores) 1,833.74 3,028.31 4,476.52 3,598.32 3,277.48 1,482.98 1,034.75 364.95 377.16 145.28 40.78 30.41 7.62 7.14 6.94 6.37 6.54 6.65 6.47 6.55 6.61 5.42 3.97 6.64

25

Instruments in the Indian Debt Market

Certificate of Deposit Certificates of Deposit (CD) are issued by scheduled commercial banks excluding regional rural banks. These are unsecured negotiable promissory notes. Bank CDs have a maturity period of 91 days to one year, while those issued by FIs have maturities between one and three years. Commercial Paper Commercial paper (CP) is a short term, unsecured instrument issued by corporate bodies (public & private) to meet short-term working capital requirements. Maturity varies between 3 months and 1 year. This instrument can be issued to individuals, banks, companies and other corporate bodies registered or incorporated in India. CPs can be issued to NRIs on nonrepatriable and non-transferable basis. Corporate Debentures The debentures are usually issued by manufacturing companies with physical assets, as secured instruments, in the form of certificates They are assigned a credit rating by rating agencies. Trading in debentures is generally based on the current yield and market values are based on yield-to-maturity. All publicly issued debentures are listed on exchanges.

26

 Floating Rate Bonds (FRB) These are short to medium term interest bearing instruments issued by financial intermediaries and corporates. The typical maturity of these bonds is 3 to 5 years. FRBs issued by financial institutions are generally unsecured while those from private corporates are secured. The FRBs are pegged to different reference rates such as T-bills or bank deposit rates. The FRBs issued by the Government of India are in the form of Stock Certificates or issued by credit to SGL accounts maintained by the RBI. Government Securities These are medium to long term interest-bearing obligations issued through the RBI by the Government of India and state governments. The RBI decides the cut-off coupon on the basis of bids received during auctions. There are issues where the rate is pre-specified and the investor only bids for the quantity. In most cases the coupon is paid semi-annually with bullet redemption features. Treasury Bills T-bills are short-term obligations issued through the RBI by the Government of India at a discount. The RBI issues T-bills for different tenures: now 91 -days and 364-days. These treasury bills are issued through an auction procedure. The yield is determined on the basis of bids tendered and accepted. Bank/FI Bonds Most of the institutional bonds are in the form of promissory notes transferable by endorsement and delivery. These are negotiable certificates, issued by the Financial Institutions such as the IDBI/ICICI/ IFCI or by commercial banks. These instruments have been issued both as regular income bonds and as discounted long-term instruments (deep discount bonds). Public Sector Undertakings (PSU) Bonds PSU Bonds are medium and long term obligations issued by public sector companies in which the government share holding is generally greater than 51%. Some PSU bonds carry tax exemptions. The minimum maturity is 5 years for taxable bonds and 7 years for tax-free bonds.

27

PSU bonds are generally not guaranteed by the government and are in the form of promissory notes transferable by endorsement and delivery. PSU bonds in electronic form (demat) are eligible for repo transactions.

MUTUAL FUND SCHEMES

An investor can participant in various schemes floated by mutual fund instead of buying equity shares. In mutual funds invest in equity shares & fixed income securities. There are three broad types of mutual fund schemes. Growth schemes Income schemes Balanced schemes

28

DEPOSITS

It is just like fixed income securities earn a fixed return. However, unlike fixed income securities, deposits are negotiable or transferable. The important types of deposits in India are: Bank deposits Company deposits Postal deposits.

TAX-SHELTERED SAVING SCHEMES

It provides benefits to those who participate in them. The most important tax sheltered saving schemes in India is: Employee provident fund scheme Public provident fund schemes National saving certificate

LIFE INSURANCE
In a broad sense, life insurance may be viewed as an investment. Insurance premiums represent the sacrifice & the assured sum the benefit. In India, the important types of insurance polices are: Endowment assurance policy Money back policy Whole life policy Premium back term assurance policy

29

REAL ESTATE
For the bilk of the investors the most important asset in their portfolio is a residential house. In addition to a residential house, the more affluent investors are likely to be interested in the following types of real estate: Agricultural land Semi-urban land

PRECIOUS OBJECTS PRECIOUS OBJECTS: It is highly valuable in monetary terms but generally they are small in size. The important precious objects are: Gold & silver Precious stones Art objects

FINANCIAL DERIVATIVES: -

FINANCIAL DERIVATIVES

A financial derivative is an instrument whose value is derived from the value of underlying asset. It may be viewed as a side bet on the asset. The most import financial derivatives from the point of view of investors are: Options Futures.

30

RISK RETURN OF VARIOUS INVESTMENT AVENUES

Every investment is characterized by return & risk. Investors intuitively understand the concept of risk. A person making an investment expects to get some return from the investment in the future. But, as future is uncertain, so is the future expected return. It is this uncertainty associated with the returns from an investment that introduces risk into an investment. Risk arises where there is a possibility of variation between expectation and realization with regard to an investment.

Meaning of Risk
Risk & uncertainty are an integrate part of an investment decision. Technically risk can be defined as situation where the possible consequences of the decision that is to be taken are known. Uncertainty is generally defined to apply to situations where the probabilities cannot be estimated. However, risk & uncertainty are used

interchangeably.

31

Types of risks
1. Systematic risk: Systematic risk is non-diversifiable & is associated with the securities market as well as the economic, sociological, political, & legal considerations of prices of all securities in the economy. The effect of these factors is to put pressure on all securities in such a way that the prices of all stocks will more in the same direction. Example: During a boom period prices of all securities will rise & indicate that the economy is moving towards prosperity. Market risk, interest rate risk & purchasing power risk are grouped under systematic risk.

RISKS

SYSTAMATIC Market Risk Interest Rate Risk Purchasing power Risk

UNSYSTAMATIC Business Risk Financial Risk

32

1. Systematic Risk

(A) Market risk Market risk is referred to as stock variability due to changes in investors attitudes & expectations. The investor reaction towards tangible and intangible events is the chief cause affecting market risk.

(B) Interest rate risk

There are four types of movements in prices of stocks in the markets. These may termed as (1) long term, (2) cyclical (bull and bear markets), (3) intermediate or within the cycle, and (4) short term.The prices of all securities rise or fall depending on the change in interest rates. The longer the maturity period of a security the higher the yield on an investment & lower the fluctuations in prices.

(C) Purchasing Power risk

Purchasing power risk is also known as inflation risk. This risk arises out of change in the prices of goods & services and technically it covers both inflation and deflation periods. During the last two decades it has been seen that inflationary pressures have been continuously affecting the Indian economy. Therefore, in India purchasing power risk is associated with inflation and rising prices in the economy.

33

2. Unsystematic Risk: -

The importance of unsystematic risk arises out of the uncertainty surrounding of particular firm or industry due to factors like labour strike, consumer preferences and management policies. These uncertainties directly affect the financing and operating enviourment of the firm. Unsystematic risks can owing to these considerations be said to complement the systematic risk forces.

(A) Business risk

Every corporate organization has its own objectives and goals and aims at a particular gross profit & operating income & also accepts to provide a certain level of dividend income to its shareholders. It also hopes to plough back some profits. Once it identifies its operating level of earnings, the degree of variation from this operating level would measure business risk.

Example:If operating income is expected to be 15% in a year, business risk will be low if the operating income varies between 14% and 16%. If the operating income were as low as 10% or as high as 18% it would be said that the business risk is high.

(B) Financial Risk: -

Financial risk in a company is associated with the method through which it plans its financial structure. If the capital structure of a company tends to make earning unstable, the company may fail financially. How a company raises funds to finance its needs and growth will have an impact on its future earnings and consequently on the stability of earnings. Debt financing provides a low cost source of funds to a company, at the same time providing financial leverage for the common stock holders. As long as the earnings of the company are higher than the cost of borrowed funds, the earning per share of common stock is increased. Unfortunately, a large amount of debt financing also increases the variability of the returns of the common stock holder & thus increases their risk. It is found that variation in returns for shareholders in levered firms (borrowed funds company) is higher than in unlevered firms. The variance in returns is the financial risk.

34

Risk Return Of Various Investment Alternatives Management Decision Required H H M M Growth stock Speculative common stock Blue chips Convertible referred stock Convertible debentures Corporate bonds Government bonds Short-term bonds Money market funds Life insurance Commercial banks Unit trusts Saving a/c Cash H H M M Investment Market Risk Purchasing Power Risk L L L L

Business Risk H H M M

Interest Risk L L L L

L L L L L O O O O O

M L L L L L L L L L

M L L L L L L L L L

L H H L L L L L L L

L H H H H H H M-H H H

So, there are so many investment options & the different option have different benefits & limitations in the sense risk associated with it. So it is difficult for them to chose option, which give maximum return at minimum risk.

35

Company Profile

Overview
A financial powerhouse! Thats what Bonanza is for you! Established in the year 1994, Bonanza developed into one of the largest financial services and broking house in India within a short span of time. Today, Bonanza is the fastest growing financial service with 5 mega group companies under it. With diligent effort, acknowledged industry leadership and experience, Bonanza has spread its trustworthy expertise all over the country with pan-India presence across more than 1632 outlets spread across 535 cities. With a smorgasbord of services across all verticals in finance, Bonanzas offers you the perfect blend of financial services right from Equity Broking, Advisory Services that cover Portfolio Management Services, Mutual Fund Investments, Insurance to exceptional Depository Services. Bonanza believes in being technologically advanced so that we can offer you our techsavvy customers - an integrated and innovative platform to trade online as well as offline. Besides, we also have one of the finest and most dedicated research teams with experts who have in-depth, unsurpassed knowledge of the market place. All this and more makes Bonanza the perfect place for you to take your first step in the direction of financial success. Bonanza is affiliated with the best in the industry right from the NSE, BSE MCX, MCX-SX to CDSL, NSDL, ICEX and USE etc. These affiliations prove our worth in the market and make Bonanza a name to reckon with. With various titles and achievements under our belt, Bonanza looks forward to tougher challenges and newer milestones to conquer, so that you our customer can get nothing less than the BEST! So come join the Bonanza family. We look forward to helping you grow financially.

36

Vision To be one of the most trusted and globally reputed financial distribution companies. Values

Customer-centric approach At Bonanza, customers come first. And their satisfaction is not just our top priority but also the driving force for us, every single day. Transparency Honesty is our forte. We believe in dealing on thoroughly ethical grounds, being fair and transparent with our customers. Meritocracy We recognize and appreciate efforts put in by our employees. And we, as a matter of fact, reward and distinguish each one of them, ceaselessly. Solidarity We believe in sharing a forthright and respectful relationship with our business partners and employees. We consider them both as our team associates, who work together. Succeed together.

Corporate Social Responsibility Other than being the masters of financial services, Bonanza also believes in the power of giving. We are a company who is socially responsible towards the community and contributes to the well-being of others through various welfare initiatives and charities. Because like they say No act of kindness, no matter how small, is ever wasted

37

PORTFOLIO Meaning of portfolio:Portfolio

A combination of securities with different risk & return characteristics will constitute the portfolio of the investor. Thus, a portfolio is the combination of various assets and/or instruments of investments. The combination may have different features of risk & return, separate from those of the components. The portfolio is also built up out of the wealth or income of the investor over a period of time, with a view to suit his risk and return preference to that of the portfolio that he holds. The portfolio analysis of the risk and return characteristics of individual securities in the portfolio and changes that may take place in combination with other securities due to interaction among themselves and impact of each one of them on others.

An investor considering investments in securities is faced with the problem of choosing from among a large number of securities. His choice depends upon the risk and return characteristics of individual securities. He would attempt to choose the most desirable securities and like to allocate is funds over this group of securities. Again he is faced with the problem of deciding which securities to hold and how much to invest in each. The investor faces an infinite number of possible portfolios or groups of securities. The risk and return characteristics of portfolio differ from those of individual securities combining to form a portfolio. The investor tries to choose the optimal portfolio taking in to consideration the risk return characteristics of all possible portfolios.

As the economy and the financial environment keep changing the risk return characteristics of individual securities as well as portfolios also change. This calls for periodical review and
38

revision of investment portfolios of investors. An investor invests his funds in a portfolio expecting to get a good return consistent with the risk that he has to bear. The return realized from the portfolio has to be measured and the performance of the portfolio has to be evaluated.

It is evident that rational investment activity involves creation of an investment portfolio. Portfolio management comprises all the processes involved in the creation and maintenance of an investment portfolio. It deals specifically with the security analysis, portfolio analysis, portfolio selection, portfolio revision and portfolio evaluation. Portfolio management makes use of analytical techniques of analysis and conceptual theories regarding rational allocation of funds. Portfolio management is a complex process which tries to make investment activity more rewarding and less risky.

39

PORTFOLIO DESIGN

Before designing a portfolio one will have to know the intention of the investor or the returns that the investor is expecting from his investment. This will help in adjusting the amount of risk. This becomes an important point from the point of view of the portfolio designer because if the investor will be ready to take more risk at the same time he will also get more returns. This can be more appropriately understood from the figure drawn below.

R1

Expected Returns

R2

Risk less Investment M1 Risk M2

From the above figure we can see that when the investor is ready to take risk of M1, he is likely to get expected return of R1, and if the investor is taking the risk of M2, he will be getting more returns i.e. R2. So we can conclude that risk and returns are directly related with each other. As one increases the other will also increase in same of different proportion and same if one decreases the other will also decrease.

40

From the above discussion we can conclude that the investors can be of the following three types:

1. Investors willing to take minimum risk and at the same time are also expecting minimum returns.

2. Investors willing to take moderate risk and at the same time are also expecting moderate returns.

3. Investors willing to take maximum risk and at the same time are also expecting maximum returns.

41

PORTFOLIO AGE RELATIONSHIP

Your age will help you determine what a good mix is / portfolio is Age below 30 Portfolio 80% in stocks or mutual funds 10% in cash 10% in fixed income 70% in stocks or mutual funds 10% in cash 20% in fixed income 60% in stocks or mutual funds 10% in cash 30% in fixed income 50% in stocks or mutual funds 10% in cash 40% in fixed income 40% in stocks or mutual funds 10% in cash 50% in fixed income

30 t0 40

40 to 50

50 to 60

above 60

These aren't hard and fast allocations, just guidelines to get you thinking about how your portfolio should look. Your risk profile will give you more equities or more fixed income depending on your aggressive or conservative bias. However, it's important to always have some equities in your portfolio (or equity funds) no matter what your age. If inflation roars back, this will be the portion of your investments that protects you from the damage, not your fixed income. Also, the fixed income of your portfolio should be diversified. If you buy bonds and debentures directly or if you invest in FDs, then make sure you have at least five different maturities to spread out the interest rate risk. Diversifying in equities and bonds means more than buying a number of positions. Each position needs to be scrutinized as to how it fits into the stocks or bonds that already are in your portfolio, and how they might be affected by the same event such as higher interest rates, lower fuel prices, etc. Put your portfolio together like a puzzle, adding a piece at a time,

42

each one a little different from the other but achieving a uniform whole once the portfolio is complete.

Types of portfolio for study:

In portfolio Design, we are considering only two types of portfolio. They are as follow: 1. Random Portfolio 2. Sector Portfolio

1. Random portfolio
Random portfolio consists of the scripts that are randomly selected by the investor by its own knowledge and preference of the stocks. Here there is no analysis is done of the script, they are selected on the tips and buts received by the investors from the external sources.

Features of random portfolio

There is no method used for selection of the script in the portfolio. Selection is based on the individual criteria for the scripts. The investment is made for higher return in short term. Generally in India most of the portfolio are selected according to this random methods as no investor himself in that much analysis of the script.

Advantages of random portfolio

Easier to keep a track on the market as not much time wasted in the analysis. This portfolio seems to have perform better in short term as script are generally which are performing better at that time. Tips are available every where for the investor to pouch. It is the experience of the individual that can fetch him good return.

43

Disadvantages of random portfolio

There is every chance that you may select a script that has a very bad background in the market. Not every time the tips pay off for you. You need to have strong reason to select that script. Such portfolios are not able to sustain when there is a crisis in the market. There is a very high risk and return involve in such portfolio.

44

2. Sector specific portfolio

Sector specific portfolio includes securities of those companies which are in the same business. Sector portfolios are very useful when there is a particular sector which is doing very good and has a bright future a head. Sector portfolio has the securities of those companies that engage in same kind of business. e.g. In late 1990s sector that was providing the highest return was information technology. Investors who have invested their money in these securities had earned very high return.

Features of sector portfolio

Script form the same group of companies that are in to the similar type of business. Maximum exposure to the industry/sector. So any news or event has the direct effect on the portfolio. Risk regarding the portfolio increases as it is expose to sector specific ups and downs. Useful investment tools for speculator and short-sellers. It is better suited for the sectors which have been providing good revenue in the near past.

Advantages of sector portfolio

It is better suited to investors who are willing to take risk. It provides better short term return then other portfolios. It is easy to keep a watch on one sector rather than many. You can have a good command over the things happening. Limited exposure to other sectors keeps the portfolio safe from the performance of other sectors in the economy.

Disadvantages of sector portfolio

It is a highly risky portfolio as risk associated with the sector directly affects the performance of the portfolio.

45

These types of portfolios are not suited for long-term investor as risk taken for the return can be too high.

There is always the possibly many scripts in the sector may not be giving that much good attractive return as others. They may eat the profits from other scripts.

46

Book value is based on historical costs, not current values, but can provide an important measure of the relative value of a company over time. Book value can be figured as assets minus liabilities, or assets minus liabilities and intangible items such as goodwill; either way, the figure that results is the company's net book value. This is contrasted with its market capitalization, or total share price value, which is calculated by multiplying the outstanding shares by their current market price. You can also compare a company's market value to its book value on a per-share basis. Divide book value by the number of shares outstanding to get book value per share and compare the result to the current stock price to help determine if the company's stock is fairly valued. Most stocks trade above book value because investors believe that the company will grow and the value of its shares will, too. When book value per share is higher than the current share price, a company's stock may be undervalued and a bargain to investors. In case of our sensex as we can see that it is currently trading at a P/B ratio of 4.41 this shows the average P/B ratio prevailing in the market. So any script trading below the P/B of 4.41 can said to be under valued if we keep the BSE SENSEX as bench mark. But it would be advisable for an investor to also look at the sector leaders P/B ratio to know what is the common industry P/B and based on that he can decide about whether to invest in the company or not. As such there is no guarantee that low P/B would able to give better return but this stocks are considered to be undervalued so one can think that this companies are undervalued so chances of appreciation are very high in case of low P/B scrip. Such companies having low P/B ratio can be considered as value stock and one can thin about investing in those companies.

47

The P/E ratio as a guide to investment decisions

Earnings per share alone mean absolutely nothing. In order to get a sense of how expensive or cheap a stock is, you have to look at earnings relative to the stock price and hence employ the P/E ratio. The P/E ratio takes the stock price and divides it by the last four quarters' worth of earnings. If AB ltd is currently trading at Rs. 20 a share with Rs. 4 of earnings per share (EPS), it would have a P/E of 5. Big increase in earnings is an important factor for share value appreciation. When a stock's P-E ratio is high, the majority of investors consider it as pricey or overvalued. Stocks with low P-E's are typically considered a good value. However, studies done and past market experience have proved that the higher the P/E, the better the stock.

First, one can obtain some idea of a reasonable price to pay for the stock by comparing its present P/E to its past levels of P/E ratio. One can learn what is a high and what is a low P/E for the individual company. One can compare the P/E ratio of the company with that of the market giving a relative measure. One can also use the average P/E ratio over time to help judge the reasonableness of the present levels of prices. All this suggests that as an investor one has to attempt to purchase a stock close to what is judged as a reasonable P/E ratio based on the comparisons made. One must also realize that we must pay a higher price for a quality company with quality management and attractive earnings potential. In the case if we look at the benchmark of BSE sensex on 1st of December it is trading at a P/E of 24.49. So if we just keep the benchmark P/E in mind then we can say that any stock which is trading bellow the P/E of 24.49 is available cheaply. But for an investor it is also advisable to look at the industry P/E as it is more important because just looking at the above position we can see that SBI is trading at a very low P/E of around 8 but if you see that in banking sector that to public sector banks the normal industry P/E is 8 all most all banks are trading around 8 or bellow the P/E of 8.

So always it is advisable to look at what is the P/E of industry in which we want to invest to get the better idea, because if we take the example of IT industry there almost you will find companies around P/E of 30. so if any IT company having of P/E would considered to be a cheap option for the investor to invest in to. So the investor should also look at the industry

48

average P/E. The new investor can know about the industry P/E or any other companies P/E in any financial magazine or from the internet also if he does not know how to calculate the P/E or is not having the data available with them.

The formula for calculating the P/E ratio is

P/E = Current Market Price Earning Per Share

49

RANDOM PORTFOLIO
Random portfolio consists of the scripts that are randomly selected by the investor by its own knowledge and preference of the stocks. Here there is no analysis is done of the script, they are selected on the tips and buts received by the investors from the external sources. We are considering BETA factor to design our Random Portfolio.

Beta Factor Beta indicates the proportion of the yield of a portfolio to the yield of the
entire market (as indicated by some index). If there is an increase in the yield of the market, the yield of the individual portfolio may also go up. If the index goes up by 1.5% and the yield of your portfolio goes up by 0.9%, the beta is 0.9/1.5 i.e 0.6. in other words, beta indicates that for every 1 % increase in the market yield, the yield of the portfolio goes up by 0.6%. High beta shares do move higher than the market when the market rises and the yield of the fund declines more than the yield of the market when the market falls. In the Indian context a beta of 1.2% is considered very bullish. You can be indifferent to market swings if you know your stocks well. Or you can put your portfolio into neutral or bias for the upside if you're bullish or a little for the downside if you're bearish. One way to do that is to have a mix of stocks that have certain betas in your portfolio. When investors are bullish on the market, they like to have high beta stocks in their portfolios because if they're right, then their stocks go up faster than the market in general, and their performance is better than the market. If investors are bearish on the market, then they use the low beta or negative beta stocks because their portfolios will go down less than the market and their performance will be better than the general market. And if they want to be neutral, they can then make sure that they have stocks with a beta of 1 or develop a portfolio that has stocks with betas greater than 1 and less than 1 so that they have the whole portfolio with an average beta of 1. A beta for a stock is derived from historical data. This means it has no predictive value for the future, but it does show that if the stock continues to have the same price patterns relative to the market in general as it has in the past, you've got a way of knowing how your portfolio will perform in relation to the market. And with a portfolio

50

with an average beta of 1, you can create your own index fund since you'll move more or less in tandem with the market.

51

Interpretation of Beta
When B = 1 means that the scrip has same volatility as compared to Index. Suitable for moderate investor.

When B>1 means that scrip is more volatile as compared to market suitable for aggressive investors.

When B<1 then scrip is less volatile as compared to market and suitable for defensive investors.

Beta of scrips plays vital role in scrip selection in Portfolio management. Portfolio can be created in many ways as sector wise, diversified in various sector, beta wise scrip portfolio.

SO BASED ON THIS BETA NOW WE WILL PREPARE THREE PORTFOLIO TO MATCH THE RISK TAKING CAPACITY OF AN INVESTOR

Portfolio

Aggressive

Moderate

Defensive

52

Data Interpretation

DEFENSIVE PORTFOLIO
SR NO. 1 2 3 4 5 6 7 8 9 10 SCRIPT ACC CIPLA BHARTI AIRTEL GRASIM ONGC ITC RANBUXY HERO MOTOCO NTPC HUL BETA 0.72 0.60 0.72 0.76 0.76 0.71 0.69 0.60 0.73 0.48 PRICE ON 13-06-2011 1004.9 338.90 377.40 2221.8 1137.7 190.80 531.4 1735.85 160.2 313.6 9.27 10.22 10.89 9.27 10.75 11.02 8.20 Wi 9.68 10.48 10.22

Total Portfolio Beta = Wi * BETA = 9.68*0.72 + 10.48*0.60 + 10.22*0.72 + 9.27*0.76 + 10.22*0.76 + 10.89*0.71 + 9.27*0.69 + 10.75*0.60 + 11.02*0.73 + 8.20*0.48 = 6.97+6.29+7.36+7.05+7.77+7.73+6.40+6.45+8.04+3.94 = 67.98 = 68

53

SCRIPTS RETURN ON INDIVIDUAL

SR NO. 1 2 3 4 5 6 7 8 9 10

SCRIPT ACC CIPLA BHARTI AIRTEL GRASIM ONGC ITC RANBUXY HERO MOTOCO NTPC HUL

BETA 0.72 0.60 0.72 0.76 0.76 0.71 0.69 0.60 0.73 0.48

13-06-2011 1004.9 338.90 377.40 2221.8 1137.7 190.80 531.4 1735.85 160.2 313.6

29-07-2011
RETURN IN %

1010.28 307.90 437 2193.45 1152.8 208.3 539 1787.2 173.70 323.95

0.54 -9.14 15.75 -1.27 1.32 9.17 1.43 2.95 8.42 3.30

RETURN IN DEFENSIVE PORT FOLIO

TOTAL PORTFOLIO INVESTMENT = 10,00,000

VALUE OF PORTFOLIO AS ON 29-07-2011 = 1033732.111

Total Return on Portfolio = 33,732.11

TOTAL RETURN IN % TERM = 3.37%

54

MODRATE PORTFOLIO

SR NO. 1 2 3 4 5 6 7 8 9 10

SCRIPT BHARTI TCS LTD BAJAJ AUTO RELIANCE BHEL LT MAH & MAH HDFC BANK HDFC INFOSIS

BETA 0.99 1.06 0.85 1.05 0.87 1.02 1.12 1.02 1.08 0.96

PRICE ON 13-06-2011 377.4 1175.6 1342.1 926.65 1930.55 1707.9 664.25 2372.3 657.5 2877.55

Wi 9.32 10.73 9.21 9.53 9.00 10.16 10.83 10.68 10.64 9.90

Total Portfolio Beta = Wi * BETA =9.22+11.37+7.83+10+7.83+10.36+12.13+10.89+11.49 +9.50 =100.64

55

SR NO. 1 2 3 4 5 6 7 8 9 10

SCRIPT BHARTI TCS LTD BAJAJ AUTO RELIANCE BHEL LNT MAH & MAH HDFC BANK HDFC INFOSIS

BETA 0.99 1.06 0.85 1.05 0.87 1.02 1.12 1.02 1.08 0.96

13-06-2011 377.4 1175.6 1342.1 926.65 1930.55 1707.9 664.25 497.7 657.5 2877.55

29-07-2011 437 1134.45 1464.85 827.7 1838.35 1725.95 718.25 505.3 688.5 2766.8

RETURN IN % 15.79 -3.5 9.15 -10.67 -4.77 1.05 8.12 1.52 4.71 -3.84

RETURN IN MODRATE PORT FOLIO

TOTAL PORTFOLIO INVESTMENT = 10,00,000/- Rs..

VALUE OF PORTFOLIO AS ON 29-07-2011 = 1017626.612

TOTAL RETURN ON PORTFOLIO = 17626.61

TOTAL RETURN IN % TERM = 1.76%

56

AGGRESSIVE PORTFOLIO

SR NO. 1 2 3 4 5 6 7 8 9 10

SCRIPT ICICI BANK LTD HINDALCO STERLITE IN DLF LIMITED JAIPRA ASSO SBI TATA POWER TATA MOTER TATA STEEL WIPRO

BETA 1.31 1.39 1.29 1.39 1.81 1.09 1.11 1.19 1.13 1.06

PRICE ON 13-06-2011 1028.5 180.35 164.7 229.3 84.25 2220.1 1234.65 1012.8 562.8 435.5

Wi 11.76 10.15 10.02 10.10 10.09 10.24 9.80 9.74 9.10 9.00

Total Portfolio Beta = Wi * BETA = 15.40+14.10+12.92+14.039+18.26+11.16+ 10.88+11.59+10.28+9.54 = 128.20

57

RETURN ON INDIVIDUAL SCRIPTS

SR NO. 1 2 3 4 5 6 7 8 9 10

SCRIPT ICICI BANK LTD HINDALCO STERLITE IN DLF LIMITED JAIPRA ASSO SBI TATA POWER TATA MOTER TATA STEEL WIPRO

BETA 1.31 1.39 1.29 1.39 1.81 1.09 1.11 1.19 1.13 1.06

13-06-2011 1028.5 180.35 164.7 229.3 84.25 2220.1 1234.65 1012.8 562.8 435.5

29-07-11 1037.75 168.4 159.9 232.9 72.85 2356.45 1285.5 947.4 565.1 406.4

RETURN IN % 0.90 -6.62 -2.9 1.57 -13.53 6.14 4.11 -6.45 0.40 -6.68

RETURN IN AGGRESSIVE PORT FOLIO

TOTAL PORTFOLIO INVESTMENT = Rs 10,00,000/-

VALUE OF PORTFOLIO AS ON 29-07-2011 = Rs 977738.678

TOTAL RETURN ON PORTFOLIO = -22261.32

TOTAL RETURN IN % TERM = -2.22 %

58

Interpretation of Random Portfolio

As in the theoretical way we have scene that the Beta shows the movement or change in the price of script vis--vis index. And a Beta >1 is more riskier and hence should give more return as compared to the script having Beta < 1. as the person is taking more risk then he should get more return. But in our case we have scene that Defensive and Moderate portfolio having Beta < 1 and equal to 1 has given more return as compared to Aggressive Portfolio.

So we can easily say that the investment in equity market is subject to market risk and
any one having long-term investment horizon should only enter into equity market. This analysis that has been carried out was only for a period of two month there are chances that in the long run aggressive portfolio would outperform the other portfolio.

59

Sectoral Portfolio
Sector specific portfolio includes securities of those companies which are in the same business. Sector portfolios are very useful when there is a particular sector which is doing very good and has a bright future a head. Sector portfolio has the securities of those companies that engage in same kind of business. e.g. In late 1990s sector that was providing the highest return was information technology. Investors who have invested their money in these securities had earned very high return.

We are considering Automobile Sector as our Sector Portfolio.

60

Industry Analysis
The Automotive industry in India is one of the largest in the world and one of the fastest growing globally. India's passenger car and commercial vehicle manufacturing industry is the seventh largest in the world, with an annual production of more than 3.7 million units in 2010. According to recent reports, India is set to overtake Brazil to become the sixth largest passenger vehicle producer in the world, growing 16-18 per cent to sell around three million units in the course of 2011-12. In 2009, India emerged as Asia's fourth largest exporter of passenger cars, behind Japan, South Korea, and Thailand.

As of 2010, India is home to 40 million passenger vehicles and more than 3.7 million automotive vehicles were produced in India in 2010 (an increase of 33.9%), making the country the second fastest growing automobile market in the world. According to the Society of Indian Automobile Manufacturers, annual car sales are projected to increase up to 5 million vehicles by 2015 and more than 9 million by 2020.By 2050, the country is expected to top the world in car volumes with approximately 611 million vehicles on the nation's roads.

Indian Automobile Industry is manufacturing over 11 million vehicles and exporting about 1.5 million every year. The dominant products of the industry are two wheelers with a market share of over 75% and passenger cars with a market share of about 16%. Commercial vehicles and three wheelers share about 9% of the market between them. About 91% of the vehicles sold are used by households and only about 9% for commercial purposes. The industry has attained a turnover of more than USD 35 billion and provides direct and indirect employment to over 13 million people.

Interestingly, the level of trade exports in this sector in India has been medium and imports have been low. However, this is rapidly changing and both exports and imports are increasing. The demand determinants of the industry are factors like affordability, product innovation, infrastructure and price of fuel. Also, the basis of competition in the sector is high and increasing, and its life cycle stage is growth. With a rapidly growing middle class, all the advantages of this sector in India are yet to be leveraged.

61

Note that, with a high cost of developing production facilities, limited accessibility to new technology and soaring competition, the barriers to enter the Indian Automotive sector are high. On the other hand, India has a well-developed tax structure. The power to levy taxes and duties is distributed among the three tiers of Government. The cost structure of the industry is fairly traditional, but the profitability of motor vehicle manufacturers has been rising over the past five years. Major players, like Tata Motors and Maruti Suzuki have material cost of about 80% but are recording profits after tax of about 6% to 11%.

The level of technology change in the Motor vehicle Industry has been high but, the rate of change in technology has been medium. Investment in the technology by the producers has been high. System-suppliers of integrated components and sub-systems have become the order of the day. However, further investment in new technologies will help the industry be more competitive. Over the past few years, the industry has been volatile. Currently, Indias increasing per capita disposable income which is expected to rise by 106% by 2015 and growth in exports is playing a major role in the rise and competitiveness of the industry.

Tata Motors is leading the commercial vehicle segment with a market share of about 64%. Maruti Suzuki is leading the passenger vehicle segment with a market share of 46%. Hyundai Motor India and Mahindra and Mahindra are focusing expanding their footprint in the overseas market. Hero Honda Motors is occupying over 41% and sharing 26%[17] of the two wheeler market in India with Bajaj Auto. Bajaj Auto in itself is occupying about 58% of the three wheeler market.

Consumers are very important of the survival of the Motor Vehicle manufacturing industry. In 2008-09, customer sentiment dropped, which burned on the augmentation in demand of cars. Steel is the major input used by manufacturers and the rise in price of steel is putting a cost pressure on manufacturers and cost is getting transferred to the end consumer. The price of oil and petrol affect the driving habits of consumers and the type of car they buy.

The key to success in the industry is to improve labour productivity, labour flexibility, and capital efficiency. Having quality manpower, infrastructure improvements, and raw material availability also play a major role. Access to latest and most efficient technology and techniques will bring competitive advantage to the major players. Utilizing manufacturing

62

plants to optimum level and understanding implications from the government policies are the essentials in the Automotive Industry of India.

STATISTICS

GROSS TUNROVER OF THE AUTOMOBILE INDUSTRY IN INDIA Year 2004-05 2005-06 2006-07 2007-08 2008-09 (IN USD MILLION) 20,896 27,011 34,285 36,612 38,238

63

Domestic Sales The cumulative growth of the Passenger Vehicles segment during April 2007 March 2008 was 12.17 per cent. Passenger Cars grew by 11.79 per cent, Utility Vehicles by 10.57 per cent and multi-purpose Vehicles by 21.39 per cent in this period. The Commercial Vehicles segment grew marginally at 4.07 per cent. While Medium & Heavy Commercial Vehicles declined by 1.66 per cent, light Commercial Vehicles recorded a growth of 12.29 per cent. Three Wheelers sales fell by 9.71 per cent with sales of Goods Carriers declining drastically by 20.49 per cent and Passenger Carriers declined by 2.13 per cent during April- March 2008 compared to the last year.

Two Wheelers registered a negative growth rate of 7.92 per cent during this period, with motorcycles and electric two wheelers segments declining by 11.90 per cent and 44.93 per cent respectively. However, Scooters and Mopeds segment grew by 11.64 per cent and 16.63 per cent respectively

Automobile Domestic Sales Trends

Category Passenger Vehicles Commercial Vehicles Three Wheelers Two Wheelers Grand Total 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2,520,421 676,408 526,022 11,790,305 15,513,156

1,061,572 1,143,076 1,379,979 318,430 307,862 351,041 359,920 467,765 403,910

1,549,882 1,552,703 1,951,333 490,494 364,781 384,194 349,727 532,721 440,392

6,209,765 7,052,391 7,872,334

7,249,278 7,437,619 9,370,951 12,295,397

7,897,629 8,906,428 10,123,988 9,654,435 9,724,243

64

Automobile Exports
Automobile Exports registered a growth of 22.30 per cent during the current financial year. The growth was led by two wheelers segment which grew at 32.31 per cent. Commercial vehicles and Passenger Vehicles exports grew by 19.10 per cent and 9.37 per cent respectively. Exports of Three Wheelers segment declined by 1.85 per cent

Type of Vehicle Passenger Vehicles Commercial Vehicles Three Wheelers Two Wheelers Total

2004-2005 166,402 29,940 66,795 366,407 629,544

2005-2006 175,572 40,600 76,881 513,169 806,222

2006-2007 198,452 49,537 143,896 619,644 1,011,529

2007-2008 218,401 58,994 141,225 819,713 1,238,333

2008-2009 335,739 42,673 148,074 1,004,174 1,530,66

65

Growth potential of indian automobile industry Growth Drivers 1. Rising per capita Income and the changing demographic distribution are conducive for growth. India has the highest proportion of population below 35 years, 70%, (potential buyers), which means that 130 million people will get added to the working population between 2003 and 2009.

66

Automobile sector Portfolio

SR NO. 1 2 3 4 5 6

SCRIPT Bajaj auto Maruti Suzuki India Ltd Mahindra & Mahindra Ashok Leyland Hero MotoCo Tata Motors

BETA 0.85 0.79 1.12 1.17 0.60 1.46

PRICE ON 13-06-2011 1342.1 1227.6 664.25 50.85 1735.85 1012.8

Wi 19 18 16 13 18 16

Total Portfolio Beta = Wi * BETA = 16.15+14.22+17.92+15.21+10.8+23.36 = 97.66

67

SR NO. SCRIPT 1 2 3 4 5 6 Bajaj auto Maruti Suzuki India Ltd Mahindra & Mahindra Ashok Leyland Hero MotoCo Tata Motors

BETA 0.85 0.79 1.12 1.17 0.60 1.46

13-06-2011 1342.1 1227.6 664.25 50.85 1735.85 1012.8

29-07-11 1464.85 1207.9 718.25 51.80 1787.2 947.4

RETURN IN % 9.15 -1.60 8.13 1.86 2.95 -6.46

RETURN IN SECTORAL PORTFOLIO

TOTAL PORTFOLIO INVESTMENT

= 10,00,000/- Rs..

VALUE OF PORTFOLIO AS ON 29-07-2011 = 1024917.932

TOTAL RETURN ON PORTFOLIO = 24917 In percentage terms = 2.49%

68

FINDING OF THE REPORT

Findings of the report gives the fruit of the all the analysis done on the research of measuring and comparing performance of the portfolio with the market portfolio.

Random portfolio

It is advisable to use the direct equity investment only if the investors have adequate knowledge about selection of stocks. Their task does not ends with the selection of script but they are also required to pay close attention to the various happening in the economy that have direct or indirect effect on stock market as we have learn that the price of the script is affected by two factor, one is company specific news and the other is economy specific news so any investor investing in the equity directly has to keep the close track of the economy as well as the company in which they invest to look out for any new development that take place

As in the theoretical way we have scene that the Beta shows the movement or change in the price of script vis--vis index. And a Beta >1 is more riskier and hence should give more return as compared to the script having Beta < 1. as the person is taking more risk then he should get more return. But in our case we have scene that Moderate portfolio having Beta < 1 has given more return as compared to Aggressive Portfolio.

So we can easily say that the investment in equity market is subject to market risk and any one having long-term investment horizon should only enter into equity market. This analysis that has been carried out was only for a period of two month there are chances that in the long run aggressive portfolio would outperform the other portfolio.

69

So if one does not have enough knowledge, expertise & analytical capabilities then one should avoid going for direct equity investment as the chances of loss increases. And the other very important aspect is the regular monitoring of the portfolio and reviewing is also an important aspect that one needs to pay close attention to.

70

Sector portfolio Sector portfolio has given less return in the month of the study as there is systemic risk as very high in the sector portfolio because of non diversification. This portfolio has given 2.36% returns on the one month performance so it is advisable for the investor not to go for such a high risky investment options. All the individual scripts and the portfolio showing very steady chart, there is very little movement in the performance chart. There is a very high Beta of majority of the scripts in the portfolio edging more than 1.4 in most of the script. Only one script having a Beta under 1 but it is too low to give a good return on the investment. Because of that the overall portfolio Beta is also sizing more than 1.4. In the sector portfolio the volatility of the majority of script is under 10. Thats shows less risk with the portfolio and also less fluctuation means less chance of return.

71

RECOMMENDATION
From the above given findings and the conclusions of the study done by me, here are the list of recommendations that comes out of the study.

Form the study it is also proven that even in short run sector portfolio is highly risky option for investment. Here in the study it is providing negative return. That shows that investors who want to have safe return must think twice before selecting sector portfolio for a long term investment.

Though random portfolio is having scripts with highest return and volatility, but for a long term prospect is becomes hard to fetch good return out of it as it is hard to take use of high volatility.

There is a requirement for frequent portfolio checking to maintain the higher return and to make use of high volatility.

72

CONCLUSION
The total risk associated with a portfolio can be reduced by mixing stocks of high return, high risk with stocks of low return, low risk. That keeps the return of the portfolio at moderate but stable level and with a risk of manageable proportion. After study of the above three portfolio of the 10 number of stocks each, it can be seen that some of the stocks like that of Unitech Ltd, Sterlites Industries, Jaiprakash Associates, , and ICICI bank were the stocks with high variance in their monthly return. These stocks are riskier with high return. Lower the beta and higher the funds performance is the better equity for investment. One might expect the best performance by funds with low diversification because they apparently are attempting to beat the market by being unique in their selection or timing. The sectors which is selected has a good potential to outperform the market in long-term to its good fundamentals. And companies, which are selected, have made technical breakout in March 2011, so such companies will perform better in recent future. If we categorize the investor in three categories risk taker, moderate risk taker and conservative, we can advise him to invest in portfolios of different degree of risk as per his risk appetite. Then various investors preference has also been covered in the in report which can act as a primer for the Bonanza Portfolio Ltd employees.

73

Bibliography Books
1. Derivatives Module of NSE ( NCFM ) 2. Securities analysis and Portfolio Management -B.K. Bhalla

Web Bibliography
1. www.bonanzaonline.com 2. www.nseindia.com 3. www.bseindia.com 4. www.derivativesindia.com 5. www.moneycontrol.com

Others

News Papers Economic Times of India Times of India

74

75