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A discretionary portfolio manager means a portfolio manager who exercises or may under a
contract relating to portfolio management,exercise any degree of discretion in respect of the
investment or management of portfolio of the portfolio securities or the funds of the client, as
the case may be.
He shall independently or individually manage the funds of each client in accordance with the
needs of the client in a manner which does not resemble the mutual fund
A non discretionary portfolio manager shall manage the funds in accordance with the directions
of the client. A portfolio manager by virtue of his knowledge, background and experience is
expected to study the various avenues available for profitable investment and advise his client
to enable the latter to maximize the return on his investment and at the same time safeguard
the funds invested
a) To assess the quality of the management of the companies in which investment has
been made or proposed to be made.
b) To assess the financial and trend analysis of companies Balance Sheet and Profit
and Loss Accounts to identify the optimum capital structure and better performance for
the purpose of withholding the investment from poor companies
c) To analyze the security market and its trend in continuous basis to arrive at a
conclusion as to whether the securities already in possession should be disinvested and
new securities be purchased. If so the timing for investment or dis-investment is also
revealed.
1. Investment Management
2. It Portfolio Management
3. Project Portfolio Management
The term asset management is often used to refer to the investment management of
collective investments,(not necessarily) whilst the more generic fund management may
refer to all forms of institutional investment as well as investment management for
private investors. Investment managers who specialize in advisory or discretionary
management on behalf of (normally wealthy) private investors may often refer to their
services as wealth management or portfolio management often within the context of so-
called "private banking.
2. Project Portfolio - This type of portfolio management specially address the issues
with spending on the development of innovative capabilities in terms of potential ROI
and reducing investment overlaps in situations where reorganization or acquisition occurs.
The management issues with the second type of portfolio management can be judged in
terms of data cleanliness, maintenance savings, suitability of resulting solution and the
relative value of new investments to replace these projects.
b) What should be the proportion of investment in fixed interest dividend securities and
variable dividend bearing securities? The fixed one ensures a definite return and thus a
lower risk but the return is usually not as higher as that from the variable dividend bearing
shares.
d) Once industries with high growth potential have been identified, the next step is to
select the particular companies, in whose shares or securities investments are to be made
FUNDAMENTAL ANALYSIS:
(A) FUNDAMENTAL ANALYSIS OF GROWTH ORIENTED COMPANIES:
One of the first decisions that an investment manager faces is to identify the industries
which have a high growth potential. Two approaches are suggested in this regard. They
are:
a) Statistical Analysis of Past Performance: A statistical analysis of the immediate past
performance of the share price indices of various industries and changes there in related
to the general price index of shares of all industries should be made. The Reserve Bank of
India index numbers of security prices published every month in its bulletin may be taken
to represent the behaviour of share prices of various industries in the last few years. The
related changes in the price index of each industryy as compared with the changes in the
average price index of the shares of all industries would show those industries which are
having a higher growth potential in the past few years. It may be noted that an Industry
may not be remaining a growth Industry for all the time. So he shall now have to make an
assessment of the various Industries keeping in view the present potentiality also to
finalize the list of Industries in which he will try to spread his investment.
b) Assessing the Intrinsic Value of an Industry/Company: After an investment
manager has identified statistically the industries in the share of whichs show interest, he
would assess the various factors which influence the value of a particular share. These
factors generally relate to the strengths and weaknesses of the company under
consideration, Characteristics of the industry within which the company fails and the
national and international economic scene. It is the job of the investment manager to
examine and weigh the various factors and judge the quality of the share or the security
under consideration.
This approach is known as the intrinsic value approach. The major objective of the
analysis is to determine the relative quality and the quantity of the security and to decide
whether or not is security is good at current markets prices. In this, both qualitative and
quantitative factors are to be considered.
Particular Characteristics of the Industry: Each industry has its own characteristics,
which must be studied in depth in order to understand their impact on the working of the
industry. Because the industry having a fast changing technology become obsolete at a faster
rate. Similarly, many industries are characterized by high rate of profits and losses in alternate
years. Such fluctuations in earnings must be carefully examined.
2) Growth Record: The growth in sales, net income, net capital employed and earnings per
share of the company in the past few years must be examined. The following three growth
indicators may be particularly looked in to
(a) Price earnings ratio,
(b) Percentage growth rate of earnings per annum and
(c) Percentage growth rate of net block of the company.
The price earnings ratio is an important indicator for the investment manager since it shows
the number the times the earnings per share are covered by the market price of a share.
Theoretically, this ratio should be same for two companies with similar features. However, this
is not so in practice due to many factors.
Hence, by a comparison of this ratio pertaining to different companies the investment manager
can have an idea about the image of the company and can determine whether the share is under-
priced or over-priced. An evaluation of future growth prospects of the company should be
carefully made. This requires the analysis of the existing capacities and their utilization,
proposed expansion and diversification plans and the nature of the company’s technology
FINANCIAL ANALYSIS: An analysis of financial for the past few years would help the
investment manager in understanding the financial solvency and liquidity, the efficiency with
which the funds are used, the profitability, the operating efficiency and operating leverages of
the company. For this purpose certain fundamental ratios have to be calculated. From the
investment point of view, the most important figures are earnings per share, price earnings
ratios, yield, book value and the intrinsic value of the share. The five elements may be
calculated for the past ten years or so and compared with similar ratios computed from the
financial accounts of other companies in the industry and with the average ratios of the industry
as a whole. The yield and the asset backing of a share are important considerations in a decision
regarding whether the particular market price of the share is proper or not. Various other ratios
to measure profitability, operating efficiency and turnover efficiency of the company may also
be calculated .The return on owner’s investment, capital turnover ratio and the cost structure
ratios may also be worked out. To examine the financial solvency or liquidity of the company,
the investment manager may work out current ratio etc.
1. Quality of Management: This is an intangible factor. Yet it has a very important
bearing on the value of the shares. Every investment manager knows that the shares of
certain business houses command a higher premium than those of similar companies
managed by other business houses. This is because of the quality of management, the
confidence that the investors have in a particular business house, its policy vis-à-vis its
relationship with the investors, dividend and financial performance of it.
But in practical it is a difficult task. When the prices are rising in the market i.e. there is bull
phase, everybody joins in buying without any delay because every day the prices touch a new
high. Later when the bear face starts, prices tumble down every day and everybody starts
counting the losses. The ordinary investor regretted such situation by thinking why he did not
sell his shares in previous day and ultimately sell at a lower price. This kind of investment
decision is entirely devoid of any sense of timing
2) Choice Of The Asset Mix : The most important decision in portfolio management is the
asset mix decision very broadly; this is concerned with the proportions of ‘stocks’ (equity
shares and units/shares of equity-oriented mutual funds) and ‘bonds’ in the portfolio. The
appropriate ‘stock-bond’ .
1) Equity Portfolio: It is influenced by internal and external factors the internal factors
affect the inner working of the company’s growth plans are analyzed with referenced to
Balance sheet, profit & loss a/c (account) of the company. Among the external factor are
changes in the government policies, Trade cycle’s, Political stability etc.
2) Equity Stock Analysis: Under this method the probable future value of a share of a
company is determined it can be done by ratio’s of earning per share and price earning
ratio of the company.
EARNING PER SHARE FORMULA
1) Nature of the industry and its product: Long term trends of industries, competition within, and
outside the industry, Technical changes, labour relations, sensitivity, to Trade cycle.
2) Industrial analysis of prospective earnings, cash flows, working capital, dividends, etc.
3) Ratio analysis: Ratios such as debt equity ratio, current ratio, net worth, profit earnings
ratio, returns on investment, are worked out to decide the future decisions.
The wise principle of portfolio management suggests that “Buy when the
market is low or BEARISH, and sell when the market is rising or BULLISH”. Stock market
operation can be analyzed by:
a) Fundamental approach: - Based on intrinsic value of shares.
b) Technical approach: - Based on Dow Jone’s Theory, Random Walk Theory, etc. Prices are
based upon demand and supply of the market.
Objectives are maximization of wealth and minimization of risk.
Bonds
Certificates of Deposit
Commercial Papers
Debentures
FD
G - Secs (Government Securities)
National savings Certificate (NSC)
Bonds
A Bond is simply an 'IOU' in which an investor agrees to lend money to a company or
government in exchange for a predetermined interest rate. If a business wants to expand, one
of its options is to borrow money from individual investors. The company issues bonds at
different interest rates and sells them to the public. Investors purchase them with the
understanding that the company will pay back their original principal with some interest that
is due by a set date (this is known as the "maturity"). The interest a bondholder earns depends
on the strength of the corporation.
Debenture
A debenture is similar to a bond except the securitization conditions are different. A debenture
is generally unsecured in the sense that there are no liens or pledges on specific assets. It is
defined as a certificate of agreement of loans which is given under the company's stamp and
carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of
interest rates) and the principal amount whenever the debenture matures.
Certificate of Deposit
A certificate of deposit or CD is a time deposit, a financial product commonly offered to
consumers by banks, thrift institutions, and credit unions. CDs are similar to savings accounts
in that they are insured and thus virtually risk-free; they are "money in the bank". They are
different from savings accounts in that the CD has a specific, fixed term (often 3 months, 6
months, or 1 to 5 years), and, usually, a fixed interest rate. It is intended that the CD be held
until maturity, at which time the money may be withdrawn together with the accrued interest.
Eligibility to issue CD
Scheduled commercial banks excluding Regional Rural Banks (RRBs) andLocal Area
Banks
All-India Financial Institutions that have been permitted by RBI to raise short-term
resources within the umbrella limit fixed by RBI.
Maturity
The maturity period of CDs issued by banks should be not less than 7 days and not
more than one year.
The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years
from the date of issuance
Reserve Requirements Banks have to maintain the appropriate reserve requirements, i.e., cash
reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs
MUTUAL FUND SCHEMES
An investor can participate in varous schemes floated by mutual fund instead of buying equity
shares. In mutual fund investment in equity shares and fixed income securities.
there are three type of mutual fund schemes
1.growth schemes
2.income schemes
3.balanced schemes
DEPOSITS
It is just like fixed income securities earn a fixed return. However , unlike fixed income
sequrities they are negotiable or transferable.
They are –
1. Bank deposits
2. Company deposits
3. Public deposits
PRECIOUS OBJE TS
1. Gold and silver
2. Precious stones
3. Art objects
FINANCIAL DERIVATIVES
Whose value are derived from the value of underlying asset. They are futures and options.
CHAPTER - 4
ANALYSIS AND INTERPRETATION
2.purchasing Power Risk: It is also known as inflation risk also emanates from the very
fact that inflation affects the purchasing power adversely. Nominal return contains both the real
return component and an inflation premium in a transaction involving risk of the above type to
compensate for inflation over an investment holding period. Inflation rates vary over time and
investors are caught unaware when rate of inflation changes unexpectedly causing erosion in
the value of realized rate of return and expected return.
Purchasing power risk is more in inflationary conditions especially in respect of bonds and
fixed income securities. It is not desirable to invest in such securities during inflationary
periods. Purchasing power risk is however, less in flexible income securities like equity shares
3.Business Risk: Business risk emanates from sale and purchase of securities affected by
business cycles, technological changes etc. Business cycles affect all types of securities i.e.
there is cheerful movement in boom due to bullish trend in stock prices whereas bearish trend
in depression brings down fall in the prices of all types of securities during depression due to
decline in their market price.
4.Financial Risk: It arises due to changes in the capital structure of the company. It is also
known as leveraged risk and expressed in terms of debt-equity ratio. Excess of risk vis-à-vis
equity in the capital structure indicates that the company is highly geared. Although a leveraged
company’s earnings per share are more but dependence on borrowings exposes it to risk of
winding up for its inability to honor its commitments towards lender or creditors. The risk is
known as leveraged or financial risk of which investors should be aware and portfolio managers
should be very careful.
5.Systematic Risk or Market Related Risk: Systematic risks affected from the entire market
are (the problems, raw material availability, tax policy or government policy, inflation risk,
interest risk and financial risk). It is managed by the use of Beta of different company shares.
Not all investors are created equal. While some prefer less risk, other investors prefer even
more risk than those who have a larger net worth. This diversity leads to the beauty of the
investment pyramid. Those who want more risk in their portfolios can increase the size of the
summit by decreasing the other two sections, and those wanting less risk can increase the size
of the base. The pyramid representing your portfolio should be customized to your risk
preference.
Normally, the higher the risk that the investor takes, the higher is the return. There is, however,
a risk less return on capital of about 12% which is the bank, rate charged by the R.B.I or long
term, yielded on government securities at around 13% to 14%. This risk less return refers to
lack of variability of return and no uncertainty in the repayment .
Risk-return is subject to variation and the objectives of the portfolio manager are to reduce that
variability and thus reduce the risk by choosing an appropriate portfolio. Traditional approach
advocates that one security holds the better, it is according to the modern approach
diversification should not be quantity that should be related to the quality of scripts which leads
to quality of portfolio. Experience has shown that beyond the certain securities by adding more
securities expensive.
RETURNS ON PORTFOLIO: Each security in a portfolio contributes return in the
proportion of its investments in security. Thus the portfolio expected return is the weighted
average of the expected return, from each of the securities, with weights representing the
proportions share of the security in the total investment. Why does an investor have so many
securities in his portfolio? If the security ABC gives the maximum return why not he invests
in that security all his funds and thus maximize return? The answer to this questions lie in the
investor’s perception of risk attached to investments, his objectives of income, safety etc
PORTFOLIO THEORIES
1) Primary Movements: They reflect the trend of the stock market and last from one year to
three years, or sometimes even more. If the long range behavior of market prices is seen, it will
be observed that the share markets go through definite phases where the prices are consistently
rising or falling. These phases are known as bull and bear phases.
During a bull phase, the basic trend is that of rise in prices. Graph 1 above shows the behavior
of stock market prices in bull phase. You would notice from the graph that although the prices
fall after each rise, the basic trend is that of rising prices. As can be seen from the graph that
each trough prices reach, is at a higher level than the earlier one. Similarly, each peak that the
prices reach is on a higher level than the earlier one. Thus 3 is higher than 1 and 2 is higher
than 1. This means that prices do not rise consistently even in a bull phase. They rise for some
time and after each rise, they fall. However, the falls are of a lower magnitude then earlier. As
a result, prices reach higher levels with each rise. Once the prices have risen very high, the bear
phase in bound to start i.e., price