Ahmed

1

A STUDY ON

“PORTFOLIO MANAGEMENT”

WITH REFERENCE TO KARVY

A Project report submitted to Jawaharlal Nehru Technological University,

Hyderabad, in partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

By

CH. SRINIVAS CHARY

Reg. No. 10241E0011

Under the Guidance of

Mrs.D. INDIRA

Professor of Management Studies

Department of Management Studies

Gokaraju Rangaraju Institute of Engineering & Technology,

Hyderabad

(Affiliated to JNTUH)

2010-2012

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3

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DECLARATION

I hereby declare that the project entitled “A Study on Portfolio Management,”

submitted by me, in partial fulfillment of the requirements for award of the degree of

MBA at Gokaraju Rangaraju Institute of Engineering and Technology, affiliated to

Jawaharlal Nehru Technological University, Hyderabad, is work turned out by me and

has not been submitted to any other University/Institute for award of any degree/diploma.

CH.SRINIVAS CHARY

10241E0011

MBA, GRIET

HYDERABAD

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ACKNOWLEDGEMENT

I take this opportunity to extend my profound thanks and deep sense of gratitude

to the authorities of KARVY STOCK BROKING, Hyderabad, for giving me an

opportunity to undertake this project work in their esteemed organization. I profusely

thank Mr. Mukarji, Assistant Manager Finance, in particular for guiding me and helping

me in successful completion of the project. I would also like to thank all the employees of

the organization.

I would like to express our immense gratitude towards our institution Gokaraju

Rangaraju Institute of Engineering & Technology, which created a great platform to

attain profound technical skills in the field of MBA, thereby fulfilling our most cherished

goal. I am very much thankful to our internal guide Mrs. Indira, Professor and our project

coordinator Sri S. Ravindra Chary for extending their cooperation in completion of

project.

I am also thankful to all those who have incidentally helped me, through their

valued guidance, co-operation and unstinted support during the course of my project.

CH. SRINIVAS CHARY

(Reg. No. 10241E0011)

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INDEX

S.No: CONTENTS PAGE NO.

CHAPTER-1 1-9

• INTRODUCTION

Scope of the Study

Objectives of the Study

Methodology of the Study

Limitations of the Study

CHAPTER-2 10-29

. INDUSTRY PROFILE

• COMPANY PROFILE

CHAPTER-3 30-56

• REVIEW OF LITERATURE

CHAPTER-4 57-66

• DATA ANALYSIS AND INTERPRETATION

CHAPTER-5 67-71

• FINDINGS

• CONCLUSION

• SUGGESTIONS

• BIBLIOGRAPHY

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CHAPTER-I

INTRODUCTION

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INTRODUCTION

A portfolio is a collection of investments held by an institution or a private

individual. In building up an investment portfolio a financial institution will typically

conduct its own investment analysis, whilst a private individual may make use of the

services of a financial advisor or a financial institution which offers portfolio

management services. Holding a portfolio is part of an investment and risk-limiting

strategy called diversification. By owning several assets, certain types of risk (in

particular specific risk) can be reduced. The assets in the portfolio could include stocks,

bonds, options, warrants, gold certificates, real estate, futures contracts, production

facilities, or any other item that is expected to retain its value.

Portfolio management involves deciding what assets to include in the portfolio,

given the goals of the portfolio owner and changing economic conditions. Selection

involves deciding what assets to purchase, how many to purchase, when to purchase

them, and what assets to divest. These decisions always involve some sort of performance

measurement, most typically expected return on the portfolio, and the risk associated with

this return (i.e. the standard deviation of the return). Typically the expected returns from

portfolios, comprised of different asset bundles are compared.

The unique goals and circumstances of the investor must also be considered.

Some investors are more risk averse than others. Mutual funds have developed particular

techniques to optimize their portfolio holdings.

Thus, portfolio management is all about strengths, weaknesses, opportunities and

threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety

and numerous other trade-offs encountered in the attempt to maximize return at a

given appetite for risk.

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Aspects of Portfolio Management:

Basically portfolio management involves

� A proper investment decision making of what to buy & sell

� Proper money management in terms of investment in a basket of assets so as

to satisfy the asset preferences of investors.

The basic objective of Portfolio Management is to maximize yield and minimize risk.

The other ancillary objectives are as per needs of investors, namely:

� Regular income or stable return

� Appreciation of capital

� Marketability and liquidity

� Safety of investment

� Minimizing of tax liability.

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NEED AND IMPORTANCE OF STUDY:

The Portfolio Management deals with the process of selection securities from the number

of opportunities available with different expected returns and carrying different levels of

risk and the selection of securities is made with a view to provide the investors the

maximum yield for a given level of risk or ensure minimum risk for a level of return.

Portfolio Management is a process encompassing many activities of investment in assets

and securities. It is a dynamics and flexible concept and involves regular and systematic

analysis, judgment and actions. The objectives of this service are to help the unknown

investors with the expertise of professionals in investment Portfolio Management. It

involves construction of a portfolio based upon the investor’s objectives, constrains,

preferences for risk and return and liability. The portfolio is reviewed and adjusted from

time to time with the market conditions. The evaluation of portfolio is to be done in terms

of targets set for risk and return. The changes in portfolio are to be effected to meet the

changing conditions.

Portfolio Construction refers to the allocation of surplus funds in hand among a variety of

financial assets open for investment. Portfolio theory concerns itself with the principles

governing such allocation. The modern view of investment is oriented towards the

assembly of proper combinations held together will give beneficial result if they are

grouped in a manner to secure higher return after taking into consideration the risk

element.

The modern theory is the view that by diversification, risk can be reduced. The

investor can make diversification either by having a large number of shares of companies

in different regions, in different industries or those producing different types of product

lines. Modern theory believes in the perspectives of combination of securities under

constraints of risk and return.

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SCOPE OF STUDY:

This study covers the Markowitz model. The study covers the calculation of correlations

between the different securities in order to find out at what percentage funds should be invested

among the companies in the portfolio. Also the study includes the calculation of individual

Standard Deviation of securities and ends at the calculation of weights of individual securities

involved in the portfolio. These percentages help in allocating the funds available for investment

based on risky portfolios.

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OBJECTIVE OF STUDY

• To calculate the return of various companies.

• To calculate the risk of various companies.

• To calculate the portfolio return of different portfolios designed for the

combination of various companies.

• To understand, analyze and select the best portfolio.

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RESEARCH METHODOLOGY

Arithmetic average or mean:

The arithmetic average measures the central tendency. The purpose of

computing an average value for a set of observations is to obtain a single value, which is

representative of all the items. The main objective of averaging is to arrive at a single

value which is a representative of the characteristics of the entire mass of data and

arithmetic average or mean of a series(usually denoted by x) is the value obtained by

dividing the sum of the values of various items in a series (sigma x) divided by the

number of items (N) constituting the series.

Thus, if X1,X2……………..Xn are the given N observations. Then

X= X1+X2+……….Xn

N

RETURN

Current price-previous price *100

Previous price

STANDARD DEVIATION:

The concept of standard deviation was first suggested by Karl Pearson in

1983.it may be defined as the positive square root of the arithmetic mean of the squares

of deviations of the given observations from their arithmetic mean In short S.D may be

defined as “Root Mean Square Deviation from Mean”

It is by far the most important and widely used measure of studying dispersions.

For a set of N observations X1,X2……..Xn with mean X,

Deviations from Mean: (X1-X),(X2-X),….(Xn-X)

Mean-square deviations from Mean:

= 1/N (X1-X)2+(X2-X)2+……….+(Xn-X)2

=1/N sigma(X-X)2

Root-mean-square deviation from mean,i.e.

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VARIANCE:

The square of standard deviation is known as Variance.

Variance is the square root of the standard deviation:

Variance = (S.D) 2

Where, (S.D) is standard deviation

CORRELATION

Correlation is a statistical technique, which measures and analyses the degree or

extent to which two or more variables fluctuate with reference to one another. Correlation

thus denotes the inter-dependence amongst variables. The degrees are expressed by a

coefficient, which ranges between –1 and +1. The direction of change is indicated by (+)

or (-) signs. The former refers to a sympathetic movement in a same direction and the

later in the opposite direction.

Karl Pearson’s method of calculating coefficient (r) is based on covariance of the

concerned variables. It was devised by Karl Pearson a great British Biometrician.

This measure known as Pearsonian correlation coefficient between two variables

(series) X and Y usually denoted by ‘r’ is a numerical measure of linear relationship and

is defined as the ratio of the covariance between X and Y (written as Cov(X,Y) to the

product of standard deviation of X and Y

Symbolically

r = Cov (X,Y)

SD of X,Y

= Σ xy/N = ΣXY

SD of X,Y N

Where x =X-X, y=Y-Y

Σxy = sum of the product of deviations in X and Y series calculated with reference to

their arithmetic means.

X = standard deviation of the series X.

Y = standard deviation of the series Y.

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LIMITATIONS

1. In this study the number of funds considered is only two funds of KARVY and

they are dividend fund and growth fund.

2. The data collected for a period of one year i.e., from December 2010 to January

2011

3. In this study the statistical tools used are risk, return, average, variance,

correlation.

4. In this study specific data is collected.

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CHAPTER-II

INDUSTRY PROFILE

&

COMPANY PROFILE

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INDUSTRY PROFILE

Evolution

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200

years ago. The earliest records of security dealings in India are meager and obscure. The

East India Company was the dominant institution in those days and business in its loan

securities used to be transacted towards the close of the eighteenth century.

By 1830's business on corporate stocks and shares in Bank and Cotton presses took place

in Bombay. Though the trading list was broader in 1839, there were only half a dozen

brokers recognized by banks and merchants during 1840 and 1850.

The 1850's witnessed a rapid development of commercial enterprise and brokerage

business attracted many men into the field and by 1860 the number of brokers increased

into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States of

Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers

increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a

disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850

could only be sold at Rs. 87).

At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,

found a place in a street (now appropriately called as Dalal Street) where they would

conveniently assemble and transact business. In 1887, they formally established in

Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively

known as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in

the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was

consolidated.

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Other leading cities in stock market operations

Ahmadabad gained importance next to Bombay with respect to cotton textile industry.

After 1880, many mills originated from Ahmadabad and rapidly forged ahead. As new

mills were floated, the need for a Stock Exchange at Ahmadabad was realized and in

1894 the brokers formed "The Ahmadabad Share and Stock Brokers' Association".

What the cotton textile industry was to Bombay and Ahmadabad, the jute industry was to

Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta.

After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares,

which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom

between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta

Stock Exchange Association".

In the beginning of the twentieth century, the industrial revolution was on the way in

India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel

Company Limited in 1907, an important stage in industrial advancement under Indian

enterprise was reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies

generally enjoyed phenomenal prosperity, due to the First World War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchange

functioning in its midst, under the name and style of "The Madras Stock Exchange" with

100 members. However, when boom faded, the number of members stood reduced from

100 to 3, by 1923, and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where there was a

rapid increase in the number of textile mills and many plantation companies were floated.

In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange

Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange

Limited).

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Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with

the Punjab Stock Exchange Limited, which was incorporated in 1936.

Indian Stock Exchanges - An Umbrella Growth

The Second World War broke out in 1939. It gave a sharp boom which was followed by a

slump. But, in 1943, the situation changed radically, when India was fully mobilized as a

supply base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities,

those dealing in them found in the stock market as the only outlet for their activities.

They were anxious to join the trade and their number was swelled by numerous others.

Many new associations were constituted for the purpose and Stock Exchanges in all parts

of the country were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited

(1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.

In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and

the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947,

amalgamated into the Delhi Stock Exchange Association Limited.

Post-independence Scenario

Most of the exchanges suffered almost a total eclipse during depression. Lahore

Exchange was closed during partition of the country and later migrated to Delhi and

merged with Delhi Stock Exchange.

Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

Most of the other exchanges languished till 1957 when they applied to the Central

Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only

Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad and Indore, the well

established exchanges, were recognized under the Act. Some of the members of the other

Associations were required to be admitted by the recognized stock exchanges on a

concessional basis, but acting on the principle of unitary control, all these pseudo stock

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exchanges were refused recognition by the Government of India and they thereupon

ceased to function.

Thus, during early sixties there were eight recognized stock exchanges in India

(mentioned above). The number virtually remained unchanged, for nearly two decades.

During eighties, however, many stock exchanges were established: Cochin Stock

Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982),

and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association

Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange

Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986),

Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association

Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara

Stock Exchange Limited (at Baroda, 1990) and recently established exchanges -

Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock

exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI)

and the National Stock Exchange of India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indian stock markets since

independence. It is quite evident from the Table that Indian stock markets have not only

grown just in number of exchanges, but also in number of listed companies and in capital

of listed companies. The remarkable growth after 1985 can be clearly seen from the

Table, and this was due to the favoring government policies towards security market

industry.

Trading Pattern of the Indian Stock Market

Trading in Indian stock exchanges are limited to listed securities of public limited

companies. They are broadly divided into two categories, namely, specified securities

(forward list) and non-specified securities (cash list). Equity shares of dividend paying,

growth-oriented companies with a paid-up capital of atleast Rs.50 million and a market

capitalization of atleast Rs.100 million and having more than 20,000 shareholders are,

normally, put in the specified group and the balance in non-specified group.

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Two types of transactions can be carried out on the Indian stock exchanges: (a) spot

delivery transactions "for delivery and payment within the time or on the date stipulated

when entering into the contract which shall not be more than 14 days following the date

of the contract" : and (b) forward transactions "delivery and payment can be extended by

further period of 14 days each so that the overall period does not exceed 90 days from the

date of the contract". The latter is permitted only in the case of specified shares. The

brokers who carry over the outstanding pay carry over charges (cantango or

backwardation) which are usually determined by the rates of interest prevailing.

A member broker in an Indian stock exchange can act as an agent, buy and sell securities

for his clients on a commission basis and also can act as a trader or dealer as a principal,

buy and sell securities on his own account and risk, in contrast with the practice

prevailing on New York and London Stock Exchanges, where a member can act as a

jobber or a broker only.

The nature of trading on Indian Stock Exchanges are that of age old conventional style of

face-to-face trading with bids and offers being made by open outcry. However, there is a

great amount of effort to modernize the Indian stock exchanges in the very recent times.

Over The Counter Exchange of India (OTCEI)

The traditional trading mechanism prevailed in the Indian stock markets gave way to

many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly

long settlement periods and benami transactions, which affected the small investors to a

great extent. To provide improved services to investors, the country's first ringless,

scripless, electronic stock exchange - OTCEI - was created in 1992 by country's premier

financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation

of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance

Corporation of India, General Insurance Corporation and its subsidiaries and CanBank

Financial Services.

Trading at OTCEI is done over the centres spread across the country. Securities traded on

the OTCEI are classified into:

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• Listed Securities - The shares and debentures of the companies listed on the OTC

can be bought or sold at any OTC counter all over the country and they should not

be listed anywhere else

• Permitted Securities - Certain shares and debentures listed on other exchanges and

units of mutual funds are allowed to be traded

• Initiated debentures - Any equity holding at least one lakh debentures of a

particular scrip can offer them for trading on the OTC.

OTC has a unique feature of trading compared to other traditional exchanges. That is,

certificates of listed securities and initiated debentures are not traded at OTC. The

original certificate will be safely with the custodian. But, a counter receipt is generated

out at the counter which substitutes the share certificate and is used for all transactions.

In the case of permitted securities, the system is similar to a traditional stock exchange.

The difference is that the delivery and payment procedure will be completed within 14

days.

Compared to the traditional Exchanges, OTC Exchange network has the following

advantages:

• OTCEI has widely dispersed trading mechanism across the country which

provides greater liquidity and lesser risk of intermediary charges.

• Greater transparency and accuracy of prices is obtained due to the screen-based

scripless trading.

• Since the exact price of the transaction is shown on the computer screen, the

investor gets to know the exact price at which s/he is trading.

• Faster settlement and transfer process compared to other exchanges.

• In the case of an OTC issue (new issue), the allotment procedure is completed in a

month and trading commences after a month of the issue closure, whereas it takes

a longer period for the same with respect to other exchanges.

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Thus, with the superior trading mechanism coupled with information transparency

investors are gradually becoming aware of the manifold advantages of the OTCEI.

National Stock Exchange (NSE)

With the liberalization of the Indian economy, it was found inevitable to lift the Indian

stock market trading system on par with the international standards. On the basis of the

recommendations of high powered Pherwani Committee, the National Stock Exchange

was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and

Investment Corporation of India, Industrial Finance Corporation of India, all Insurance

Corporations, selected commercial banks and others.

Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.

Wholesale debt market operations are similar to money market operations - institutions

and corporate bodies enter into high value transactions in financial instruments such as

government securities, treasury bills, public sector unit bonds, commercial paper,

certificate of deposit, etc.

There are two kinds of players in NSE:

(a) trading members and

(b) participants.

Recognized members of NSE are called trading members who trade on behalf of

themselves and their clients. Participants include trading members and large players like

banks who take direct settlement responsibility.

Trading at NSE takes place through a fully automated screen-based trading mechanism

which adopts the principle of an order-driven market. Trading members can stay at their

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offices and execute the trading, since they are linked through a communication network.

The prices at which the buyer and seller are willing to transact will appear on the screen.

When the prices match the transaction will be completed and a confirmation slip will be

printed at the office of the trading member.

NSE has several advantages over the traditional trading exchanges. They are as follows:

• NSE brings an integrated stock market trading network across the nation.

• Investors can trade at the same price from anywhere in the country since inter-

market operations are streamlined coupled with the countrywide access to the

securities.

• Delays in communication, late payments and the malpractice’s prevailing in the

traditional trading mechanism can be done away with greater operational

efficiency and informational transparency in the stock market operations, with the

support of total computerized network.

Unless stock markets provide professionalized service, small investors and foreign

investors will not be interested in capital market operations. And capital market being one

of the major source of long-term finance for industrial projects, India cannot afford to

damage the capital market path. In this regard NSE gains vital importance in the Indian

capital market system.

Preamble

Often, in the economic literature we find the terms ‘development’ and ‘growth’ are used

interchangeably. However, there is a difference. Economic growth refers to the sustained

increase in per capita or total income, while the term economic development implies

sustained structural change, including all the complex effects of economic growth. In

other words, growth is associated with free enterprise, where as development requires

some sort of control and regulation of the forces affecting development. Thus, economic

development is a process and growth is a phenomenon.

Economic planning is very critical for a nation, especially a developing country like India

to take the country in the path of economic development to attain economic growth.

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Why Economic Planning for India?

One of the major objective of planning in India is to increase the rate of economic

development, implying that increasing the rate of capital formation by raising the levels

of income, saving and investment. However, increasing the rate of capital formation in

India is beset with a number of difficulties. People are poverty ridden. Their capacity to

save is extremely low due to low levels of income and high propensity to consume.

Therefore, the rate of investment is low which leads to capital deficiency and low

productivity. Low productivity means low income and the vicious circle continues. Thus,

to break this vicious economic circle, planning is inevitable for India.

The market mechanism works imperfectly in developing nations due to the ignorance and

unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is

very vital. In India, a large portion of the economy is non-monitised; the product, factors

of production, money and capital markets is not organized properly. Thus the prevailing

price mechanism fails to bring about adjustments between aggregate demand and supply

of goods and services. Thus, to improve the economy, market imperfections has to be

removed; available resources has to be mobilized and utilized efficiently; and structural

rigidities has to be overcome. These can be attained only through planning.

In India, capital is scarce; and unemployment and disguised unemployment is prevalent.

Thus, where capital was being scarce and labour being abundant, providing useful

employment opportunities to an increasing labour force is a difficult exercise. Only a

centralized planning model can solve this macro problem of India.

Further, in a country like India where agricultural dependence is very high, one cannot

ignore this segment in the process of economic development. Therefore, an economic

development model has to consider a balanced approach to link both agriculture and

industry and lead for a paralleled growth. Not to mention, both agriculture and industry

cannot develop without adequate infrastructural facilities which only the state can provide

and this is possible only through a well carved out planning strategy. The government’s

role in providing infrastructure is unavoidable due to the fact that the role of private

sector in infrastructural development of India is very minimal since these infrastructure

projects are considered as unprofitable by the private sector.

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Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce

the prevailing income inequalities. This is possible only through planning.

Planning History of India

The development of planning in India began prior to the first Five Year Plan of

independent India, long before independence even. The idea of central directions of

resources to overcome persistent poverty gradually, because one of the main policies

advocated by nationalists early in the century. The Congress Party worked out a program

for economic advancement during the 1920’s, and 1930’s and by the 1938 they formed a

National Planning Committee under the chairmanship of future Prime Minister Nehru.

The Committee had little time to do anything but prepare programs and reports before the

Second World War which put an end to it. But it was already more than an academic

exercise remote from administration. Provisional government had been elected in 1938,

and the Congress Party leaders held positions of responsibility. After the war, the Interim

government of the pre-independence years appointed an Advisory Planning Board. The

Board produced a number of somewhat disconnected Plans itself. But, more important in

the long run, it recommended the appointment of a Planning Commission.

The Planning Commission did not start work properly until 1950. During the first three

years of independent India, the state and economy scarcely had a stable structure at all,

while millions of refugees crossed the newly established borders of India and Pakistan,

and while ex-princely states (over 500 of them) were being merged into India or Pakistan.

The Planning Commission as it now exists, was not set up until the new India had

adopted its Constitution in January 1950.

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Objectives of Indian Planning

The Planning Commission was set up the following Directive principles :

• To make an assessment of the material, capital and human resources of the

country, including technical personnel, and investigate the possibilities of

augmenting such of these resources as are found to be deficient in relation to the

nation’s requirement.

• To formulate a plan for the most effective and balanced use of the country’s

resources.

• Having determined the priorities, to define the stages in which the plan should be

carried out, and propose the allocation of resources for the completion of each

stage.

• To indicate the factors which are tending to retard economic development, and

determine the conditions which, in view of the current social and political

situation, should be established for the successful execution of the Plan.

• To determine the nature of the machinery this will be necessary for securing the

successful implementation of each stage of Plan in all its aspects.

• To appraise from time to time the progress achieved in the execution of each stage

of the Plan and recommend the adjustments of policy and measures that such

appraisals may show to be necessary.

• To make such interim or auxiliary recommendations as appear to it to be

appropriate either for facilitating the discharge of the duties assigned to it or on a

consideration of the prevailing economic conditions, current policies, measures

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and development programs; or on an examination of such specific problems as

may be referred to it for advice by Central or State Governments.

The long-term general objectives of Indian Planning are as follows:

• Increasing National Income

• Reducing inequalities in the distribution of income and wealth

• Elimination of poverty

• Providing additional employment; and

• Alleviating bottlenecks in the areas of : agricultural production, manufacturing

capacity for producer’s goods and balance of payments.

Economic growth, as the primary objective has remained in focus in all Five Year Plans.

Approximately, economic growth has been targeted at a rate of five per cent per annum.

High priority to economic growth in Indian Plans looks very much justified in view of

long period of stagnation during the British rule

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COMPANY PROFILE

Background:

Karvy Consultants Limited was started in the year 1981, with the vision and enterprise of

a small group of practicing Chartered Accountants. Initially it was started with consulting

and financial accounting automation, and carved inroads into the field of registry and

share accounting by 1985. Since then, it has utilized its experience and superlative

expertise to go from strength to strength…to better its services, to provide new ones, to

innovate, diversify and in the process, evolved as one of India’s premier integrated

financial service enterprise.

Today, Karvy has access to millions of Indian shareholders, besides companies,

banks, financial institutions and regulatory agencies. Over the past one and half decades,

Karvy has evolved as a veritable link between industry, finance and people. In January

1998, Karvy became the first Depository Participant in Andhra Pradesh. An ISO 9002

company, Karvy's commitment to quality and retail reach has made it an integrated

financial services company.

An Overview:

KARVY, is a premier integrated financial services provider, and ranked among the top

five in the country in all its business segments, services over 16 million individual

investors in various capacities, and provides investor services to over 300 corporates,

comprising the who is who of Corporate India. KARVY covers the entire spectrum of

financial services such as Stock broking, Depository Participants, Distribution of

financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking,

Commodities Broking, Personal Finance Advisory Services, Merchant Banking &

Corporate Finance, placement of equity, IPOs, among others. Karvy has a professional

30

management team and ranks among the best in technology, operations and research of

various industrial segments.

Today, Karvy service over 6 lakhs customer accounts spread across over 250 cities/towns

in India and serves more than 75 million shareholders across 7000 corporate clients and

makes its presence felt in over 12 countries across 5 continents. All of Karvy services are

also backed by strong quality aspects, which have helped Karvy to be certified as an ISO

9002 company by DNV.

ACHIEVEMENTS:

� Among the top 5 stock brokers in India (4% of NSE volumes)

� India's No. 1 Registrar & Securities Transfer Agents

� Among the top 3 Depository Participants

� Largest Network of Branches & Business Associates

� ISO 9001:2000 certified operations by DNV

� Among top 10 Investment bankers

� Largest Distributor of Financial Products

� Adjudged as one of the top 50 IT uses in India by MIS Asia

� Full Fledged IT driven operations

� First ISO-9002 Certified Registrars in India

� Ranked as “The Most Admired Registrar” by MARG

� Largest mobilize of funds as per PRIME DATABASE

� First depository participant from Andhra Pradesh.

� Handled over 500 public issues as Registrars.

� Handling the Reliance account, which accounts for nearly 10 million account

holders?

Range of services:

• Stock broking services

• Distribution of Financial Products (investments & loan products)

• Depository Participant services

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• IT enabled services

• Personal finance Advisory Services

• Private Client Group

• Debt market services

• Insurance & merchant banking

• Mutual Fund Services

• Corporate Shareholder Services

• Other global services

Besides these, they also offer special portfolio analysis packages that provide daily

technical advice on scrips for successful portfolio management and provide customized

advisory services to help customers make the right financial moves that are specifically

suited to their portfolio. They are continually engaged in designing the right investment

portfolio for each customer according to individual needs and budget considerations.

Karvy Consultants limited deals in Registrar and Investment Services. Karvy is one of the

early entrants registered as Depository Participant with NSDL (National Securities

Depository Limited), the first Depository in the country and then with CDSL (Central

Depository Services Limited).

Karvy stock broking is a member of National Stock Exchange (NSE), The Bombay Stock

Exchange (BSE), and The Hyderabad Stock Exchange (HSE). The services provided are

multi dimensional and multi-focused in their scope: to analyze the latest stock market

trends and to take a close looks at the various investment options and products available

in the market. Besides this, they also offer special portfolio analysis packages.

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The paradigm shift from pure selling to knowledge based selling drives the

business today. The monthly magazine, Finapolis, provides up-dated market information

on market trends, investment options, opinions etc. Thus empowering the investor to base

every financial move on rational thought and prudent analysis and embark on the path to

wealth creation.

Karvy is recognized as a leading merchant banker in the country, Karvy is registered with

SEBI as a Category I merchant banker. This reputation was built by capitalizing on

opportunities in corporate consolidations, mergers and acquisitions and corporate

restructuring.

Karvy has a tie up with the world’s largest transfer agent, the leading Australian

company, Computer share Limited. It has attained a position of immense strength as a

provider of across-the-board transfer agency services to AMCs, Distributors and

Investors. Besides providing the entire back office processing, it also provides the link

between various Mutual Funds and the investor.

Karvy global services limited covers Banking, Financial and Insurance Services

(BFIS), Retail and Merchandising, Leisure and Entertainment, Energy and Utility and

Healthcare sectors.

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Karvy comtrade limited trades in all goods and products of agricultural and mineral

origin that include lucrative commodities like gold and silver and popular items like oil,

pulses and cotton through a well-systematized trading platform.

Karvy Insurance Broking Pvt. Ltd. provides both life and non-life insurance products

to retail individuals, high net-worth clients and corporates. With Indian markets seeing a

sea change, both in terms of investment pattern and attitude of investors, insurance is no

more seen as only a tax saving product but also as an investment product.

Karvy Inc. is located in New York to provide various financial products and

information on Indian equities to potential foreign institutional investors (FIIs) in the

region. This entity would extensively facilitate various businesses of Karvy viz., stock

broking (Indian equities), research and investment by QIBs in Indian markets for both

secondary and primary offerings.

.Quality Policy:

To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by

combining its human and technological resources, to provide superior quality financial

services. In the process, Karvy will strive to exceed Customer's expectations.

34

Quality Objectives

As per the Quality Policy, Karvy will:

� Build in-house processes that will ensure transparent and harmonious relationships

with its clients and investors to provide high quality of services.

� Establish a partner relationship with its investor service agents and vendors that

will help in keeping up its commitments to the customers.

� Provide high quality of work life for all its employees and equip them with

adequate knowledge & skills so as to respond to customer's needs.

� Continue to uphold the values of honesty & integrity and strive to establish

unparalleled standards in business ethics.

� Use state-of-the art information technology in developing new and innovative

financial products and services to meet the changing needs of investors and clients.

� Strive to be a reliable source of value-added financial products and services and

constantly guide the individuals and institutions in making a judicious choice of

same.

Strive to keep all stake-holders (shareholders, clients, investors, employees, suppliers and

regulatory authorities) proud and satisfied

35

CHAPTER-II

REVIEW OF LITERATURE

36

PORTFOLIO MANAGEMENT:

� Specification and qualification of investor objectives, constraints, and preferences in the

form of an investment policy statement.

� Determination and qualification of capital market expectations for the economy, market

sectors, industries and individual securities.

� Allocation of assets and determination of appropriate portfolio strategies for each asset

class and selection of individual securities.

� Performance measurement and evaluation to ensure attainment of investor objectives.

� Monitoring portfolio factors and responding to changes in investor objectives, constrains

and / or capital market expectations.

� Rebalancing the portfolio when necessary by repeating the asset allocation, portfolio

strategy and security selection.

CRITERIA FOR PORTFOLIO DECISIONS:

� In portfolio management emphasis is put on identifying the collective importance of all

investor’s holdings. The emphasis shifts from individual assets selection to a more

balanced emphasis on diversification and risk-return interrelationships of individual

assets within the portfolio. Individual securities are important only to the extent they

affect the aggregate portfolio. In short, all decisions should focus on the impact which the

decision will have on the aggregate portfolio of all the assets held.

� Portfolio strategy should be molded to the unique needs and characteristics of the

portfolio‘s owner.

� Diversification across securities will reduce a portfolio‘s risk. If the risk and return are

lower than the desired level, leverages (borrowing) can be used to achieve the desired

level.

� Larger portfolio returns come only with larger portfolio risk. The most important decision

to make is the amount of risk which is acceptable.

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� The risk associated with a security type depends on when the investment will be

liquidated. Risk is reduced by selecting securities with a payoff close to when the

portfolio is to be liquidated.

� Competition for abnormal returns is extensive, so one has to be careful in evaluating the

risk and return from securities. Imbalances do not last long and one has to act fast to

profit from exceptional opportunities.

• Provides user interfaces that allow for the extraction of data based on user defined

parameters.

• Provides a comprehensive set of tools to perform portfolio and risk evaluation

against parameters set within the risk framework.

• Provides a set of tools to optimize portfolio value and risk position by:

• Considering various legs of different contracts to create an optimal trading

strategy.

• The calculation of residual purchase requirements.

• Performs analysis that provides the relevant information to create hedge and trade

plans.

• Performs analysis on current and potential trades.

• Evaluates the best mix of contracts on offer from counterparties to minimize the

overall purchase cost and maximize profits.

• Creates and maintains trading and hedge strategies by:

• Allocating trades to contracts and books.

• Maintaining trades against contracts and books.

• Reviewing trades against existing trading strategy.

• Maintains an audit trail of decisions taken and query resolution.

• Produces accurate and timely reports

Portfolio Management

To sustain long-term growth, companies manage a number of products and candidates at

different stages of maturity. However, different product profiles and the therapeutic areas

they serve have disparate commercial opportunities.

Our portfolio prioritization, pipeline analysis, category franchise strategy, and technology

licensing assessments provide a systematic means of optimizing development programs

38

and product opportunities. We outline and quantify the areas of greatest opportunity for

your organization and recommend actionable strategies that establish or expand your

position in target markets.

Key portfolio management questions that we address:

• Which technologies and product candidates have the greatest potential

commercial value?

• How can we broaden and deepen our therapy penetration?

• What actions can we take to maximize return on investment for individual

candidates and discoveries?

• Which proprietary rights do we buy, co-market, license, or sell?

• How do we balance short and long term product needs to maximize therapeutic

franchise value?

We detail the value of discoveries in clinical phases, candidates in the pipeline, and

products on the market. These individual and therapeutic category evaluations enable

executives to make strategic investment, licensing and prioritization decisions to realize

their portfolio's full potential.

Portfolio Management

you can now receive the same portfolio management services as many

institutional investors-whether it is a separately managed account or a mutual fund

wrap portfolio.

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Some benefits of managed portfolios include:

Providing access to top-tier investment management professionals

Tailored portfolios to meet specific investment needs

Ownership of individual securities

Ease of pre-designed mutual fund portfolios

Every investor is unique, and investment advisory services provide you with

professional investment advice and a personalized investment strategy. Whether

you're seeking a tailored, professionally managed portfolio, or the convenience

and simplicity of a diversified mutual fund wrap program, your investment choice

should focus on meeting your financial goals. During this process, you should

consider current and future growth objectives, income needs, time horizon and

risk tolerance. These considerations form the blueprint for developing a portfolio

management strategy. The process involves, but is not limited to, the following

important stages.

• Set investment objectives

• Develop an asset allocation strategy

• Evaluate/Select investment vehicle

• Portfolio review -- Ongoing portfolio monitoring

Portfolio Management Maturity

Summarizes five levels of project portfolio management maturity .each level represents

the adoption of an increasingly comprehensive and effective subset of related solutions

discussed in the previous parts of this 6-part paper for addressing the reasons that

organizations choose the wrong projects. Understanding organizational maturity with

regard to project portfolio management is useful. It facilitates identifying performance

gaps, indicates reasonable performance targets, and suggests an achievable path for

improvement.

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The fact that five maturity levels have been identified is not meant to suggest that all

organizations ought to strive for top-level performance. Each organization needs to

determine what level of performance is reasonable at the current time based on business

needs, resources available for engineering change, and organizational ability to accept

change. Experience shows that achieving high levels of performance typically takes

several years. It is difficult to leap-frog several steps at once. Making progress is what

counts.

Five levels of project portfolio management.

The detailed definitions of the levels, provided below, are not precise. Real organizations

will tend to be more advanced with regard to some characteristics and less advanced

relative to others. For most organizations, though, it is easy to pick one of the levels as

characterizing the current maturity of project portfolio management performance.

Level 1: Foundation

Level 1 organizes work into discrete projects and tracks costs at the project level.

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• Project decisions are made project-by-project without adherence to formal project

selection criteria.

• The portfolio concept may be recognized, but portfolio data are not centrally

managed and/or not regularly refreshed.

• Roles and responsibilities have not been defined or are generic, and no value-

creation framework has been established.

• Only rarely are business case analyses conducted for projects, and the quality is

often poor.

• Project proposals reference business benefits generally, but estimates are nearly

always qualitative rather than quantitative.

• There is little or no formal balancing between the supply and demand for project

resources, and there is little if any coordination of resources across projects,

which often results in resource conflicts.

• Over-commitment of resources is common.

• There may be a growing recognition that risks need to be managed, but there is

little real management of risk.

Level 1 organizations are not yet benefiting from project portfolio management, but they

are motivated to address the relevant problems and have the minimum foundation in

place to begin building project portfolio management capability. At this level,

organizations should focus on establishing consistent, repeatable processes for project

scheduling, resource assignment, time tracking, and general project oversight and

support.

Level 2: Basics

Level 2 replaces project-by-project decision making with the goal of identifying the best

collection of projects to be conducted within the resources available. At a minimum this

requires aggregating project data into a central database, assigning responsibilities for

project portfolio management, and force-ranking projects.

• Redundant projects are identified and eliminated or merged.

• Business cases are conducted for larger projects, although quality may be

inconsistent.

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• Individual departments may be establishing structures to oversee and coordinate

their projects.

• There is some degree of options analysis (i.e., different versions of the project will

be considered).

• Project selection criteria are explicitly defined, but the link to value creation is

sketchy.

• Planning is mostly activity scheduling with limited performance forecasting.

• There are attempts to quantify some non-financial benefits, but estimates are

mostly "guestimates" generated without the aid of standard techniques.

• Overlap and double counting of benefits between projects is common.

• Ongoing projects are still rarely terminated based on poor performance.

• The PPM tools being used may have good data display and management

capabilities, but project prioritization algorithms may be simplistic and the results

potentially misleading to decision makers.

• Portfolio data has an established refresh cycle or is regularly accessed and

updated. Resource requirements at the portfolio level are recognized but not

systematically managed.

• Knowledge sharing is local and ad hoc.

• Risk analysis may be conducted early in projects but is not maintained as a

continual management process. Uncertainties in project schedule, cost and

benefits are not quantified.

• Schedule and cost overruns are still common, and the risks of project failure

remain large.

Level 2 organizations are beginning to implement project portfolio management, but

most of the opportunity has not yet been realized. The focus should be on formalizing the

framework for evaluating and prioritizing projects and on implementing tools and

processes for supporting project budgeting, risk and issues tracking, requirements

tracking, and resource management.

Level 3: Value Management

Level 3, the most difficult step for most organizations, requires metrics, models, and tools

for quantifying the value to be derived from projects. Although project interdependencies

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and portfolio risks may not be fully and rigorously addressed, analysis allows projects to

be ranked based on "bang-for-the-buck," often producing a good approximation of the

value-maximizing project portfolio.

• The principles of portfolio management are widely understood and accepted.

• The project portfolio has a well-defined perimeter, with clear demarcation and

understanding of what it contains and does not contain.

• Portfolio management processes are centrally defined and well documented, as

are roles and responsibility for governance and delivery.

• Portfolio management can demonstrate that its role in scrutinizing projects has

resulted in some initiatives being stopped or reshaped to increase portfolio value.

• Executives are engaged, provide tradeoff weights for the value model, and

provide active and informed support.

• Plans are developed to a consistent standard and are outcome- or value-based.

• Effective estimation techniques are being used within planning and a range of

project alternatives are routinely considered.

• Data quality assurance processes are in place and independent reviews are

conducted.

• There is a common, consistent practice for project approval and monitoring.

• Project dependencies are identified, tracked, and managed.

• Decisions are made with the aid of a tool based on a defensible logic for

computing project value that generates the efficient frontier.

• Portfolio data are kept up-to-date and audit trails are maintained.

• Costs, expenditures and forecasts are monitored at the portfolio level in

accordance with established guidelines and procedures.

• Interfaces with financial and other related functions within the organization have

been defined.

• A process is in place for validating the realization of project benefits.

• There is a defined risk analysis and management process, with efforts appropriate

to risk significance, although some sources of risk are not quantified in terms of

probability and consequence.

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Level 3 organizations demonstrate a commitment to proactive, standardized project and

project portfolio management. They are achieving significant return from their

investment, although more value is available.

Level 4: Optimization

Level 4 is characterized by mature processes, superior analytics, and quantitatively

managed behavior.

• Tools for optimizing the project portfolio correctly and fully account for project

risks and interdependencies.

• The business processes of value creation have been modeled and measurement

data is collected to validate and refine the model.

• The model is the basis for the logic for estimating project value, prioritizing

projects, making project funding and resource allocation decisions, and

optimizing the project portfolio.

• The organization's tolerance for risk is known, and used to guide decisions that

determine the balance of risk and benefit across the portfolio.

• There is clear accountability and ownership of risks.

• External risks are monitored and evaluated as part of the investment management

process and common risks across the whole portfolio (which may not be visible to

individual projects) are quantified and in support of portfolio optimization.

• Senior executives are committed, engaged, and proactively seek out innovative

ways to increase value.

• There is likely to be an established training program to develop the skills and

knowledge of individuals so that they can more readily perform their designated

roles.

• An extensive range of communications channels and techniques are used for

collaboration and stakeholder management.

• High-level reports on key aspects of portfolio are regularly delivered to executives

and the information is used to inform strategic decision making.

• There is trend reporting on progress, actual and projected cost, value, and level of

risk.

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• Assessments of stakeholder confidence are collected and used for process

improvement.

• Portfolio data is current and extensively referenced for better decision making.

Level 4 organizations are using quantitative analysis and measurements to obtain efficient

predictable and controllable project and project portfolio management. They are

obtaining the bulk of the value available from practicing project portfolio management.

Level 5: Core Competency

Level 5 occurs when the organization has made project portfolio management a core

competency, uses best-practice analytic tools, and has put processes in place for

continuous learning and improvement.

• Portfolio management processes are proven and project decisions, including

project funding levels and timing, are routinely made based the value

maximization value.

• Processes are continually refined to take into account increasing knowledge,

changing business needs, and external factors.

• Portfolio management drives the planning, development, and allocation of

projects to optimize the efficient use of resources in achieving the strategic

objectives of the organization.

• High levels of competence are embedded in all portfolio management roles, and

portfolio management skills are seen as important for career advancement.

• Portfolio gate reviews are used to proactively assess and manage portfolio value

and risk.

• Portfolio management informs future capacity demands, capability requirements

are recognized, and resource levels are strategically managed.

• Information is highly valued, and the organization's ability to mitigate external

risks and grasp opportunities is enhanced by identifying innovative ways to

acquire and better share knowledge.

• Benefits management processes are embedded across the organization, with

benefits realization explicitly aligned with the value measurement framework.

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• The portfolio is actively managed to ensure the long term sustainability of the

enterprise.

• Stakeholder engagement is embedded in the organization's culture, and

stakeholder management processes have been optimized.

• Risk management underpins decision-making throughout the organization.

• Quantitatively measurable goals for process improvement have been established

and performance against them tracked.

• The relationship between the portfolio and strategic planning is understood and

managed.

• Resource allocations to and from projects are intimately aligned so as the

maximize value creation.

Level 5 organizations are obtaining maximum possible value from project portfolio

management. By fully institutionalizing project portfolio management into their culture

they free people to become more creative and innovative in achieving business success.

Building Project Portfolio Management Maturity

Experience shows that building project portfolio management maturity takes time. As

suggested by, significant short-term performance gains can be achieved, but making step

changes requires understanding current weaknesses and the commitment of effort and

resources.

Step changes can be made, but achieving high levels of maturity typically takes years

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QUALITIES OF PORTFOLIO MANAGER:

1. SOUND GENERAL KNOWLEDGE: Portfolio management is an exciting and challenging

job. He has to work in an extremely uncertain and confliction environment. In the stock market

every new piece of information affects the value of the securities of different industries in a

different way. He must be able to judge and predict the effects of the information he gets. He

must have sharp memory, alertness, fast intuition and self-confidence to arrive at quick

decisions.

2. ANALYTICAL ABILITY: He must have his own theory to arrive at the intrinsic value of the

security. An analysis of the security‘s values, company, etc. is s continuous job of the portfolio

manager. A good analyst makes a good financial consultant. The analyst can know the

strengths, weaknesses, opportunities of the economy, industry and the company.

3. MARKETING SKILLS: He must be good salesman. He has to convince the clients about the

particular security. He has to compete with the stock brokers in the stock market. In this

context, the marketing skills help him a lot.

4. EXPERIENCE: In the cyclical behavior of the stock market history is often repeated, therefore

the experience of the different phases helps to make rational decisions. The experience of the

different types of securities, clients, market trends, etc., makes a perfect professional manager.

PORTFOLIO BUILDING:

Portfolio decisions for an individual investor are influenced by a wide variety of factors.

Individuals differ greatly in their circumstances and therefore, a financial programme well suited

to one individual may be inappropriate for another. Ideally, an individual‘s portfolio should be

tailor-made to fit one‘s individual needs.

Investor‘s Characteristics:

An analysis of an individual‘s investment situation requires a study of personal

characteristics such as age, health conditions, personal habits, family responsibilities, business or

professional situation, and tax status, all of which affect the investor‘s willingness to assume risk.

48

Stage in the Life Cycle:

One of the most important factors affecting the individual‘s investment objective is his

stage in the life cycle. A young person may put greater emphasis on growth and lesser emphasis

on liquidity. He can afford to wait for realization of capital gains as his time horizon is large.

Family responsibilities:

The investor‘s marital status and his responsibilities towards other members of the family can

have a large impact on his investment needs and goals.

Investor‘s experience:

The success of portfolio depends upon the investor‘s knowledge and experience in

financial matters. If an investor has an aptitude for financial affairs, he may wish to be more

aggressive in his investments.

Attitude towards Risk:

A person‘s psychological make-up and financial position dictate his ability to assume the

risk. Different kinds of securities have different kinds of risks. The higher the risk, the greater the

opportunity for higher gain or loss.

Liquidity Needs:

Liquidity needs vary considerably among individual investors. Investors with regular

income from other sources may not worry much about instantaneous liquidity, but individuals

who depend heavily upon investment for meeting their general or specific needs, must plan

portfolio to match their liquidity needs. Liquidity can be obtained in two ways:

1. By allocating an appropriate percentage of the portfolio to bank deposits, and

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2. By requiring that bonds and equities purchased be highly marketable.

Tax considerations:

Since different individuals, depending upon their incomes, are subjected to different marginal

rates of taxes, tax considerations become most important factor in individual‘s portfolio strategy.

There are differing tax treatments for investment in various kinds of assets.

Time Horizon:

In investment planning, time horizon becomes an important consideration. It is highly

variable from individual to individual. Individuals in their young age have long time horizon for

planning, they can smooth out and absorb the ups and downs of risky combination. Individuals

who are old have smaller time horizon, they generally tend to avoid volatile portfolios.

Individual‘s Financial Objectives:

In the initial stages, the primary objective of an individual could be to accumulate wealth via

regular monthly savings and have an investment programmed to achieve long term capital gains.

Safety of Principal:

The protection of the rupee value of the investment is of prime importance to most investors.

The original investment can be recovered only if the security can be readily sold in the market

without much loss of value.

Assurance of Income:

`Different investors have different current income needs. If an individual is dependent of its

investment income for current consumption then income received now in the form of dividend

and interest payments become primary objective.

Investment Risk:

All investment decisions revolve around the trade-off between risk and return. All

rational investors want a substantial return from their investment. An ability to understand,

50

measure and properly manage investment risk is fundamental to any intelligent investor or a

speculator. Frequently, the risk associated with security investment is ignored and only the

rewards are emphasized. An investor who does not fully appreciate the risks in security

investments will find it difficult to obtain continuing positive results.

RISK AND EXPECTED RETURN:

There is a positive relationship between the amount of risk and the amount of expected

return i.e., the greater the risk, the larger the expected return and larger the chances of substantial

loss. One of the most difficult problems for an investor is to estimate the highest level of risk he

is able to assume.

� Risk is measured along the horizontal axis and increases from the left to right.

� Expected rate of return is measured on the vertical axis and rises from bottom to top.

� The line from 0 to R (f) is called the rate of return or risk less investments commonly

associated with the yield on government securities.

� The diagonal line form R (f) to E(r) illustrates the concept of expected rate of return

increasing as level of risk increases.

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TYPES OF RISKS:

Risk consists of two components. They are

1. Systematic Risk

2. Un-systematic Risk

1. Systematic Risk:

Systematic risk is caused by factors external to the particular company and uncontrollable

by the company. The systematic risk affects the market as a whole. Factors affect the systematic

risk are

� economic conditions

� political conditions

� sociological changes

The systematic risk is unavoidable. Systematic risk is further sub-divided into three types. They

are

a) Market Risk

b) Interest Rate Risk

c) Purchasing Power Risk

a). Market Risk

One would notice that when the stock market surges up, most stocks post higher price.

On the other hand, when the market falls sharply, most common stocks will drop. It is not

uncommon to find stock prices falling from time to time while a company‘s earnings are rising

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and vice-versa. The price of stock may fluctuate widely within a short time even though earnings

remain unchanged or relatively stable.

b). Interest Rate Risk:

Interest rate risk is the risk of loss of principal brought about the changes in the interest

rate paid on new securities currently being issued.

c). Purchasing Power Risk:

The typical investor seeks an investment which will give him current income and / or

capital appreciation in addition to his original investment.

2. Un-systematic Risk:

Un-systematic risk is unique and peculiar to a firm or an industry. The nature and mode of

raising finance and paying back the loans, involve the risk element. Financial leverage of the

companies that is debt-equity portion of the companies differs from each other. All these factors

affect the un-systematic risk and contribute a portion in the total variability of the return.

� Managerial inefficiently

� Technological change in the production process

� Availability of raw materials

� Changes in the consumer preference

� Labor problems

The nature and magnitude of the above mentioned factors differ from industry to industry

and company to company. They have to be analyzed separately for each industry and firm. Un-

systematic risk can be broadly classified into:

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a) Business Risk

b) Financial Risk

a. Business Risk:

Business risk is that portion of the unsystematic risk caused by the operating environment of the

business. Business risk arises from the inability of a firm to maintain its competitive edge and

growth or stability of the earnings. The volatility in stock prices due to factors intrinsic to the

company itself is known as Business risk. Business risk is concerned with the difference between

revenue and earnings before interest and tax. Business risk can be divided into.

i). Internal Business Risk

Internal business risk is associated with the operational efficiency of the firm. The

operational efficiency differs from company to company. The efficiency of operation is reflected

on the company‘s achievement of its pre-set goals and the fulfillment of the promises to its

investors.

ii).External Business Risk

External business risk is the result of operating conditions imposed on the firm by

circumstances beyond its control. The external environments in which it operates exert some

pressure on the firm. The external factors are social and regulatory factors, monetary and fiscal

policies of the government, business cycle and the general economic environment within which a

firm or an industry operates.

b. Financial Risk:

It refers to the variability of the income to the equity capital due to the debt capital. Financial

risk in a company is associated with the capital structure of the company. Capital structure of the

company consists of equity funds and borrowed funds.

PORTFOLIO ANALYSIS:

Various groups of securities when held together behave in a different manner and give

interest payments and dividends also, which are different to the analysis of individual securities.

A combination of securities held together will give a beneficial result if they are grouped in a

manner to secure higher return after taking into consideration the risk element.

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There are two approaches in construction of the portfolio of securities. They are

� Traditional approach

� Modern approach

TRADITIONAL APPROACH:

Traditional approach was based on the fact that risk could be measured on each

individual security through the process of finding out the standard deviation and that security

should be chosen where the deviation was the lowest. Traditional approach believes that the

market is inefficient and the fundamental analyst can take advantage of the situation. Traditional

approach is a comprehensive financial plan for the individual. It takes into account the

individual need such as housing, life insurance and pension plans. Traditional approach basically

deals with two major decisions. They are

a) Determining the objectives of the portfolio

b) Selection of securities to be included in the portfolio

MODERN APPROACH:

Modern approach theory was brought out by Markowitz and Sharpe. It is the combination

of securities to get the most efficient portfolio. Combination of securities can be made in many

ways. Markowitz developed the theory of diversification through scientific reasoning and

method. Modern portfolio theory believes in the maximization of return through a combination

of securities. The modern approach discusses the relationship between different securities and

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then draws inter-relationships of risks between them. Markowitz gives more attention to the

process of selecting the portfolio. It does not deal with the individual needs.

MARKOWITZ MODEL:

Markowitz model is a theoretical framework for analysis of risk and return and their

relationships. He used statistical analysis for the measurement of risk and mathematical

programming for selection of assets in a portfolio in an efficient manner. Markowitz apporach

determines for the investor the efficient set of portfolio through three important variables i.e.

� Return

� Standard deviation

� Co-efficient of correlation

Markowitz model is also called as an “Full Covariance Model“. Through this model the

investor can find out the efficient set of portfolio by finding out the trade off between risk and

return, between the limits of zero and infinity. According to this theory, the effects of one

security purchase over the effects of the other security purchase are taken into consideration and

then the results are evaluated. Most people agree that holding two stocks is less risky than

holding one stock. For example, holding stocks from textile, banking and electronic companies is

better than investing all the money on the textile company‘s stock.

Markowitz had given up the single stock portfolio and introduced diversification. The

single stock portfolio would be preferable if the investor is perfectly certain that his expectation

of highest return would turn out to be real. In the world of uncertainty, most of the risk adverse

investors would like to join Markowitz rather than keeping a single stock, because diversification

reduces the risk.

ASSUMPTIONS:

� All investors would like to earn the maximum rate of return that they can achieve from

their investments.

� All investors have the same expected single period investment horizon.

� All investors before making any investments have a common goal. This is the avoidance

of risk because Investors are risk-averse.

56

� Investors base their investment decisions on the expected return and standard deviation of

returns from a possible investment.

� Perfect markets are assumed (e.g. no taxes and no transition costs)

� The investor assumes that greater or larger the return that he achieves on his investments,

the higher the risk factor surrounds him. On the contrary when risks are low the return

can also be expected to be low.

� The investor can reduce his risk if he adds investments to his portfolio.

� An investor should be able to get higher return for each level of risk “by determining the

efficient set of securities“.

� An individual seller or buyer cannot affect the price of a stock. This assumption is the

basic assumption of the perfectly competitive market.

� Investors make their decisions only on the basis of the expected returns, standard

deviation and covariance’s of all pairs of securities.

� Investors are assumed to have homogenous expectations during the decision-making

period

� The investor can lend or borrow any amount of funds at the risk less rate of interest. The

risk less rate of interest is the rate of interest offered for the treasury bills or Government

securities.

� Investors are risk-averse, so when given a choice between two otherwise identical

portfolios, they will choose the one with the lower standard deviation.

� Individual assets are infinitely divisible, meaning that an investor can buy a fraction of a

share if he or she so desires.

57

� There is a risk free rate at which an investor may either lend (i.e. invest) money or borrow

money.

� There is no transaction cost i.e. no cost involved in buying and selling of stocks.

� There is no personal income tax. Hence, the investor is indifferent to the form of return

either capital gain or dividend.

THE EFFECT OF COMBINING TWO SECURITIES:

It is believed that holding two securities is less risky than by having only one investment

in a person‘s portfolio. When two stocks are taken on a portfolio and if they have negative

correlation then risk can be completely reduced because the gain on one can offset the loss on the

other. This can be shown with the help of following example:

INTER- ACTIVE RISK THROUGH COVARIANCE:

Covariance of the securities will help in finding out the inter-active risk. When the

covariance will be positive then the rates of return of securities move together either upwards or

downwards. Alternatively it can also be said that the inter-active risk is positive. Secondly,

covariance will be zero on two investments if the rates of return are independent.

Holding two securities may reduce the portfolio risk too. The portfolio risk can be

calculated with the help of the following formula:

CAPITAL ASSET PRICING MODEL (CAPM):

Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basic structure of

Capital Asset Pricing Model. It is a model of linear general equilibrium return. In the CAPM

theory, the required rate return of an asset is having a linear relationship with asset‘s beta value

i.e. un-diversifiable or systematic risk (i.e. market related risk) because non market risk can be

eliminated by diversification and systematic risk measured by beta. Therefore, the relationship

58

between an assets return and its systematic risk can be expressed by the CAPM, which is also

called the Security Market Line.

R = Rf Xf+ Rm(1- Xf)

Rp = Portfolio return

Xf =The proportion of funds invested in risk free assets

1- Xf = The proportion of funds invested in risky assets

Rf = Risk free rate of return

Rm = Return on risky assets

Formula can be used to calculate the expected returns for different situations, like mixing

risk less assets with risky assets, investing only in the risky asset and mixing the borrowing with

risky assets.

THE CONCEPT:

According to CAPM, all investors hold only the market portfolio and risk less securities.

The market portfolio is a portfolio comprised of all stocks in the market. Each asset is held in

proportion to its market value to the total value of all risky assets.

For example, if wipro Industry share represents 15% of all risky assets, then the market

portfolio of the individual investor contains 15% of wipro Industry shares. At this stage, the

investor has the ability to borrow or lend any amount of money at the risk less rate of interest.

E.g.: assume that borrowing and lending rate to be 12.5% and the return from the risky

assets to be 20%. There is a trade off between the expected return and risk. If an investor invests

in risk free assets and risky assets, his risk may be less than what he invests in the risky asset

alone. But if he borrows to invest in risky assets, his risk would increase more than he invests his

own money in the risky assets. When he borrows to invest, we call it financial leverage. If he

invests 50% in risk free assets and 50% in risky assets, his expected return of the portfolio would

be

59

Rp= Rf Xf+ Rm(1- Xf)

= (12.5 x 0.5) + 20 (1-0.5)

= 6.25 + 10

= 16.25%

if there is a zero investment in risk free asset and 100% in risky asset, the return is

Rp= Rf Xf+ Rm(1- Xf)

= 0 + 20%

= 20%

if -0.5 in risk free asset and 1.5 in risky asset, the return is

Rp= Rf Xf+ Rm(1- Xf)

= (12.5 x -0.5) + 20 (1.5)

= -6.25+ 30

= 23.75%

60

CHAPTER-IV

DATA ANALYSIS AND INTERPRETATION

61

CALCULATION OF AVERAGE RETURN OF COMPANIES:

_

Average Return (R) = (R)/N

(P0) = Opening price of the share

(P1) = Closing price of the share

D = Dividend WIPRO:

Year (P0) (P1) D (P1-P0)

D+(P1-P0)/

P0*100

2005-2006 1,233.45 1361.20 279 127.75 12.71

2006-2007 1,361.20 2,012 5 650.8 48.16

2007-2008 2012 1900.75 5 -111.25 -15.84

2008-2009 1900.75 1900.45 8 -0.3 1.38

2009-2010 1900.45 425.30 - -1475.15 -0.776

TOTAL RETURN 45.634

Average Return = 45.63/5 = 9.12

DR REDDY LABORATORIES LTD:

Year (P0) (P1) D (P1-P0)

D+(P1-P0)/

P0*100

2005-2006 916.30 974.35 5 58.2 6.89

2006-2007 974.35 739.15 5 23.52 -23.63

2007-2008 739.15 1,421.40 5 682.25 92.98

2008-2009 1,421.40 1456.55 3.75 35.15 2.74

2009-2010 1456.55 591.25 .75 -865.3 -59.4

TOTAL RETURN 19.58

Average Return = 19.58/5 = 3.916

62

ACC:

Year (P0) (P1) D (P1-P0)

D+(P1-P0)/

P0*100

2005-2006 138.50 254.65 4 116.15 86.71

2006-2007 254.65 360.55 7 105.9 44.34

2007-2008 360.55 782.20 8 421.61 119.19

2008-2009 782.20 735.25 25 -46.95 -2.8

2009-2010 735.23 826.10 2 90.85 12.63

TOTAL RETURN 258.07

Average Return = 258.07/5 =51.614

HERO MOTOCORP LIMITED:

Year (P0) (P1) D (P1-P0)

D+(P1-P0)/

P0*100

2005-2006 188.20 490.60 20 302.40 171.3

2006-2007 490.60 548.00 20 57.40 15.77

2007-2008 548.00 890.45 20 342.45 66.14

2008-2009 890.45 688.75 17 -20.17 -20.74

2009-2010 688.75 9.5 1.45 1.45 1.958

TOTAL RETURN 234.428

Average Return = 234.428/5 = 46.885

DIAGRAMATIC PRESENTATION

63

RETURNS

COMPANY RETURN

WIPRO 9.12

DR.REDDY 3.916

ACC 51.614

HERO MOTOCORP 46.885

64

CALCULATION OF STANDARD DEVIATION:

Standard Deviation = Variance

__

Variance = 1/n (R-R)2

WIPRO:

Year

Return

(R)

Avg.

Return (R)

(R-R)

(R-R)2

2005-2006 12.71 9.12 3.59 12.8881

2006-2007 48.16 9.12 39.04 1524.122

2007-2008 -15.84 9.12 -24.96 623.0016

2008-2009 1.38 9.12 -7.74 59.9076

2009-2010 -0.776 9.12 -9.896 97.93082

TOTAL

2317.85

_

Variance = 1/n (R-R)2 = 1/5 (2317.85) = 463.57

Standard Deviation = Variance = 463.57 =21.53

DR. REDDY:

Year

Return

(R)

Avg.

Return (R)

(R-R)

(R-R)2

2005-2006 6.89 46.88 2.98 8.8804

2006-2007 -23.63 46.88 -27.54 758.4516

2007-2008 92.98 46.88 89.07 7933.465

2008-2009 2.74 46.88 -1.17 1.3689

2009-2010 -59.4 46.88 -63.31 4008.156

TOTAL

12710.32

Variance = 1/n-1 (R-R)2 = 1/5 (12710.32) = 2542.06

Standard Deviation = Variance = 2542.06= 50.14

65

ACC:

Year

Return

(R)

Avg.

Return (R)

(R-R)

(R-R)2

2005-2006 86.71 51.61 35.1 1232.01

2006-2007 44.34 51.61 -7.27 52.8529

2007-2008 119.19 51.61 67.58 4567.056

2008-2009 -2.8 51.61 -54.41 2960.448

2009-2010 12.63 51.61 -38.98 1519.44

TOTAL 10331.81

Variance = 1/n-1 (R-R)2 = 1/5 (10331.81) = 2066.36

Standard Deviation = Variance = 2066.36 = 45.45

HERO MOTOCORP:

Year

Return

(R)

Avg.

Return (R)

(R-R)

(R-R)2

2003-2004 171.3 32.59 138.71 19,240.5

2006-2007 15.77 32.59 -16.82 284.1

2007-2008 66.14 32.59 33.57 1,126.273

2008-2009 -20.74 32.59 -53.33 2,844.1

2009-2010 1.958 32.59 -31 -960.8

TOTAL 29,592.4

Variance = 1/n-1 (R-R)2 = 1/5 (29,592.4) = 4,232.1

Standard Deviation = Variance = 4,232.1 = 70.23

66

DIAGRAMATIC PRESENTATION

COMPANY RISK

WIPRO 22.86

DR.REDDY 46.66

ACC 47.963

HERO MOTOCORP 70.23

RISK

67

CALCULATION OF PORTFOLIO RETURN:

Rp=(RA*WA) + (RB*WB)

Where Rp = portfolio return

RA= return of A WA= weight of A

RB= return of B WB= weight of B

CALCULATION OF PORTFOLIO RETURN OF WIPRO & OTHER

COMPANIES:

WIPRO (a) & DR.REDDY (b):

RA= 4.6 WA=0.77

RB=0.67 WB=0.23

Rp = (4.6*0.77) + (0.67*0.23)

Rp = (3.542 + 0.1541)

Rp = 3.6961%

WIPRO (a) &ACC (b):

RA= 4.6 WA=0.70

RB= 42.02 WB=-0.30

Rp = (4.6*0.70) + (42.02*0.30)

Rp = (0.92+12.606)

Rp = 13.52%

WIPRO (a) & HERO MOTOCORP (b):

RA= 4.6 WA=0.98

RB= 32.498 WB=0.02

Rp = (4.6*0.9) + (32.498*0.02)

Rp = (4.508 + 0.6499)

Rp = 5.16%

68

CALCULATION OF PORTFOLIO RETURN OF DR REDDY &

OTHER COMPANIES

DRREDDY (a) & ACC (b):

RA= 0.67 WA=0.52

RB=42.02 WB=0.48

Rp = (0.67*0.52) + (42.02*0.48)

Rp = (.3487+20.139)

Rp = 20.5%

DRREDDY (a) & HERO MOTOCORP (b):

RA= 0.67 WA=0.82

RB=32.498 WB=0.18

Rp (0.67*0.82) + (32.498*0.18)

Rp (0.5494+5.84964)

Rp 6.399%

CALCULATION OF PORTFOLIO RETURN OF ACC & OTHER

COMPANIES

ACC(a) &HERO MOTOCORP (b):

RA= 42.02 WA=0.79

RB=32.498 WB=0.21

Rp = (42.02*0.79) + (32.498*0.21)

Rp = (33.1958+6.8248)

Rp = 40.02%

69

DISPLAY OF ALL CALCULATED VALUES

COMBINATION CORRELATION COVARIANCE

PORTFOLIO

RETURN

PORTFOLIO

RISK

WIPRO &

DR.REDDY -0.184 -196.72 3.7 18.9

WIPRO & ACC 0.247 267.69 0.49 23.5

WIPRO &HERO 0.28 449.7 5.0 22.9

ITC & DR.REDDY 0.89 2736.2 -9.8 26.9

ITC &ACC 0.830 2591.4 36.542 50

ITC &HERO 0.587 2736.33 25.4 60.6

DR.REDDY & ACC .7434 1639.8 20.5 43.9

DR REDDY&HERO 0.705 1,124.1095 -14.6 15.3

ACC & HERO 0.7873 2,613.7 43.9 42

INTERPRETATION

• From the above calculated values it is observed that the combination of the companies

ACC & HERO gives the high portfolio return of 43.9 with medium values of risk

correlation & covariance.

• The investors who are risk averse can invest their funds in the portfolio combination

of,ACC,HERO MOTOCORP AND WIPRO proportion. The investors who are slightly

risk averse are suggested to invest in WIPRO, DR. REDDY, ACC as the combination is

slightly low risk when compared with other companies.

70

CHAPTER-V

FINDINGS

CONCLUSION

SUGGESTIONS

BIBILOGRAPHY

71

FINDINGS

The analytical part of the study for the 6 years period reveals the following

interpretations,

wipro with itc:

In this combination as per the calculations and the study the wipro bears a proportion of

investment of (0.93)and where as ITC bears a proportion of (0.07)which is less than compared to

wipro. The standard deviation of wipro is (22.86) and (66.04) in ITC.

From the return point of view wipro is (4.6) and (20.1) is ITC. From risk point of view wipro is

less risk than, ITC so the investors who are will to face high risk the better option will be

investing in ITC.

Wipro with acc:

Portfolio weights for wipro and ACC are (0.70)and (0.30) respectively. This indicates

that the investors who are interested to take more risk they can invest in this combination, and

also can get high returns.

Dr reddy&acc:

The portfolio of weights of the both (0.52) is Dr.reddy (.048) is for acc. The standard

deviation of Dr.reddy is (46.66) and (47.27) for acc. The returns of drreddy is (0.67) and (42.02)

is acc. According to this combination investor can invest acc, this is more risk as well as more

returns can get up to (42.02). If investor wants less risk he has to invest in acc.Dr reddy is a low

risk as well as low returns also.

“Greater Portfolio Return with less Risk is always is an attractive

combination” for the Investors.

72

CONCLUSION

The investors who are risk averse can invest their funds in the portfolio

combination of,ACC,HERO MOTOCORP AND WIPRO proportion. The

investors who are slightly risk averse are suggested to invest in WIPRO, DR.

REDDY, ACC as the combination is slightly low risk when compared with other

companies.

The analysis regarding the companies ACC, HERO MOTOCORP has

howed a wise investment in public and in private sector with an increasing trend

where as corporate sector has recorded a decreasing trends income which denotes

an increasing trend through out the study period.

As far as the average return of the company is concerned ACC, , HERO

MOTOCORP is high with an average return of 48.41%. WIPRO,

DR.REDDY is getting low returns. HERO MOTOCORP securities are

performing at medium returns.

As far as the correlation is concerned the securities DR.REDDY are high

correlated with minimum portfolio risk. The investor who is risk averse will

have to invest in this combination which gives good return with low risk.

73

SUGGESTIONS:

� As the average return of securities, ACC, HERO MOTOCORP and are HIGH, it

is suggested that investors who show interest in these securities taking risk into

consideration.

� As the risk of the securities ITC, ACC, HERO MOTOCORP and BHEL are risky

securities it suggested that the investors should be careful while investing in these

securities.

� The investors who require minimum return with low risk should invest in WIPRO

& DR.REDDY.

� It is recommended that the investors who require high risk with high return should

invest in ITC and HERO MOTOCORP.

� The investors are benefited by investing in selected scripts of Industries.

� Buy stocks in companies with potential for surprises.

� Take advantage of volatility before reaching a new equilibrium.

� Listen to rumors and tips, check for yourself.

� Don’t put your trust in only one investment. It is like “putting all the eggs in one

basket “. This will help lesson the risk in the long term.

� The investor must select the right advisory body which is has sound knowledge

about the product which they are offering.

� Professionalized advisory is the most important feature to the investors.

Professionalized research, analysis which will be helpful for reducing any kind of

risk to overcome.

74

BIBLIOGRAPHY

Books

Security Analysis & Portfolio Management - Fishers & Jordon

Financial Management – M.Y. Khan

Financial Management – Prasanna Chandra

News Papers

Times of India

India Today

Websites

www.amfiindia.com

www.sebi.com

www.google.com

www.ingvysyabank.com