A Project Report On

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

By
TanweerUlAmin

Undertheguidanceof:
ArjunRawat

UniversityOfKashmir
Inpartialfulfilmentoftherequirementsfortheawardofthedegree

OfMBAFinancialManagement.
 DECLARATION

I hereby declare that the project report titled Security Analysis and
PortfolioManagementwithreferencetoIIFLismyoriginalworkandhasnot
been published or submitted for any degree, diploma or other similar titles
elsewhere.ThishasbeenundertakenforthepurposeofpartialfulfilmentofMBA
infinancialmanagementatUniversityofKashmir,Hazratbal,Kashmir.

TanweerulAmin
RollNo.:26
 PREFACE

Thisprojectreportattemptstobringunderonecovertheentirehardwork
anddedicationputinbymeinthecompletionoftheprojectworkon

SecurityAnalysisandPortfolioManagementwithreferencetoIIFL

Ihaveexpressedmyexperiencesinmyownsimpleway.Ihopewho
goesthroughitwillfinditinterestingandworthreading.Allconstructive
feedbackiscordiallyinvited.
 ACKNOWLEDGEMENT

It gives me great pleasure in presenting the project report that gives the details of
my project on Security Analysis and Portfolio Management carried out at
IIFL, Noida sector 63 (UP), dated from 21-01-2016 17-03-2016 (2months).

It is impossible to list all the people who have helped me during my project. I
take this opportunity to express my whole hearted thanks to Mr. Arjun Rawat
at IIFL who has treated me as an employee & helped me in all my queries
personally.

I would also like to express my deep sense of gratitude towards all managers,
staff, & to all those who directly or indirectly helped me in successfully execution
of my work.

Lastly but most essentially I would like to thank Getanjali kumari without his
help it wouldnt be possible for me to complete the project at the stipulated period
of time.

 CONTENTS
Page No.

Executive summary 1-2

Company profile 3-19
Overview
Birds Eye View
Journey
Corporate Structure
Capital Market Advisory
Asset Management
Real Estate Advisory
Corporate Social Responsibility
SWOT Analysis of IIFL
Competitors of IIFL

Security Analysis 20-21

Analysis of Securities
Approaches

Fundamental Analysis 22-25

GDP
Industrial Growth Rate
Agriculture
Saving & Investors
Govt. Budget & Deficit
Price Level & Inflation
Balance of Payments
Sentiments

IndustrialAnalysis2627
IndustrialLifeCycleAnalysis
StructureofanIndustry
PorterModel

CompanyAnalysis2831
FinancialAnalysis
ComparativeStatement
TrendAnalysis
CommonSizeStatement
FundFlowAnalysis
CashFlowAnalysis

TechnicalAnalysis3235
BreadthIndicators
MarketSentimentIndicators
RandomWalkTheory
 CONTENTS
PageNo.

PortfolioManagement3646
CharacteristicsofInvestment
InvestmentCategories
Features
Functions
Process
PortfolioSelection

PortfolioAnalysis4755
RiskManagement
PracticalStudy

Conclusion56

Bibliography57

 ExecutiveSummary

The activities of large, internationally active financial institutions have grown

increasingly complex and diverse in recent years. This increasing complexity has
necessarilybeenaccompaniedbyaprocessofinnovationinhowtheseinstitutions
measure and monitor their exposure to different kinds of risk. One set of risk
management techniques that has attracted a great deal of attention over the past
severalyears,bothamongpractitionersandregulators,is"stresstesting",whichcan
belooselydefinedastheexaminationofthepotentialeffectsonafirmsfinancial
conditionofasetofspecifiedchangesinriskfactors,correspondingtoexceptional
butplausibleevents.

A concept of security analysis and portfolio management services has been very
famousandoldamongvariousinstitutions.

Thisreportrepresentspracticesapplicationofportfoliomanagementtechniquesinthe
portfolio section. Portfolio management is an integrated and exhaustive of
fundamentalandtechnicalmethodswhichareusedforcalculationofannulreturnand
earningspersharefortheportfolio.

Modernportfoliotheorysuggeststhatthetraditionalapproachtoportfolioanalysis,
selection and management may yield less than optimum results. Hence a more
scientificapproachisrequired,basedonestimatesofriskandreturnoftheportfolio
andthe attitudesoftheinvestortowarda riskreturntradeoffstemmingfrom the
analysisoftheindividualsecurities.

1
OBJECTIVES:

Tostudyandunderstandtheportfoliomanagementconcepts.

Tostudyandunderstandthesecurityanalysisconcepts.

Tomeasuretheriskandreturnofportfolioofcompanies.

Toselectanoptimumportfolio.

RESEARCHMETHODOLOGY

DatacollectedfromvariousBooks,NewspapersandInternet.

LIMITATIONS:

Themajorlimitationsoftheprojectare:

Detailedstudyofthetopicwasnotpossibleduetothelimitedsizeofthe
project. There was a constraint with regard to time allocated for the
researchstudy.

The availability of information in the form of annual reports and price

fluctuationsofthecompanieswasabigconstraintofthestudy.

2
 COMPANY PROFILE

Overview

TheIIFLGroupisaleadingfinancialservicescompanyinIndia,
promotedbyfirstgenerationentrepreneurs.Wehaveadiversifiedbusinessmodelthat
includescreditandfinance,wealthmanagement,financialproductdistribution,asset
management,capitalmarketadvisoryandinvestmentbanking.

We have a largely retail focussed model, servicing over 2 million customers,

includingseverallakhfirsttimecustomersformutualfunds,insuranceandconsumer
credit.Thishasbeenachievedduetoourextensivedistributionreachofcloseto4,000
businesslocationsandalsoinnovativemethodslikeseminarsalesanduseofmobile
vansformarketinginsmallerareas.

Ourevolutionfromanentrepreneurialstartuptoamarketleadershippositionisa
storyofsteadygrowthbyadaptingtothechangingenvironment,withoutlosingthe
focus on our core domain of financial services. Our NBFC and lending business
accountsfor68%ofourconsolidatedincomeinFY13andhasadiversifiedproduct
portfolioratherthanremainingamonolineNBFC.Wearealeaderindistributionof
lifeinsuranceandmutualfundsamongnonbankentities.Althoughtheshareofequity
brokingintotalincomewasonly13%inFY13,IIFLcontinuestoremainaleading
playerinboth,retailandinstitutionalspace.

3
4
Location Mumbai
Corporateoffice IIFL centre,LowerParel
IIFLHouse,SunInfoTechPark,RoadNo.16V,PlottNo.B23,Thane
Registeredoffice
IndustrialArea,WagleEstate,Thane,Maharashtra400604
Yearof
1995
incorporation
Industry FinancialServices
Credit &Finance,WealthManagement,Financial ProductDistribution
Keybusinesses
CapitalMarketRelated
Employees 14,000+
Businesslocations Around 4000 locations in 900 towns and cities
SriLanka,Singapore,Dubai,NewYork,Mauritius,UK,HongKong,
Globalreach
Switzerland
Listings NSE, BSE
Listingdate 17May,2005
Registrars Link IntimeIndiaPvt.Ltd.
Shorttermdebt
CRISILA1+&ICRA(A1+)
rating
Longtermdebt
ICRA(AA)&CRISILAA/Stable
rating
www.indiainfoline.com,www.iiflfinance.com,
Domains
www.ttweb.indiainfoline.com,www.flame.org.in
ISINcode INE53 0B01024
Bloombergcode IIFLINEQUITY
Reuterscode IIFL.B O

5
IIFLtrackrecordofuninterruptedprofitsanddividendssincelisting.

6
7
Segmentalrevenuesplit

8
 OurJourney
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
. 2014
. 2015

1996

AsmallgroupofprofessionalsformedanInformationServices
Company
ThecompanywasformedinOctober1995withavisionto
producehighquality,unbiased,independentresearchonthe
Indianeconomy,business,industriesandcorporates.

ThecompanywasoriginallyincorporatedasProbity
ResearchandServicesPvt.Ltd.Thenameofthecompanywas
laterchangedtoIndiaInfolineLtd.
. 2015

Record Profits!
Our consolidated income was at Rs 36.7 billion and profit after tax stood at
Rs 4.5 billion for the financial year ended March 31, 2015.

9
1
0
 Whatwedo(ProductandServices)?

IIFLGroupofferscredit&financefacilitiesthroughits
subsidiaries:

IndiaInfolineFinanceLtd(98.87%subsidiary);and
IndiaInfolineHousingFinanceeLtd(Whollyownedsubsidiary).

TheNBFChasahighqualityloanbookofclosetoRs10,000crores,withadiversified
portfolioincluding:

Homeloans

SME&Traderloans

Healthcare&Equipmentfinancing

LoanssecuredagainstGold

CommercialVehiclefinancing

LoanssecuredagainstProperty

LoanssecuredagainstShares

Wehavechosentobeadiversifiedportfoliocompanyratherthanamonoline
NBFC.We
Exerciseutmostprudenceincreditselection,monitoringandavoidconcentration.Ourcredit
evaluationprocessnotonlytakesintoaccountthevalueandqualityofthecollateral,butalso
thecashflowsofthepotentialborrower.Backedbyadiversifiedportfolio,robustcredit
assessment,effectiveriskmanagementtechniquesandanefficientcollectionmechanism,the
NetNPAsarekeptwellundercontrolatlessthan0.2%.TheNBFCandlendingbusiness
accountedfor68%ofourconsolidatedincomeinFY13.

11
Revenues

Loanbook

12
Loanbookbreakup

NIM

13
GrossNPA

NetNPA

CAR

14
We pioneeredinternet brokinginIndia andrationalised brokerage rates from 150
basispointsinthelateninetiesto5basispoints.Althoughtheshareofequitybroking
intotalincomewasonly13%inFY13,wecontinuetoremainaleadingplayerin
both,retailandinstitutionalspace.

Ourextensionintocommoditiesandcurrencyadvisoryreconcileswithitsvisionto
emergeasaonestopshopfinancialintermediary.Weareintheprocessofbuildinga
cultureofadvisoryandfinancialplanningtomoveawayfrompureexecutionandde
riskourbusinessfurther.

IIFLCapital,theinstitutionalequitiesdivisionoftheIIFLGroup,isthefirstportof
callformostleadingforeigninstitutionalinvestorsandmutualfundsthatinvestin
India.Ourunmatchedblockplacementcapabilityisrenownedandisunderpinnedby
ourreputationforintegrityandclientconfidentiality.

Revenuesincreased2.3%toRs552.53crorein201213.

Marketshareinequity Marketshareincommodity

15
WelaunchedourMutualFundbusinesstooffernicheproducts.TheIIFLNiftyETF,
ourmaidenscheme,carriesthelowestexpensesofanyequityETFinIndia .
Ourpassively managed Dividend OpportunitiesETF has beenrankedthesecondbest
PerformerbyValueResearch.Atotalofsixschemeshave beenlaunched,includingfour
closeendeddebtschemesandtwoopenendedequity Schemes.Total assets under
management (AUM) stoodat Rs3,271million asonMarch 31, 2013.

Ourstrengthliesingaugingthemarketpulseandlaunchingnicheproductswithlow
churnandoperationalefficiency,therebykeepingcostslow.

Thebusinessleveragesuponthestrengthofourresearchandplacementcapabilitiesof
the institutional and retail sales teams. Our experienced investment banking team
possessestheskillsettomanageallkindsofinvestmentbankingtransactions.Our
closeinteractionswithinvestorsaswellascorporatehelpsusunderstandandoffer
tailormadesolutionstofulfilrequirements.

Wepossessstrongplacementcapabilitiesacrossinstitutional,HNIandretail
investors.
Someofourmarqueetransactions:

16
Weprovideendtoendadvisoryservices,whetherbuy,sell,leaseorrenttoassist
customers in decisionmaking, transaction, documentation and facilitate post deal
activity.Ourmissionistohelpclientscreateandpreservewealthbyprovidingthe
bestrealestateinvestment.

Awards:
BestWealthManagementHouse(India),2011&2012,TripleA

No.1inFixedIncomePortfolioManagementinIndia,2012Euro
MoneyBestBrokingHousewithGlobalPresence,2011&2012
D&B

TopPerformer,Equity(FICategory),2012
BSE Best Commodities Investment, 2012
EuroMoney
Best Customer Service in Financial Services, 2013 Retailer Customer Service
Awards

17
IIFLFoundation

InlinewithIIFLsvisiontobethemostrespectedcompanyinthefinancialservices
space, the company recognises the importance of contributing to and sustaining
socialtransformation.TheIIFLFoundationhasbeensetuptoworkinareasofskill
development for various industries and to ensure financial inclusion through the
supportandupliftmentoftheunderprivilegedsectionsofsociety.

The IIFL Foundationfocuses onspecific areas ofneed,includinghealthcareand

education. The foundation will screen and select institutions and developmental
agencies which are working in these domains and will provide necessary aid to
improvethelivesoftheunderprivilegedandhelptheminachievingtheirpotential.

TheIIFLFoundationhasinitiatedcareerguidancetothestudentsofHighSchooland
JuniorcollegesinremoteareasofMaharashtratoenablethemtopursuethecareer
whichprovidesrightemploymentopportunities.

FLAME
FLAME (Financial Literacy Agenda for Mass Empowerment) is an IIFL
Foundation initiative topromote financialliteracyamongstthemassesinorderto
make them an integral part of India's spectacular growth story. In an era of
acceleratingGDPandrisingpercapitagrowth,financialliteracyhasbecomemore
criticalthaneverbeforesuchthatweallreapthetangiblebenefitsofthenations
economicprosperity. Financialinclusionhasbeenquitehighonthegovernmental
agenda,givenitsemphasisonwideningtheBanking&Financialservicesnetwork
acrossthecountry.TheFLAMEinitiativestandscommittedtocomplementthiseffort
by helping common people gain financial growth and security though better
awarenessandeducationonthevarietyoffinancialproductswhileavoidingthelure
ofandlossfromunrealisticclaimsmadebyunscrupulousagentsandponzischemes.
Visitour
Dedicatedsiteforfinancialliteracy:www.flame.org.in

18
 SWOTANALYSISOFIIFL

STRENGHTS:
Lowbrokeragesystem
Effectiveaftersalesservicessystem
First Indian brokerage house to get membership of Singapore
Exchange
Teletradealsopossible
Online portals successful branding as 5paisa.com
. Have over 2500 offices in India in over 500 cities

WEAKNESSES:

LackofAggressiveadvertisementsandsalespromotionprogrammed.
Theworkingofthesalesforceistraditional.
Inventoryinvestmentsshouldbemore.
Miscommunicationandineffectivecoordinationatvariouslevelofhierarchy.

OPPORTUNITIES:

GrowingcapitalmarketinIndia&othercountry
PoliticalstabilityinIndia&othercountry
BettergovernancebySEBI
- More penetration into the growing cities

THREATS:
Demand&supply
Increasingcompetitioninsecuritymarket
Lostinfaithinsharemarketafterbigscamsinthestockmarket
Naturalcalamities
Inabilityofcustomerstopaybrokerageattherighttime
Highriskinvolvedinthestockmarket.

19
20
COMPETITORSOFIIFL:

SHAREKHAN
RELIANCE MONEY
UNICON
KARVY
INDIABULLS
RK GLOBAL SECURITIES
RELIGARE

21
 SECURITYANALYSIS

Definition:

Formakingproperinvestmentinvolvingbothriskandreturn,theinvestorhastomake
studyofthealternativeavenuesoftheinvestmenttheirriskandreturncharacteristics,
andmakeaproperprojectionorexpectationoftheriskandreturnofthealternative
investmentsunderconsideration.Hehastotunetheexpectationstothispreferenceof
theriskandreturnformakingaproperinvestmentchoice.Theprocessofanalyzing
theindividualsecuritiesandthemarketasawholeandestimatingtheriskandreturn
expectedfromeachoftheinvestmentswithaviewtoidentifyundervaluessecurities
forbuyingandovervaluessecuritiesforsellingisbothanartandasciencethatiswhat
calledsecurityanalysis.

Security:

The security has inclusive of shares, scripts, bonds, debenture stock or any other
marketablesecuritiesoflikenatureinorofanydebenturesofacompanyorbody
corporate,thegovernmentandsemigovernmentbodyetc.Inthestrictsenseofthe
word,asecurityisaninstrumentofpromissorynoteoramethodofborrowingor
lendingorasourceofcontributingtothefundsneedbyacorporatebodyornon
corporatebody,privatesecurityforexampleisalsoasecurityasitisapromissory
noteofanindividualorfirmandgivesrisetoclaimonmoney.Butsuchprivate
securitiesofprivatecompaniesorpromissorynotesofindividuals,partnershiporfirm
totheintentthattheirmarketabilityispoorornil,arenotpartofthecapitalmarket
anddonotconstitutepartofthesecurityanalysis.
AnalysisofSecurities:

Securityanalysisinbothtraditionalsenseandmodernsenseinvolvestheprojectionof
future dividend or ensuring flows, forecast of the share price in the future and
estimating the intrinsic value of a security based on the forecast of earnings or
dividend. Security analysis in traditional sense is essentially on analysis of the
fundamentalvalueofsharesanditsforecastforthefuturethroughthecalculationof
its intrinsic worth of share. Modern security analysis relies on the fundamental
analysisofthesecurity,leadingtoitsintrinsicworthandalsorisereturnanalysis
depending on the variability of the returns, covariance, safety of funds and the
projectionofthefuturereturns.

Ifthesecurityanalysisbasedonfundamentalfactorsofthecompany,thentheforecast
ofthesharepricehastotakeintoaccountinevitablythetrendsandthescenariointhe
economy,intheindustrytowhichthecompanybelongsandfinallythestrengthsand
weaknesses ofthe company itself. Its management, promoters backward, financial
results,projectionofexpansion,termplanningetc.
ApproachestoSecurityAnalysis:

FundamentalAnalysis

TechnicalAnalysis

EfficientMarketHypothesis
FUNDAMENTALANALYSIS

It'salogicalandsystematicapproachtoestimatingthefuturedividends&shareprice
as these two constitutes the return from investing in shares. According to this
approach, the share price of a company is determinedby the fundamental factors
affectingtheEconomy/Industry/CompanysuchasEarningsPerShare,DIPratio,
Competition,MarketShare,QualityofManagementetc.itcalculatesthetrueworthof
thesharebasedonitspresentandfutureearningcapacityandcomparesitwiththe
currentmarketpricetoidentifythemispricedsecurities.

Fundamentalanalysisinvolvesathreestepexamination,whichcallsfor:

1. Understandingofthemacroeconomicenvironmentanddevelopments.
2. Analyzingtheprospectsoftheindustrytowhichthefirmbelongs.
3. Assessingtheprojectedperformanceofthecompany.

MACROECONOMICANALYSIS:

Themacroeconomyistheoveralleconomicenvironmentinwhichallfirmsoperate.
Thekeyvariablescommonlyusedtodescribethestateofthemacroeconomyare:
GrowthRateofGrossDomesticProduct(GDP):

TheGrossDomesticProductismeasureofthetotalproductionoffinalgoodsand
servicesintheeconomyduringaspecifiedperiodusuallyayear.Thegrowthrateof
GDPisthemostimportantindicatoroftheperformanceoftheeconomy.Thehigher
thegrowthrateofGDP,otherthingsbeingequal,themorefavourableitisforthe
stockmarket.
IndustrialGrowthRate:

Thestockmarketanalystsfocusmoreontheindustrialsector.Theylookattheoverall
industrialgrowthrateaswellasthegrowthratesofdifferentindustries.Thehigherthe
growthrateoftheindustrialsector,otherthingsbeingequal,themorefavourableitis
forthestockmarket.
AgricultureandMonsoons:

AgricultureaccountsforaboutaquarteroftheIndianeconomyandhasimportant
linkages, direct and indirect, with industry. Hence, the increase or decrease of
agricultural production has a significant bearing on industrial production and
corporateperformance.Aspellofgoodmonsoonsimpartsdynamismtotheindustrial
sectorandbuoyancytothestockmarket.Likewise,astreakofbadmonsoonscastsits
shadowovertheindustrialsectorandthestockmarket.
SavingsandInvestments:

The demand for corporate securities has an important bearing on stock price
movements.Soinvestmentanalystsshouldknowwhatthelevelofinvestmentinthe
economy is and what proportion of that investment is directed toward the capital
market.Theanalystsshouldalsoknowwhatthesavingsareandhowthesameare
allocatedovervariousinstrumentslikeequities,bonds,bankdeposits,smallsavings
schemes,andbullion.Otherthingsbeingequal,thehigherthelevelofsavingsand
investments and the greater the allocation of the same over equities, the more
favourableitisforthestockmarket.
GovernmentBudgetandDeficit:

Governmentplaysanimportantroleinmosteconomies.Theexcessofgovernment
expenditures over governmental revenues represents the deficit. While there are
severalmeasuresfordeficit,themostpopularmeasureisthefiscaldeficit.Thefiscal
deficithastobefinancedwithgovernmentborrowings,whichisdoneinthreeways:

1. ThegovernmentcanborrowfromthereservebankofIndia.
2. Thegovernmentcanresorttoborrowingindomesticcapitalmarket.
3. Thegovernmentmayborrowfromabroad.

Investmentanalystsexaminethegovernmentbudgettoassesshowitislikelyto
impactonthestockmarket.
PriceLevelandInflation:

ThepricelevelmeasuresthedegreetowhichthenominalrateofgrowthinGDPis
attributabletothefactorofinflation.Theeffectofinflationonthecorporatesector
tends to be uneven. While certain industries may benefit, others tend to suffer.
Industriesthatenjoyastrongmarketfortheseproductsandwhichdonotcomeunder
thepurviewofpricecontrolmaybenefit.Ontheotherhand,industriesthathavea
weakmarketandwhichcomeunderthepurviewofpricecontroltendtolose.Onthe
whole,itappearsthatamildlevelofinflationisgoodforthestockmarket.

InterestRate:

Interestratesvarywithmaturity,defaultrisk,inflationrate,productivityofcapital,
specialfeatures,andsoon.Ariseininterestratesdepressescorporateprofitabilityand
alsoleadstoanincreaseinthediscountrateappliedbyequityinvestors,bothofwhich
haveanadverseimpactonstockprices.Ontheotherhand,afallininterestrates
improvescorporateprofitabilityandalsoleadstoadeclineinthediscountrateapplied
byequityinvestors,bothofwhichhaveafavourableimpactonstockprices.

BalanceofPayments,ForexReserves,andExchangeRates:

Thebalanceofpaymentsdeficitdepletestheforexreservesofthecountryandhasan
adverseimpactontheexchangerate;ontheotherhandabalanceofpaymentssurplus
augments the forex reserves of the country and has a favourable impact on the
exchangerate.
InfrastructuralFacilitiesandArrangements:

Infrastructural facilities and arrangements significantly influence industrial

performance.Morespecifically,thefollowingareimportant:

Adequateandregularsupplyofelectricpoweratareasonabletariff.
A well developed transportation and communication system (railway
transportation,roadnetwork,inlandwaterways,portfacilities,airlinks,and
telecommunicationssystem).
Anassuredsupplyofbasicindustrialrawmaterialslikesteel,coal,petroleum
products,andcement.
Responsivefinancialsupportforfixedassetsandworkingcapital.

Sentiments:

The sentiments of consumers and businessmen can have an important bearing on

economicperformance.Higherconsumerconfidenceleadstohigherexpenditureon
big ticket items. Higher business confidence gets translated into greater business
investmentthathasastimulatingeffectontheeconomy.Thus,sentimentsinfluence
consumptionandinvestmentdecisionsandhaveabearingontheaggregatedemand
forgoodsandservices.
INDUSTRYANALYSIS:

Theobjectiveofthisanalysisistoassesstheprospectsofvariousindustrial
groupings. Admittedly, it is almost impossible to forecast exactly which
industrialgroupingswillappreciatethemost.Yetcarefulanalysiscansuggest
whichindustrieshaveabrighterfuturethanothersandwhichindustriesare
plaguedwithproblemsthatarelikelytopersistforwhile.
Concernedwiththebasicsofindustryanalysis,thissectionisdividedintothree
parts:
Industrylifecycleanalysis
Studyofthestructureandcharacteristicsofanindustry
Profitpotentialofindustries:Portermodel.

INDUSTRYLIFECYCLEANALYSIS:

Manyindustrieseconomistsbelievethatthedevelopmentofalmosteveryindustry
maybeanalyzedintermsofalifecyclewithfourwelldefinedstages:
Pioneeringstage:

Duringthisstage,thetechnologyandortheproductarerelativelynew.Luredby
promisingprospects,manyentrepreneursenterthefield.Asaresult,thereiskeen,and
oftenchaotic,competition.Onlyafewentrantsmaysurvivethisstage.
RapidGrowthStage:

Inthisstagefirms,whichsurvivetheintensecompetitionofthepioneeringstage,
witnesssignificantexpansionintheirsalesandprofits?
MaturityandStabilizationStage:

Duringthestage,whentheindustryismoreorlessfullydeveloped,itsgrowthrateis
comparable to that of the economy as a whole. With the satiation of demand,
encroachmentofnewproducts,andchangesinconsumerpreferences,theindustry
eventuallyentersthedeclinestage,relativetotheeconomyasawhole.Inthisstage,
whichmaycontinueindefinitely,theindustrymaygrowslightlyduringprosperous
periods,stagnateduringnormalperiods,anddeclineduringrecessionaryperiods.
STUDYTHESTRUCTURE&CHARACTERISTICSOFANINDUSTRY:

Since each industry is unique, a systematic study of its specific features and
characteristicsmustbeanintegralpartoftheinvestmentdecisionprocess.Industry
analysisshouldfocusonthefollowing:
I. StructureoftheIndustryandnatureofCompetition:

Thenumberoffirmsintheindustryandthemarketshareofthetopfew(four
tofive)firmsintheindustry
Licensingpolicyofthegovernment
Entrybarriers,ifany
Pricingpoliciesofthefirm
Degreeofhomogeneityordifferentiationamongproducts
Competitionfromforeignfirms
Comparisonoftheproductsoftheindustrywithsubstitutesintermsofquality,
price,appeal,andfunctionalperformance

II. NatureandProspectofDemand:
Majorcustomerandtheirrequirements
Keydeterminantsofdemand
Degreeofcyclicalityindemand
Expectedrateofgrowthintheforeseeablefuture

III.Cost,Efficiency,andProfitability:
Proportionsofthekeycostelements,viz.rawmaterials,labour,utilities,&fuel
Productivityoflabour
Turnoverofinventory,receivables,andfixedassets
Controloverpricesofoutputsandinputs
Behaviourofpricesofinputsandoutputsinresponsetoinflationarypressures
Grossprofit,operatingprofit,andnetprofitmargins
Returnonassets,earningpower,andreturnonequity

IV. TechnologyandResearch:
Degreeoftechnologicalstability
Importanttechnologicalchangesonthehorizonandtheirimplications
Researchanddevelopmentoutlaysasapercentageofindustrysales
Proportionofsalesgrowthattributabletonewproducts
PROFITPOTENTIALANDINDUSTRIES:PORTERMODEL

MichaelPorterhasarguedthattheprofitpotentialofanindustrydependsonthe
combinedstrengthofthefollowingfivebasiccompetitiveforces:

Threatofnewentrants
Rivalryamongtheexistingfirms
Pressurefromsubstituteproducts
Bargainingpowerofbuyers
Bargainingpowerofsellers

COMPANYANALYSIS

Companyanalysisisthefinalstageofthefundamentalanalysis,whichistobedone
todecidethecompanyinwhichtheinvestorshouldinvest.TheEconomyAnalysis
providestheinvestorabroadoutlineoftheprospectsofgrowthintheeconomy.The
IndustryAnalysishelpstheinvestortoselecttheindustryinwhichtheinvestment
would be rewarding. Company Analysis deals with estimation of the Risks and
Returnsassociatedwithindividualshares.

Thestockpricehasbeenfoundondependontheintrinsicvalueofthecompany's
sharetotheextentofabout50%aspermanyresearchstudies.GraharmandDoddin
theirbookon'securityanalysis'havedefinedtheintrinsicvalueas"thatvaluewhich
isjustifiedbythefactofassets,earninganddividends".Thesefactsarereflectedinthe
earning potential if the company. The analyst has to project the expected future
earningspershareanddiscountthemtothepresenttime,whichgivestheintrinsic
valueofshare.Anothermethodtouseistakingtheexpectedearningspershareand
multiplyingitbytheindustryaveragepriceearningmultiple.

Bythismethod,theanalystestimatestheintrinsicvalueorfairvalueofshareand
compares it with the market price to know whether the stock is overvalued or
undervalued.Theinvestmentdecisionistobuyundervaluedstockandsellovervalued
stock.

A.Financialanalysis:

Sharepricedependspartlyonitsintrinsicworthforwhichfinancialanalysisfora
companyisnecessarytohelptheinvestortodecidewhethertobuyornottheshares
ofthecompany.Thesoundnessandintrinsicworthofacompanyisknownonlysuch
analysis.Aninvestorneedstoknowtheperformanceofthecompany,itsintrinsic
worthasindicatedbysomeparameterslikebookvalue,EPS,PIEmultipleetc.and
cometoaconclusionwhethertheshareisrightlypricedforpurchaseornot.This,in
shortisshortimportanceoffinancialanalysisofacompanytotheinvestor.
Financialanalysisisanalysisoffinancialstatementofacompanytoassessitsfinancial
healthandsoundnessofitsmanagement."Financialstatementanalysis"involvesa
studyofthefinancialstatementofthecompanytoascertainitsprevailingstateof
affairsandthereasonsthereof.Suchastudywouldenablethepublicandinvestorsto
ascertainwhetheronecompanyismoreprofitablethantheotherandalsotostatethe
causeandfactorsthatareprobablyresponsibleforthis.
MethodorDevicesofFinancialanalysis

Theterm'financialstatement'asusedinmodernbusinessreferstothebalancesheet,
orthestatementoffinancialpositionofthecompanyatapointoftimeandincomeand
expenditurestatement;ortheprofitandlossstatementoveraperiod.

Interpretthefinancialstatement;itisnecessarytoanalyzethemwiththeobjectof
formation of opinion with respect to the financial condition of the company. The
followingmethodsofanalysisaregenerallyused.

1. Comparativestatement.
2. Trendanalysis
3. Commonsizestatement
4. Foundflowanalysis
5. Cashflowanalysis
6. Ratioanalysis
Thesalientfeaturesofeachoftheabovestepsarediscussedbelow:
1.Comparativestatement:

The comparative financial statements are statements of the financial position at

different periods of time. Any statements prepared in a comparative from will be
covered in comparative statements. From practical point of view, generally, two
financialstatements(balancesheetandincomestatement)arepreparedincomparative
fromforfinancialanalysispurpose.Notonlythecomparisonofthefiguresoftwo
periodsbutalsoberelationshipbetweenbalancesheetandincomestatementenables
ondepthstudyoffinancialpositionandoperativeresults.
Thecomparativestatementmayshow:
(1) Absolutefigures(Rupeeamounts).
(2) Changesinabsolutefiguresi.e.,increaseordecreaseinabsolutefigures.
(3) Absolutedataintermsofpercentage.
(4) Increaseordecreaseintermsofpercentages.
2.TrendAnalysis:

The financial statement may be analyzed by computing trends of series of

information.Thismethoddeterminesthedirectionupwardordownwardsandinvolves
thecomputationofthepercentagerelationshipthateachstatementitembearstothe
sameiteminbaseyear.Theinformationforanumberofyearsistakenupandone
year,generallythefirstyear,istakenasabaseyear.Thefiguresofthebaseyearare
takenas100andtrendratiosforotheryearsarecalculatedonthebasisofbaseyear.

ThesetendinthecaseofGPMorsalesturnoverareusefultoindicatetheextentof
improvementordeteriorationoveraperiodoftimeintheaspectsconsidered.The
trendsindividends,EPS,assetgrowth,orsalesgrowtharesomeexamplesofthe
trendsusedtostudytheoperationalperformanceofthecompanies.
Procedureforcalculatingtrends:

(I)Oneyearistakenasabaseyeargenerally;thefirstorthelastistakenasbaseyear.

(II)Thefiguresofbaseyeararetakenas100.

(III)Trendpercentagesarecalculatedinrelationtobaseyear.Ifafigureinotheryear
islessthanthefigureinbaseyearthetrendpercentagewillbelessthan100andit will
bemorethanthe100itfigureismorethanthebaseyearfigures.Eachyear'sfigureisdivided
bythebaseyearsfigure.
3.Commonsizestatement:

The commonsize statements, balance sheet and income statement are shown in
analytical percentage. The figures are shown as percentages of total assets, total
liabilitiesandtotalsales.Thetotalassetsaretakenas100anddifferentassetsare
expressedasapercentageofthetotal.Similarly,variousliabilitiesaretakenasapart
oftotalliabilities.Thesestatementsarealsoknownascomponentpercentageor100
percentstatementsbecauseeveryindividualitemisstatedasapercentageofthetotal
100. The shortcomings in comparative statements and trend percentages where
changesintermscouldnotbecomparedwiththetotalshavebeencoveredup.The
analysisisabletoassessthefiguresinrelationtototalvalues.Thecommonsize
statementmaybepreparedinthefollowingway.

(i) Thetotalofassetsorliabilitiesaretakenas100
(ii)
(iii) Theindividualassetsareexpressedasapercentageoftotalassets,i.e.,100and
differentliabilitiesarecalculatedinrelationtototalliabilities.Forexample,if
totalassetsareRs.5lakhsandinventoryvalueisRs.50,000,thenitwillbe
10%oftotalassets.(50,000x100)/(5,00,000)
4. Fundflowanalysis:

Theoperationofbusinessinvolvestheconversionofcashintononcashassets,which
arerecoveredintocashform.Thestatementshowingsourcesandusesoffundsof
funds is properly known as 'Funds Flow Statement'. The changes representing the
'sourcesoffunds'inthebusinessmaybeissueofdebentures,increaseinnetworth;
additiontofunds,reservesandsurplus,relationofearnings.
Changesshowingthe'usesoffunds'include:

a) AdditiontoassetsFixedandCurrent.
b) Additiontoinvestments.
c) Decreasinginliabilitiesbypayingoffloansandcreditors.
d) Decreaseinnetworthbyincurringofloans,withdrawaloffundsfrom
businessandpaymentofdividends.

5.CashFlowanalysis:

Cashflowisusedforonlycashinflowandoutflow.Thecashflowsarepreparedfrom
cashbudgetsandoperationofthecompany.Incashflowsonlycashandbankbalance
areinvolvedandhenceitisanarrowertermthantheconceptoffundsflows.Thecash
flowstatementexplainshowthedividendsarepaid,howfixedassetsarefinanced.
Theanalysishadtoknowtherealcashflowpositionofcompany,itsliquidityand
solvency,whicharereflectedinthecashflowpositionandthestatementsthereof.
TECHNICALANALYSIS

Technicalanalysisinvolvesastudyofmarketgenerateddatalikepricesandvolumes
to determine the future direction of price movement. Technical analysis analyses
internalmarketdatawiththehelpofchartsandgraphs.Subscribingtothe'castlesin
theair'approach,theyviewtheinvestmentgameasanexerciseinanticipatingthe
behaviourofmarketparticipants.Theylookatchartstounderstandwhatthemarket
participantshavebeendoingandbelievethatthisprovidesabasisforpredictingfuture
behaviour.
Definition:

"Thetechnicalapproachtoinvestingisessentiallyareflectionoftheideathatprices
moveintrendswhicharedeterminedbythechangingattitudesofinvestorstowarda
varietyofeconomic,monetary,politicalandpsychologicalforces.Theartoftechnical
analysisforitisanartistoidentifytrendchangesatanearlystageandtomaintain
aninvestmentpostureuntiltheweightoftheevidenceindicatesthatthetrendhas
beenreversed."

MartinJ.Pring.
Chartingtechniquesintechnicalanalysis:
Technicalanalysisusesavarietyofchartingtechniques.Themostpopularonesare:

TheDowtheory;
Barandlinecharts;
Thepointandfigurechart;
Themovingaveragesline;and
Therelativestrengthline.

TheDowTheory:

"Themarketisalwaysconsideredashavingthreemovements,allgoingatthesame
time.Thefirstisthenarrowmovementfromdaytoday.Thesecondistheshort
swing,runningfromtwoweekstoamonthormore;thethirdisthemainmovement,
coveringatleastfouryearsinitsduration."

CharlesH.DOW

TheDowTheoryreferstothreemovementsas:
(a) Dailyfluctuationsthatarerandomdaytodaywiggles;
(b) Secondary movements or corrections that may last for a few weeks to some
months;
(c) Primarytrendsrepresentingbullandbearphasesofthemarket.
Barandlinecharts

Thebarchartisoneofthesimplestandcommonlyusedtoolsoftechnicalanalysis,
depictsthedailypricerangealongwiththeclosingprice.Italsoshowsthedaily
volume of transactions. A line chartshows the line connecting successive closing
prices.
Pointandfigurechart:

Onapointandfigurechartonlysignificantpricechangesarerecorded.Iteliminates
thetimescaleandsmallchangesandcondensestherecordingofpricechanges.
Movingaverageanalysis:

Amovingaverageiscalculatedbytakingintoaccountthemostrecent'n'observations.
Toidentifytrendstechnicalanalysisusemovingaveragesanalysis.
Relativestrengthanalysis:

The relative strength analysis is based on the assumption that the prices of some
securitiesriserapidlyduringthebullphasebutfallslowlyduringthebearphasein
relation to the market as a whole. Technical analysts measure relative strength in
differentways;asimpleapproachcalculatesratesofreturnandclassifiessecurities
that have superior historical returns as having relative strength. More commonly,
technicalanalystslookatcertainratiostojudgewhetherasecurityor,forthatmatter,
anindustryhasrelativestrength.

TECHNICALINDICATORS:

Inadditiontocharts,whichformthemainstayoftechnicalanalysis,techniciansalso
usecertainindicatorstogaugetheoverallmarketsituation.Theyare:

Breadthindicators
Marketsentimentindicators

BREADTHINDICATORS:

1.TheAdvanceDeclineline:

Theadvancedeclinelineisalsoreferredasthebreadthofthemarket.Itsmeasurement
involvestwosteps:

a. Calculatethenumberofnetadvances/declinesonadailybasis.
b. Obtainthebreadthofthemarketbycumulatingdailynetadvances/declines.
2.NewHighsandLows:

A supplementary measure to accompany breadth of the market is the highlow

differentialorindex.Thetheoryisthatanexpandingnumberofstocksattainingnew
highs and a dwindling number of new lows will generally accompany a raising
market.Thereverseholdstrueforadecliningmarket.
MARKETSENTIMENTINDICATORS:
1.ShortInterestRatio:

Theshortinterestinasecurityissimplythenumberofsharesthathavebeensold
shortbutyetboughtback.

Theshortinterestratioisdefinedasfollows:
Totalnumberofsharessoldshort
Shortinterestratio=
Averagedailytradingvolume
2.Put/CallRatio:

Another indicator monitored by contrary technical analysis is the put / call ratio.
Speculatorsbuycallswhentheyarebullishandbuyputswhentheyarebearish.Since
speculatorsareoftenwrong,sometechnicalanalystsconsidertheput/callratioasa
usefulindicator.Theput/callratioisdefinedas:

Numbersofputspurchased
Put/Callratio=
Numberofcallspurchased
3.MutualFundLiquidity:

Ifmutualfundliquidityislow,itmeansthatmutualfundsarebullish.Soconstrains
arguethatthemarketisat,ornear,apeakandhenceislikelytodecline.Thus,low
mutualfundliquidityisconsideredasabearishindicator.

Converselywhenthemutualfundliquidityishigh,itmeansthatmutualfundsare
bearish.Soconstrainsbelievethatthemarketisat,ornear,abottomandhenceis
poisedtorise.Thus,highmutualfundliquidityisconsideredasabullishindication.
RANDOMWALKTHEORY:

Fundamentalanalysistriestoevaluatetheintrinsicvalueofthesecuritiesbystudying
thevariousfundamentalfactorsaboutEconomy,Industryandcompanyandbasedon
this information, it categories the securities as wither undervalued or overhauled.
Technicalanalysisbelievesthatthepastbehaviourofstockpricesgivesanindication
ofthefuturebehaviourandthatthestockpricemovementisquiteorderlyandrandom.
But,anewtheoryknownasRandomWalkTheory,assertsthatsharepricemovements
representrandomwalkratherthananorderlymovement.

Accordingtothistheory,anychangeinthestockpricesIStheresultofinformation
aboutcertainchangesintheeconomy,industryandcompany.Eachpricechangeis
independent of other price changes as each change is caused by a new piece of
information.Thesechangesinstock'spricesrevealsthefactthatalltheinformationon
changesintheeconomy,industryandcompanyperformanceisfullyreflectedinthe
stockpricesi.e.,theinvestorswillhavefullknowledgeaboutthesecurities.Thus,the
RandomWalkTheoryisbasedonthehypothesisthattheStockMarketsareefficient.
Hence,lateritisknownasEfficientMarketHypothesis.
EFFICIENTMARKETHYPOTHESIS:

ThistheorypresupposesthatthestockMarketsaresocompetitiveandefficientin
processingalltheavailableinformationaboutthesecuritiesthatthereis"immediate
priceadjustment"tothechangesintheeconomy,industryandcompany.TheEfficient
Market Hypothesis model is actually concerned with the speed with which
informationisincorporatedintothesecurityprices.

TheEfficientMarketHypothesishasthreeSubhypothesis:
WeaklyEfficient:

ThisformofEfficientMarketHypothesisstatesthatthecurrentpricesalreadyfully
reflectalltheinformationcontainedinthepastpricemovementsandanynewprice
changeistheresultofanewpieceofinformationandisnotrelated.Thisformisa
directrepudiationoftechnicalanalysis.
SemiStronglyEfficient:

ThisformofEfficientMarketHypothesisstatesthatthestockpricesnotonlyreflect
allhistoricalinformationbutalsoreflectallpubliclyavailableinformationaboutthe
company as soon as it is received. So, it repudiates the fundamental analysis by
implyingthatthereisnotimegapforthefundamentalanalystinwhichhecantrade
forsuperiorgains,asthereisanimmediatepriceadjustment.
 StronglyEfficient:

ThisformofEfficientMarketHypothesisstatesthatthemarketcannotbebeatenby
usingbothpubliclyavailableinformationaswellasprivateorinsiderinformation.
But,eventhoughtheEfficientMarketHypothesisrepudiatesbothFundamentaland
Technical analysis, the market is efficient precisely because of the organized and
systematiceffortsofthousandsofanalystsundertakingFundamentalandTechnical
analysis.Thus,theparadoxofEfficientMarketHypothesisisthatboththeanalysisis
requiredtomakethemarketefficientandtherebyvalidatethehypothesis.

PORTFOLIOMANAGEMENT
ConceptofPortfolio:
Portfolioisthecollectionofsecuritiesmaybefinancialorrealassetssuchasequity
shares,debentures,bonds,treasurybillsandpropertyetc.portfolioisacombinationof
assets or it consists of collection of securities. These holdings are the result of
individualpreferences,decisionsoftheholdersregardingrisk,returnandahostof
otherconsiderations.
Portfoliomanagement:
Aninvestorconsideringinvestmentinsecuritiesisfacedwiththeproblemofchoosing
fromamongalargenumberofsecurities.Hischoicedependsupontheriskreturn
characteristicsofindividualsecurities.Hewouldattempttochoosethemostdesirable
securitiesandliketoallocatehisfundsoverhisgroupofsecurities.Againheisfaced
withtheproblemofdecidingwhichsecuritiestoholdandhowmuchtoinvestineach.

Theinvestorfacesaninfinitenumberofpossibleportfolioorgroupofsecurities.The
riskandreturncharacteristicsofportfoliosdifferfromthoseofindividualsecurities
combining to form a portfolio. The investor tries to choose the optimal portfolio
takingintoconsiderationtheriskreturncharacteristicsofallpossibleportfolios.

As the economic and financial environment keeps the changing the risk return
characteristicsofindividualsecuritiesaswellasportfolioalsochange.Aninvestor
investshisfundsinaportfolioexpectingtogetagoodreturnwithlessrisktobear.
Portfoliomanagementconcernstheconstructionandmaintenanceofacollectionof
investment.Itisinvestmentoffundsindifferentsecuritiesinwhichthetotalriskof
the Portfolio is minimized while expecting maximum return from it. It primarily
involves reducing riskrather that increasing return. Return is obviously important
though,andtheultimateobjectiveofportfoliomanageristoachieveachosenlevelof
returnbyincurringtheleastpossiblerisk.
 CharacteristicsofInvestment:

Thecharacteristicsofinvestmentcanbeunderstoodintermsofas:
- Return,
- Risk,
- Safety,
- Liquidityetc.

Return: Allinvestmentsarecharacterizedbytheexpectationofareturn.In
fact,investmentsaremadewiththeprimaryobjectiveofderivingreturn.The
expectationofareturnmaybefromincome(yield)aswellasthroughcapital
appreciation.Capitalappreciationisthedifferencebetweenthesalepriceand
thepurchaseprice.Theexpectationofreturnfromaninvestmentdependsupon
thenatureofinvestment,maturityperiod,andmarketdemandandsoon.

Risk: Riskisinherentinanyinvestment.Riskmayrelatetolossofcapital,
delayinrepaymentofcapital,nonpaymentofreturnorvariabilityofreturns.
Theriskofaninvestmentisdeterminedbytheinvestments,maturityperiod,
repaymentcapacity,natureofreturncommitmentandsoon.Riskandexpected
returnofaninvestmentarerelated.Theoretically,thehighertherisk,higheris
the expected returned. The higher return is a compensation expected by
investorsfortheirwillingnesstobearthehigherrisk.

Safety: Thesafetyofinvestmentisidentifiedwiththecertaintyofreturnof
capitalwithoutlossoftimeormoney.Safetyisanotherfeaturethataninvestor
desiresfrominvestments.Everyinvestorexpectstogetbacktheinitialcapital
onmaturitywithoutlossandwithoutdelay.

Liquidity:Aninvestmentthatiseasilysaleablewithoutlossofmoneyortime
issaidtobeliquid.Awelldevelopedsecondarymarketforsecurityincreases
theliquidityoftheinvestment.Aninvestortendstoprefermaximizationof
expected return, minimization of risk, safety of funds and liquidity of
investment.
 Investmentcategories:

Investmentgenerallyinvolvescommitmentoffundsintwotypesofassets:
- Realassets
- Financialassets

Realassets:Realassetsaretangiblematerialthingslikebuilding,automobiles,land,
goldetc.

Financialassets:Financialassetsarepieceofpaperrepresentinganindirectclaimto
real assets held by someone else. These pieces of paper represent debt or equity
commitmentintheformofIOUsorstockcertificates.Investmentsinfinancialassets
consistof
- Securitised(i.e.securityformsof)investment
- Nonsecuritiesinvestment
-
The term securities used inthe broadest sense, consists of those papers
whicharequotedandaretransferable.Undersection2(h)oftheSecurities
Contract(Regulation)Act,1956(SCRA)securitiesinclude:

i) Shares,stocks,bonds,debentures,debenturestockorothermarketablesecuritiesof
alikenatureinorofanyincorporatedcompanyorotherbodycorporate.
ii) Governmentsecurities.
iii) Such other instruments as may be declared by the central Government as
securities,and;
iv) Rightsofinterestsinsecurities.
Investmentavenuescanbebroadlycategorizedunderthefollowingheads:

1.Corporatesecurities:
.Equityshares,Preferenceshares
.Debentures/Bonds,GDRs/ADRs
.Warrants,Derivatives
2. Depositsinbanksandnonbankingcompanies
3. Postofficedepositsandcertificates
4. Lifeinsurancepolicies
5. Providentfundschemes
6. Governmentandsemigovernmentsecurities
7. Mutualfundschemes
8. Realassets.
FEATURESOFPORTFOLIOMANAGEMENT:
Theobjectiveofportfoliomanagementistoinvestinsecuritiesinsuchawaythatone
maximizesone'sreturnandminimizesrisksinordertoachieveone'sinvestment
objective.

1) SAFETYOFTHEINVESTMENT:Thefirstimportantobjectiveinvestmentsafety
orminimizationofrisksisoftheimportantobjectiveofportfoliomanagement.There
are many types of risks. Which are associated with investment in equity socks,
includingsuperstock.ThereisnosuchthingcalledZeroriskinvestment.Moreover
relativelylowriskinvestmentgivescorrespondinglowerreturns.

2) STABLE CURRENT RETURNS: Once investment safety is guaranteed, the

portfolioshould yieldasteadycurrentincome.Thecurrentreturnsshouldatleast
matchtheopportunitycostofthefundsoftheinvestor.Whatwearereferringtohere
iscurrentincomebyofinterestordividends,notcapitalgains.
3) APPRECIATION IN THE VALUE OF CAPITAL: A good portfolio should
appreciateinvalueinordertoprotecttheinvestorfromerosioninpurchasingpower
duetoinflation.Inotherwords,abalanceportfoliomustconsistifcertaininvestment,
whichtendstoappreciateinrealvalueafteradjustingforinflation.

4) MARKETABILITY: A good portfolio consists of investment, which can be

marketed withoutdifficulty.Iftherearetoomanyunlistedorinactiveshareinyour
portfolio, you will face problems in enchasing them, and switching from one
investmenttoanother.Itisdesirabletoinvestincompanieslistedonmajorstock
exchanges,whichareactivelytraded.

5) LIQUIDITY:Theportfolioshouldensurethatthereareenoughfundsavailableat
theshortnoticetotakeoftheinvestor'sliquidityrequirements.

6) TAXPLANNING:Sincetaxationisanimportantvariableintotalplanning,agood
portfolio shouldletitsownerenjoyfavourabletaxshelter.Theportfolioshouldbe
developed considering income tax, but capital gains, gift tax too. What a good
portfolioaimsatistaxplanning,nottaxevasionortaxavoidance.

FunctionsofPortfolioManager

Themainfunctionsofportfoliomanagerare:
Advisoryrole:
He advises new investments, review of existing ones, identification of objectives,
recommendinghighyieldsecuritiesetc.

ConductingMarketandEconomicSurveys:
Thereisessentialforrecommendinghighyieldingsecurities,theyhavetostudythe
currentphysicalproperties,budgetproposals,industrialpoliciesetc.Furtherportfolio
manager should take into account the credit policy, industrial growth, foreign
exchangeposition,changesincorporatelawsetc.

FINANCIALANALYSIS

Heshouldevaluatethefinancialstatementsofacompanyinordertounderstandtheir
networth,futureearnings,prospectsandstrengths.

STUDYOFSTOCKMARKET

Heshouldseethetrendsofatvariousstockexchangesandanalyzescripts,sothathe
isabletoidentifytherightsecuritiesforinvestments.

STUDYOFINDUSTRY
To know its future prospects, technological changes etc. required for investment
proposalsheshouldalsoforeseetheproblemsoftheindustry.
DECIDETHETYPEOFPORTFOLIO
Keepinginthemindtheobjectivesofaportfolio,theportfoliomanagerhavetodecide
whether the portfolio should comprise equity, preference shares, debentures
convertible,nonconvertibleorpartlyconvertible,moneymarketsecuritiesetc.ora
mixofmorethanonetype.
Agoodportfoliomanagershouldensurethat:
Thereisoptimummixofportfoliosi.e.securities.
To strike a balance between the cost of funds and the average return on
investments.
Balanceisstruckasbetweenthefixedincomeportfoliosanddividendbearing
securities.
Portfolios of various industries are diversified / to decide the type of
investment.
Portfoliosarereviewedperiodicallyforbettermanagementandreturns./Any
rightorbonusprospectsinacompanyaretakenintoaccount.
Bettertaxplanningisthere.
Liquidityassetsaremaintained/Transactioncostsareminimized.

PORTFOLIOMANAGEMENTPROCESS:
PortfoliomanagementISacomplexactivity,whichmaybebrokendownintothe
followingsteps:

1.SPECIFICATIONOFINVESTMENTOBJECTIVESANDCONSTRAINTS:
Thefirststepintheportfoliomanagementprocessistospecifyone'sinvestment
objectivesandconstraints.Thecommonlystatedinvestmentgoalsare:

a) Income
b) Growth
c) Stability
Theconstraintsarisingfromliquidity,timehorizon,taxandspecialcircumstances
mustbeidentified.

2.CHOICEOFASSETMIXES:

Themostimportantdecisioninportfoliomanagementistheassetmixdecision.Very
broadly,thisisconcernedwiththeproportionsof'stocks'and'bonds'intheportfolio.

3.FORMULATIONOFPORTFOLIOSTRATEGY:

Once a certain asset mix is chosen, an appropriate portfolio strategy has to be

hammered out. Two broad choices are available an active portfolio strategy or a
passiveportfoliostrategy.Anactiveportfoliostrategystrivestoearnsuperiorrisk
adjustedreturnsbyresortingtomarkettiming,orsectorrotation,orsecurityselection,
or some combination of these. A passive portfolio strategy, on the other hand,
involves holding a broadly diversified portfolio and maintaining a predetermined
levelofriskexposure.
4.SELECTIONOFSECURITIES:
Generally,investorspursueanactivestancewithrespecttosecurityselection.For
stock selection, investors commonly go by fundamental analysis and or technical
analysis.Thefactorsthatareconsideredinselectingbondsareyieldtomaturity,credit
rating,termtomaturity,taxshelterandliquidity.
5.PORTFOLIOEXECUTION:
Thisisthephaseofportfoliomanagementwhichisconcernedwithimplementingthe
portfolioplanbybuyingandorsellingspecifiedsecuritiesingivenamounts.
6.PORTFOLIOREVISION:
Thevalueofaportfolioaswellasitscompositiontherelativeproportionsofstock
andbondcomponentsmaychangeasstocksandbondsfluctuate.Inresponsetosuch
changes,periodicrebalancingoftheportfolioisrequired.Thisprimarilyinvolvesa
shiftfromstockstobondsorviceversa.Inaddition,itmaycallforsectorrotationas
wellassecurityswitches.
7.PERFORMANCEEVALUATION
:
Theperformanceofaportfolioshouldbeevaluatedperiodically.Thekeydimensions
ofportfolioperformanceevaluationareriskandreturnandthekeyissueiswhether
theportfolioreturniscommensuratewithitsriskexposure.

APORTFOLIOMANAGEMENTHASBEENCHARACTERIZED

Traditionportfoliotheory
Modernportfoliotheory
Traditionportfoliotheory:

Thistheoryaimsattheselectionofsuchsecuritiesthatwouldfitinwellwiththeasset
preferences,needsandchoicesofinvestor.Thus,aretiredexecutiveinvestinfixed
incomesecuritiesforaregularandfixedreturn.Abusinessexecutiveorayoung
aggressiveinvestorontheotherhandinvestsinnewandgrowingcompaniesandin
riskyventures.
Modernportfoliotheory:

Thistheorysuggeststhatthetraditionalapproachtoportfolioanalysis,selectionand
management may yield less than optimalresultthata more scientific approachis
needed based on estimates of risk and returnofthe portfolio andattitudes ofthe
investortowardsariskreturntradeoffsteamingfromtheanalysisoftheindividual
securities.
InthisregardIndiaaftergovernmentpolicyofliberalizationhasunleashedforeign
marketforces.Forcesthathaveadirectimpactonthecapitalmarket.Anindividual
investorcan'teasilymonitorthesecomplexvariablesinthesecuritiesmarketbecause
of lack of time, information and knowhow. That is when investors look in to
alternativeinvestmentoptions;oncesuchoptionismutualfunds.Butintherecent
timesinvestorhaslostfaithinthistypeinvestmentandhasturnedtowardsportfolio
investment.

Withportfolioinvestmentgainingpopularityithasemphasizedonhavingaproper
portfoliotheorytomeettheneedsoftheinvestorandoperateinthecapitalmarket
usingthroughscientificanalysisandbackedbydependablemarketinvestigationsto
minimizeriskandmaximizereturns.

ThescientificanalysisofriskandreturnismodernportfoliotheoryandMarkowitz
laidthefoundationofthistheoryin1951.Hebeganwiththesimpleobservationthat
sincealmostallinvestorsinvestsinseveralsecuritiesratherthatinjustone,theremust
besomebenefitfrominvestinginaportfolioofseveralsecurities.
SEBIGUIDELINESTOTHEPORTFOLIOMANAGERS:

On 7thJanuary 1993 securities exchange boardof India issuedregulations tothe

portfoliomanagersfortheregulationofportfoliomanagementservicesbymerchant
bankers.Theyareasfollows:

Portfoliomanagementservicesshallbeinthenatureofinvestmentorconsultancy
managementforanagreedfeeatclient'srisk.

The portfolio manager shall not guarantee return directly or indirectly the fee
shouldnotbedependeduponoritshouldnotbereturnsharingbasis.

Varioustermsofagreements,fees,disclosuresofriskandrepaymentshouldbe
mentioned.

Client'sfundsshouldbekeptseparatelyinclientwiseaccount,whichshouldbe
subjecttoaudit.

Managershouldreportclientsatintervalsnotexceeding6months.

Portfoliomanagershouldmaintainhighstandardofintegrityandnotdesireany
benefitdirectlyorindirectlyformclient'sfunds.

Theclientshallbeentitledtoinspectthedocuments.

Portfoliomanagershouldmaintainhighstandardofintegrityandnotdesireany
benefitdirectlyorindirectlyformclient'sfunds.

Theclientshallbeentitledtoinspectthedocuments.

Portfoliomanagershallnotinvestfundsbelongingtoclientsinbadlafinancing,
billsdiscountingandlendingoperations.

Clientmoneycanbeinvestedinmoneyandcapitalmarketinstruments.

Settlementonterminationofcontractasagreedinthecontract.

Client's funds should be kept in a separate bank account opened in scheduled

commercialbank.

PurchaseorSaleofsecuritiesshallbemadeatprevailingmarketprice.

Portfoliomanagerswithhisclientarefiduciaryinnature.Heshallactbothasan
agentandtrusteeforthefundsreceived.
PORTFOLIOSELECTION

Portfolio analysis provides the input for the next phase in portfolio management,
whichisportfolioselection.Thepropergoalofportfolioconstructionistogethigh
returnsatagivenlevelofrisk.Theinputsfromportfolioanalysiscanbeusedto
identifythesetofefficientportfolios.Fromthissetofportfolios,theoptimalportfolio
hastobeselectedforinvestment.

MARKOWITZMODEL
HarryM.Markowitziscreditedwithintroducingnewconceptofriskmeasurement
andtheirapplicationtotheselectionofportfolios.Hestartedwiththeideaofrisk
aversionofinvestorsandtheirdesiretomaximizeexpectedreturnwiththeleastrisk.
Markowitzusedmathematicalprogrammingandstatisticalanalysisinordertoarrange
for .the optimum allocation of assets within portfolio. To reach this objective,
Markowitz generated portfolios within a rewardrisk context. In other words, he
considered the variance in the expected returns from investments and their
relationshiptoeachotherinconstructingportfolios.Inessence,Markowitz'smodelis
atheoreticalframeworkfortheanalysisofriskreturnchoices.Decisionsarebasedon
theconceptofefficientportfolios.

Aportfolioisefficientwhenitisexpectedtoyieldthehighestreturnforthelevelof
risk accepted or, alternatively, the smallest portfolio risk or a specified level of
expectedreturn.Tobuildanefficientportfolioanexpectedreturnlevelischosen,and
assetsaresubstituteduntiltheportfoliocombinationwiththesmallestvarianceatthe
returnlevelisfound.Asthisprocessisrepeatedforotherexpectedreturns,setof
efficientportfoliosisgenerated.
Assumptions:
TheMarkowitzmodelisbasedonseveralassumptionsregardinginvestorbehaviour:

i) Investorsconsidereachinvestmentalternativeasbeingrepresentedbya
probabilitydistributionofexpectedreturnsoversomeholdingperiod.
ii) Investors maximize one periodexpected utility and possess utility
curve,whichdemonstratesdiminishingmarginalutilityofwealth.
iii) Individuals estimate risk on the basis of the variability of expected
returns.
iv) Investors base decisions solely on expected return and variance (or
standarddeviation)ofreturnsonly.
v) Foragivenrisklevel,investorspreferhighreturnstolowerreturns.
Similarly,foragivenlevelofexpectedreturn,investorpreferlessriskto
morerisk.

Under these assumptions, a single asset or portfolio of assets is considered to be

"efficient"ifnootherassetorportfolioofassetsoffershigherexpectedreturnwiththe
same(orlower)riskorlowerriskwiththesame(orhigher)expectedreturn.
MARKOWITZDIVERSIFICATION

Markowitzpostulatedthatdiversificationshouldnotonlyaimatreducingtheriskofa
security by reducing its variability or standard deviation but by reducing the
covariance or interactive risk of two or more securities in a portfolio. As by
combinationofdifferentsecurities,itistheoreticallypossibletohavearangeofrisk
varyingfromzerotoinfinity.Markowitztheoryofportfoliodiversificationattached
importancetostandarddeviationtoreduceittozero,ifpossible.
CAPITALMARKETTHEORY

TheCAPMwasdevelopedinmid1960,themodelhasgenerallybeenattributedto
William Sharpe, but John Linter and Jan Mossin made similar independent
derivations. Consequently, the model is often referred to as SharpeLinterMossin
(SLM)CapitalAssetPricingModel.TheCAPMexplainstherelationshipthatshould
existbetweensecuritiesexpectedreturnsandtheirrisksintermsofthemeansand
standarddeviationsaboutsecurityreturns.Becauseofthisfocusonthemeanand
standarddeviationtheCAPMisadirectextensionoftheportfoliomodelsdeveloped
byMarkowitzandSharpe.

CapitalMarketTheoryisanextensionoftheportfoliotheoryofMarkowitz.Thisisan
economicmodeldescribeshowsecuritiesarepricedinthemarketplace.Theportfolio
theoryexplainshowrationalinvestorsshouldbuildefficientportfoliobasedontheir
risk return preferences. Capital Asset Pricing Model (CAPM) incorporates a
relationship,explaininghowassetsshouldbepricedinthecapitalmarket.
ASSUMPTIONSOFCAPITALMARKETTHEORY:

TheCAPMrestsoneightassumptions.Thefirst5assumptionsarethosethatunderlie
theefficientmarkethypothesisandthusunderliebothmodernportfoliotheory(MPT)
andtheCAPM.Thelast3assumptionsarenecessarytocreatetheCAPMfromMPT.
Theeightassumptionsarethefollowing:

1) TheInvestor'sobjectiveistomaximizetheutilityofterminalwealth.
2) Investorsmakechoicesonthebasisofriskandreturn.
3) Investorshavehomogeneousexpectationsofriskandreturn.
4) Investorshaveidenticaltimehorizon.
5) Informationisfreelyandsimultaneouslyavailabletoinvestors.
6) Thereisariskfreeasset,andinvestorscanborrowandlendunlimitedamounts
attheriskfreerate.
7) Therearenotaxes,transactioncosts,restrictionsonshortratesorothermarket
imperfections.
8) Totalassetquantityisfixed,andallassetsaremarketableanddivisible.
PORTFOLIOANALYSIS

APortfolioisagroupofsecuritiesheldtogetherasinvestment.Investorsinvesttheir
fundsinaportfolioofsecuritiesratherthaninasinglesecuritybecausetheyarerisk
averse.Byconstructingaportfolio,investorsattemptstospreadriskbynotputtingall
their eggs into one basket. Portfolio phase of portfolio management consists of
identifyingtherangeofpossibleportfoliosthatcanbeconstitutedfromagivensetof
securitiesandcalculatingtheirreturnandriskforfurtheranalysis.

Individual securities in a portfolio are associated with certain amount of Risk &
Returns.Onceasetofsecurities,thataretobeinvestedin,areidentifiedbasedon
RiskReturncharacteristics,portfolioanalysisistobedoneasnextstepastheRisk&
ReturnoftheportfolioisnotasimpleaggregationofRisk&Returnsofindividual
securities but, somewhat less or more than that. Portfolio analysis considers the
determination of future Risk & Return in holding various blends of individual
securities so that right combinations giving higher returns at lower risk, called
EfficientPortfolios,canbeidentifiedsoastoselectanoptimumoneoutofthese
efficientportfolioscanbeselectedinthenextstep.
ExpectedReturnofaPortfolio:

Itistheweightedaverageoftheexpectedreturnsoftheindividualsecuritiesheldin
the portfolio. These weights are the proportions of total investable funds in each
security.
N
Rp=xiRi
I1
RP = Expectedreturnofportfolio
N = No.ofSecuritiesinPortfolio
XI= ProportionofInvestmentinSecurityi
Ri = ExpectedReturnonsecurityi
RiskMeasurement

Risk:Riskisinherentinanyinvestment.Riskmayrelatetolossofcapital,delayin
repaymentofcapital,nonpaymentofreturnorvariabilityofreturns.Theriskofan
investmentisdeterminedbytheinvestments,maturityperiod,repaymentcapacity,
natureofreturncommitmentandsoon.Riskandexpectedreturnofaninvestmentare
related.Theoretically,thehighertherisk,higheristheexpectedreturned.Thehigher
returnisacompensationexpectedbyinvestorsfortheirwillingnesstobearthehigher
risk.

Thestatisticaltooloftenusedtomeasureandusedasaproxyforriskisthestandard
deviation.

N
s
= S p(riE(r))2
i1
N
Variance(s2)= Sp(riE(r))2

Heres = Variance(s2)

P = istheprobabilityofsecurity

N = Numberofsecuritiesinportfolio

ri = Expectedreturnonsecurityi
 PRACTICALSTUDYOFSOMESELECTEDSCRIPS

PORTFOLIOA PORTFOLIOB
BHEL WIPRO
RELIANCEINDUSTRY JINDALSTEEL
CALCULATIONOFRETUNANDRISK:
SR
EXPECTEDRETURNE(Ri) i
N

PORTFOLIOA

BHARATHEAVYELECTRICALSLIMITED(BHEL):

2
DATE SHAREPRICE(X) (XX') (XX')

31/07/2013 871.60 24.72 611.0784

30/07/2013 858.85 37.47 1404.001

29/07/2013 885.60 10.72 114.9184

26/07/2013 889.90 6.42 41.2164

25/07/2013 890.85 5.47 29.9209

24/07/2013 908.60 12.28 150.7984

23/07/2013 909.10 12.78 163.3284

22/07/2013 908.50 12.18 148.3524

19/07/2013 923.15 26.83 719.8489

18/07/2013 917.05 20.73 429.7329

EXPECTEDRETURN=8963.20/10=896.32=X
2
(XX') =3813.196

RISK= 3813.196 =61.751

RELIANCEINDUSTRYLTD.

2
DATE SHAREPRICE(X) (XX') (XX')

31/07/2013 437.30 40.355 1628.526

30/07/2013 419.75 22.805 520.068

29/07/2013 408.50 11.555 133.518

26/07/2013 382.80 14.145 200.081

25/07/2013 376.25 20.695 428.283

24/07/2013 391.95 4.995 24.950

23/07/2013 384.20 12.745 162.435

22/07/2013 392.95 3.995 15.960

19/07/2013 390.75 6.195 38.378

18/07/2013 385.00 11.945 142.683

EXPECTEDRETURN =3969.45/10=396.945=X
2
(XX') =3294.882

RISK= 3294.882 =57.401

PORTFOLIOB

WIPRO
2
DATE SHAREPRICE(X) (XX') (XX')
31/07/2013 199.60 4.285 18.361

30/07/2013 202.25 1.635 2.673

29/07/2013 199.35 4.535 20.556

26/07/2013 190.05 13.835 191.407

25/07/2013 196.75 7.135 50.908

24/07/2013 201.95 1.935 3.744

23/07/2013 210.35 6.465 41.796

22/07/2013 211.35 7.465 55.726

19/07/2013 210.60 6.715 45.091

18/07/2013 216.60 12.715 161.671

EXPECTEDRETURN=2038.85/10=203.885=X
2
(XX') =591.945

RISK= 591.945 =24

JINDALSTEELLtd.
2
DATE SHAREPRICE(X) (XX') (XX')
31/07/2013 158.25 5.50 30.25

30/07/2013 152.65 11.10 123.21

29/07/2013 156.95 6.80 46.24

26/07/2013 158.80 4.95 24.50

25/07/2013 158.60 5.15 26.52

24/07/2013 163.00 0.75 0.56

23/07/2013 165.10 1.35 1.82

22/07/2013 161.50 2.25 5.06

19/07/2013 173.75 10 100.00

18/07/2013 188.90 25.15 632.52

EXPECTEDRETURN=1637.5/10=163.75=X
2
(XX') =990.695

RISK= 990.695 =31.47

PORTFOLIOA
THERISKANDRETURNOFEACHCOMPANY
INPORTFOLIOAIS:

SL.No COMPANY RETURN RISK

1 BHEL 896.32 61.751

2 RELIANCEENERGY 396.94 57.401

PORTFOLIOB
THERISKANDRETURNOFEACHCOMPANY
INPORTFOLIOBIS:

SI.No COMPANY RETURN RISK

1 WIPRO 203.88 24.000

2 JINDALSTEEL 163.75 31.470

INTERPERATION

Fromtheabovefigures,itisclearthatintotalthereisahighreturnonportfolioA
companieswhencomparedwithportfolioBcompanies.Butatthesametimeifwe
compare the risk it is clear that risk is less for companies in portfolio B when
comparedwithportfolioAcompanies.AspertheMarkowitzanefficientportfoliois
onewithMinimumrisk,maximumprofittherefore,itisadvisableforaninvestorto
workouthisportfolioinsuchawaywherehecanoptimizehisreturnsbyevaluating
andrevisinghisportfolioonacontinuousbasis.
 CONCLUSIONS

Portfolioiscollectionofdifferentsecuritiesandassetsbywhichwecansatisfythe
basicobjective"Maximizeyieldminimizerisk.Furtherwehavetoremembersome
importantinvestingruleswhichare:

Investingrulestoberemembered.
Don'tspeculateunlessit'sfulltimejob.
Beware of barbers, beauticians, waitersof anyone bringing gifts of inside
informationortips.
Beforebuyingasecurity,itsbettertofindouteverythingonecanaboutthe
company,itsmanagementandcompetitors,itsearningsandpossibilitiesfor
growth.
Don'ttrytobuyatthebottomandsellatthetop.Thiscan'tbedoneexceptby
liars.
Learnhowtotakeyourlossesandcleanly.Don'texpecttoberightallthetime.
Ifyouhavemadeamistake,cutyourlossesasquicklyaspossible
Don'tbuytoomanydifferentsecurities.Betterhaveonlyafewinvestments
thatcanbewatched.
Makeaperiodicreappraisalofallyourinvestmentstoseewhetherchanging
developmentshavealteredprospects.
Studyyourtaxpositiontoknownwhenyouselltogreatestadvantages.
Alwayskeepagoodpartofyourcapitalinacashreserve.Neverinvestallyour
funds.
Don'ttrytobejackoffallinvestments.Sticktofieldyouknownbest.
Purchasingstocksyoudonotunderstandifyoucan'texplainittoatenyear
old,justdon'tinvestinit.
Overdiversifying:Thisisthemostoversold,overused,logicdefyingconcept
amongstockbrokersandregisteredinvestmentadvisors.
Notrecognizingdifferencebetweenvalueandprice:Thisgoesalongwiththe
failure to compute the intrinsic value of a stock, which are simply the
discountedfutureearningsofthebusinessenterprise.
FailuretounderstandMr.Market:Justbecausethemarkethasputapriceona
businessdoesnotmeanitisworthit.Onlyanindividualcandeterminethe
valueofaninvestmentandthendetermineifthemarketpriceisrational.
Failure to understand the impact of taxes: Also known as the sorrows of
compounding, just as compounding works to the investor's longterm
advantage, the burden of taxes because of excessive trading works against
buildingwealth.
Toomuchfocusonthemarketwhetherornotanindividualinvestmenthas
meritandvaluehasnothingtodowiththattheoverallmarketisdoing.
 BIBLIOGRAPHY

BOOKS:
1. InvestmentandPortfolioManagement(ByPrasannaChandra)
2. InvestmentManagement(ByV.K.Bhalla)

INTERNET:
1. www.indiainfoline.com
2. www.iiflfinance.com
3. www.ftweb.indiainfoline.com
4. www.flame.com
5. www.moneycontrol.com
6. www.wikipedia.com