PORT FOLIO ANALYSIS The primary motive of buying a share is to sell it subsequently at a higher price.

. In many cases, dividends are also expected. The intrinsic value of an equity share depends on a multitude of factors. These values can only be estimated and not predicated with certainty. These values are primarily determined by the performance of the company which in turn is influenced by the performance of the industry to which the company belongs and the general economic and socio-political scenario of the country. An investor who would like to be rational and scientific in his investment activity has to evaluate a lot of information about the past performance and the expected future performance of companies, industries and the economy as a whole before taking the investment decision. Such evaluation or analysis is called fundamental analysis. Meaning of fundamental analysis:It is really a logical and systematic approach to estimating the future dividends and share price. It is based on the basic premise the share price is determined by a number of fundamental factors relating to the economy, industry and company. Hence, the economy fundamentals, industry fundamentals and company fundamentals have to be considered while analyzing a security for investment purpose. Each share is assumed to have an economic worth based on its present and future earning capacity. This is called its intrinsic value or fundamental value. The investor can then compare the intrinsic value of the share with the prevailing Market price to arrive at an investment decision. If the market price of the share is lower than its intrinsic value, the investor would decide buy the share as it is under priced. If the market price of such share higher than its intrinsic value and the market price is expected to come down in future and hence the investor would decide to sell such share. Fundamental analysis thus provides an analytical frame work for rational investment decision making. This analytical frame work is known as EIC, or economy- industry-company analysis. ECONOMY-INDUSTRY-COMPANY ANALYSIS FRAME WORK (Top-Bottom approach): The analysis of economy, industry and company fundamentals constitute the main activity in the fundamental approach to security analysis. These can be viewed as different stages in the investment decision making process and can be depicted graphically with concentric circles. The logic of this three tier analysis is that the company performance depends not only its own efforts, but also on the general industry and economy factors. The multitude of factors affecting the performance of a company can be broadly classified as: 1. Economy wide factors: such as growth rate of the economy, inflation rate, foreign exchange rate, etc which affect all companies. 2. Industry wide factors: such as demand supply gap in the industry, the emergence of substitute products, changes in government policy relating to the industry etcthese factors affect only those companies belonging to a specific industry.

3. Company specific factors: such as the age of its plant, the equality of management, brand image of its product, its labour management relations, etc ECONOMY ANALYSIS The performance of a company depends on the performance of the economy. If the economy is booming, incomes rise, demand for goods increases, and the industries and companies in general tend to be prosperous. On the other hand, if the economy is in recession, the performance of companies will be generally bad. A study of these economic variables would give an idea about future corporate earnings and the payment of dividends and interest to investors. Economic variables that an investor must monitor as part of his fundamental analysis. Growth Rates of National Income The rate of growth of the national economy is an important variable to be considered by an investor. GNP (Gross National Product), NNP (Net National Product), and GDP (Gross Domestic Product) are the

PORT FOLIO MANAGEMENT What is portfolio management? An investor considering investment in securities, is faced with the problem of choosing from among large number of securities. His choice depends upon the risk, return characteristics of individual securities. He would attempt to choose the most desirable securities and like to allocate his funds over this group of securities again. Consequently, investor faces an infinite number of possible portfolio or group of securities. Explain the phases of port folio management? Portfolio is a process, encompassing many activities aimed at optimizing the investment of ones fund. The five phases are mentioned here under: Security analysis Portfolio analysis Portfolio selection Portfolio revision Portfolio evaluation

Each phase is an integral part of the whole process, and the success of portfolio management depends upon the efficiency in carrying out each of these phases. Investment Process

Investment policy - Investible fund - Objectives

- Knowledge

Analysis

Valuation

Portfolio Construction

Portfolio Evaluation - Appraisal - Revision

- Market - Industry
- Company

- Intrinsic value - Future value

-Diversification - Selection & Allocation

SECURITY ANALYSIS: After formulating the investment policy, the securities to be bought have to be scrutinized through the market, industry and company analysis. Market analysis: The stock market mirrors the general economic scenario. The growth in gross domestic product and inflation are reflected in the stock prices. The recession in the economy results in a bear market. The stock prices may be fluctuating in short run, but in the long run they move in trends i.e. either upwards or downwards. The investor can fix his entry and exit points through technical analysis. Industry analysis: The industry that contributes to the output of the major segments of the economy vary in their growth rates and their overall contribution to economic activity. Some industries grow faster than the GDP and are expected to continue in their growth. For eg. the information technology industry has experienced higher growth rate than the GDP in 1998. The economic significance and the growth potential of the industry have to be analysed. Company Analysis: The purpose of Company Analysis is to help the investors to make better decisions. The Companys earnings, profitability, operating efficiency, capital structure, and management have to be screened. These factors have direct bearing on the stock prices and the return of the investors. Appreciation of the stock value is a function of the performance of the Company. Company with high product market share is able to create wealth to the investors in the form of capital appreciation.

VALUATION: The valuation helps the investor to determine the return and risk expected from an investment in the common stock. The intrinsic value of the share is measure through the book value of the share and price earning ratio. Simple discounting models also can be adopted to value the shares. The Stock Market Analysts have

developed many advanced models to value the shares. The real worth of the share is compared with the market price and then the investment decisions are made. Future Value: Future Value of the securities could be estimated by using a simple statistical technique like trend analysis. The analysis of the historical behavior of the price enables the investor to predict the future value. CONSTRUCTION OF PORTFOLIO: A portfolio is a combination of securities. The portfolio is constructed in such a manner to meet the investors goals and objectives. The investor tries to attain maximum return with minimum risk. Towards this end he diversifies his portfolio and allocates funds among the securities. Diversification: The main objective of diversification is the reduction of risk in the loss of capital and income. A diversified portfolio is comparatively less risky than holding a single portfolio. There are several ways to diversify the portfolio. Debt and equity diversification Debt instruments provide assured return with limited capital appreciation. Common stocks provide income and capital gain but with the flavor of uncertainty. Both debt instruments and equity are combined each other. Industry diversification Industries growth and their reaction to government policies differ from each other. Banking industry shares may provide regular returns but with limited capital appreciation. Company diversification Securities from different companies are purchased to risk. Technical analysts suggest the investors to buy securities based on the price movements. Fundamental analysts suggest the selection financially sound and investor friendly companies. Selection Based on the diversification level, industry and company analysis the securities have to be selected. Funds are allocated for the selected securities. Selection of securities and the allocation of funds and seals the construction of the portfolio. EVALUATION The portfolio has to be managed efficiently. The efficient management calls for the evaluation of the portfolio. This process consists of portfolio appraisal and revision.

Appraisal The return and risk performance of the security vary from time to time. The variability in returns of the securities is measured and compared. The developments in the economy, industry and relevant companies

from which the stocks are bought have to be appraised. The appraisal warns the loss and the steps can be taken to avoid such losses. Revision Revision depends on the results of the appraisal. The low yielding securities with high risk are replaced with high yielding securities with low risk factor. To keep the return at a particular level necessitates the investor to revise the components of the portfolio periodically.