Ksd.docx

KSD’s Model College Kanchangaon Village, Khambalpada, NR. R.B.T. School, Thakurli East -421201.

CERTIFICATE This is to certify that Mr. Pisharody Hrithik Ramchandran has worked and duly completed his Project Work for the degree of Bachelor in Commerce (Accounting & Finance) under the Faculty of Commerce in the subject of International Finance & SAPM and his project is entitled, “Risk Perception & Portfolio Management In Equity Markets” under my supervision. I further certify that the entire work has been done by the learner under my guidance and that no part of it has been submitted previously for any Degree or Diploma of any University. It is his own work and facts reported by his personal findings and investigations.

Asst. Prof. Akansha Sant

A PROJECT REPORT ON RISK PERCEPTION AND PORTFOLIO MANAGEMENT IN EQUITY MARKET.

A PROJECT SUBMITTED TO UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION OF THE DEGREE OF BACHELOR IN COMMERCE (ACCOUNTING AND FINANCE) UNDER THE FACULTY OF COMMERCE

BY PISHARODY HRITHIK RAMCHANDRAN RAJANI

UNDER THE GUIDANCE OF ASST. PROF. AKANSHA SANT KSD’s MODEL COLLEGE KANCHANGAON VILLAGE, KHAMBALPADA, NR. R.B.T. SCHOOL, THAKURLI EAST -421201.

A PROJECT REPORT ON RISK PERCEPTION AND PORTFOLIO MANAGEMENT IN EQUITY MARKET.

A PROJECT SUBMITTED TO UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION OF THE DEGREE OF BACHELOR IN COMMERCE (ACCOUNTING AND FINANCE) UNDER THE FACULTY OF COMMERCE

BY PISHARODY HRITHIK RAMCHANDRAN RAJANI

UNDER THE GUIDANCE OF ASST. PROF. AKANSHA SANT KSD’s MODEL COLLEGE KANCHANGAON VILLAGE, KHAMBALPADA, NR. R.B.T. SCHOOL, THAKURLI EAST -421201.

TABLE OF CONTENTS

SERIAL NO. 1 2 3 4 5 6 7 8

DESCRIPTION PAGE NO. i. CERTIFICATE ii. DECLARATION iii. ACKNOWLEDGEMENT CHAPTER 1: INTRODUCTION CHAPTER 2: RESEARCH METHODOLOGY CHAPTER 3: LITERATURE REVIEW CHAPTER 4: DATA ANALYSIS & INTERPRETATION CHAPTER 5: CONCLUSION

Declaration I the undersigned Mr. Pisharody Hrithik Ramchandran Rajani here by, declare that the work embodied in this project work titled “Risk Perception and Portfolio Management in Equity Market”, forms my own contribution to the research work carried out under the guidance of Asst. Prof. Akansha Sant is a result of my own research work and has not been previously submitted to any other University for any other Degree/ Diploma to this or any other University. Wherever reference has been made to previous works of others, it has been clearly indicated as such and included in the bibliography. I, here by further declare that all information of this document has been obtained and presented in accordance with academic rules and ethical conduct.

Pisharody Hrithik Ramchandran Rajani B.com (Accounting & Finance) Certified by Name and Certificate of the Guiding Teacher

Acknowledgement To list who all helped me is difficult because they are so numerous and the depth is so enormous. I would like to acknowledge the following as being idealistic channels and fresh dimensions in the completion of the project. I take this opportunity to thank the University of Mumbai for giving me chance to do this project. I would like to thank my Principle, Dr. Vinay Bhole for providing the necessary facilities required for completion of this project. I take this opportunity to thank our Coordinator Asst. Prof. Geeta Nair, for her moral support and guidance. I would also like my sincere gratitude towards my project guide Asst. Prof. Akansha Sant whose guidance and care made the project successful. I would like to thank my College Library, for having provided various reference books and magazines related to my project. Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion of the project especially my Parents and Peers who supported me throughout my project.

Pisharody Hrithik Ramchandran Rajani

1

INTRODUCTION

For most of the investors throughout their life, they will be earning and spending money. Rarely, investor’s current money income exactly balances with their consumption desires. Sometimes, investors may have more money than they want to spend; at other times, they may want to purchase more than they can afford. These imbalances will lead investors either to borrow or to save to maximize the long-run benefits from their income. When current income exceeds current consumption desires, people tend to save the excess. They can do any of several things with these savings. One possibility is to put the money under a mattress or bury it in the backyard until some future time when consumption desires exceed current income. When they retrieve their savings from the mattress or backyard, they have the same amount they saved. Another possibility is that they can give up the immediate possession of these savings for a future larger amount of money that will be available for future consumption. This tradeoff of present consumption for a higher level of future consumption is the reason for saving. What investor does with the savings to make them increase over time is investment. In contrast, when current income is less than current consumption desires, people borrow to make up the difference. Those who give up immediate possession of savings (that is, defer consumption) expect to receive in the future a greater amount than they gave up. Conversely, those who consume more than their current income (that is, borrowed) must be willing to pay back in the future more than they borrowed. The rate of exchange between future consumption (future rupee) and current consumption (current rupee) is the pure rate of interest. Both people’s willingness to pay this difference for borrowed funds and their desire to receive a surplus on their savings give rise to an interest rate referred to as the pure time value of money. This interest rate is established in the capital market by a comparison of the supply of excess income available (savings) to be invested and the demand for excess consumption (borrowing)at a given time.

An investment is the current commitment of rupee for a period of time in order to derive future payments that will compensate the investor for: (1) The time the funds are committed, (2) The expected rate of inflation, and (3) The uncertainty of the future payments. The “Investor” can be an individual, a government, a pension fund, or a corporation. Similarly, this definition includes all types of investments, including investments by corporations in plant and equipment and investments by individuals in stocks, bonds, commodities, or real estate. This study emphasizes investments by individual investors. In all cases, the investor is trading a known rupee amount today for some expected future stream of payments that will be greater than the current outlay.

DEFINATION OF AN INDIVIDUAL INVESTMENT: “An individual who purchases small amounts of securities for themselves, as opposed to an institutional investor, Also called as Retail Investor or Small Investor.” At this point, researcher has answered the questions about why people invest and what they want from their investments. They invest to earn a return from savings due to their deferred consumption. They want a rate of return that compensates them for the time, the expected rate of inflation, and the uncertainty of the return. In today’s world everybody is running for money and it is considered as a root of happiness. For secure life and for bright future people start investing. Every time investors are confused with investment avenues and their risk return profile. So, even if Researcher focuses on past, present or future, investment is such a topic that needs constant upgradation as economy changes. The research study will be helpful for the investors to choose proper investment avenue and to create profitable investment portfolio.

ELEMENTS OF INVESTMENTS: The Elements of Investments are as follows: a) Return: Investors buy or sell financial instruments in order to earn return on them. The return on investment is the reward to the investors. The return includes both current income and capital gain or losses, which arises by the increase or decrease of the security price. b) Risk: Risk is the chance of loss due to variability of returns on an investment. In case of every investment, there is a chance of loss. It may be loss of interest, dividend or principal amount of investment. However, risk and return are inseparable. Return is a precise statistical term and it is measurable. But the risk is not precise statistical term. However, the risk can be quantified. The investment process should be considered in terms of both risk and return. c) Time: time is an important factor in investment. It offers several different courses of action. Time period depends on the attitude of the investor who follows a ‘buy and hold’ policy. As time moves on, analysis believes that conditions may change and investors may revaluate expected returns and risk for each investment. d) Liquidity: Liquidity is also important factor to be considered while making an investment. Liquidity refers to the ability of an investment to be converted into cash as and when required. The investor wants his money back any time. Therefore, the investment should provide liquidity to the investor. e) Tax Saving: The investors should get the benefit of tax exemption from the investments. There are certain investments which provide tax exemption to the investor. The tax saving investments increases the return on investment. Therefore, the investors should also think of saving income tax and invest money in order to maximize the return on investment.

INVESTMENT ATTRIBUTES: Every investor has certain specific objective to achieve through his long term or short term investment. Such objectives may be monetary/financial or personal in character. The Three financial objectives are:-

1. Safety & Security of the fund invested (Principal amount) 2. Profitability (Through interest, dividend and capital appreciation) 3. Liquidity (Convertibility into cash as and when required) These objectives are universal in character as every investors will like to have a fair balance of these three financial objectives. An investor will not like to take undue risk about his principal amount even when the interest rate offered is extremely attractive. These factors are known as investment attributes. There are personal objectives which are given due consideration by every investor while selecting suitable avenues for investment. Personal objectives may be like provision for old age and sickness, provision for house construction, provision for education and marriage of children’s and finally provision for dependents including wife, parents or physically handicapped member of the family. Investment Avenue selected should be suitable for achieving both the financial and personal objectives. Advantages and disadvantages of various investment avenues need to be considered in the context of such investment objectives. 1) Period of Investment:- It is one major consideration while selecting avenue for investment. Such period may be, a. Short Term (up to one year) – To meet such objectives, investment avenues that carry minimum or no risk are suitable. b. Medium Term (1 year to 3 years) – Investment avenues that offers better returns and may carry slightly more risk can be considered, and lastly c. Long Term (3 years and above) – As the time horizon is adequate, investor can look at investment that offers best returns and are considered more risky. 2) Risk in Investment : Risk is another factor which needs careful consideration while selecting the avenue for investment. Risk is a normal feature of every investment as an investor has to part with his money immediately and has to collect it back with some benefit in due course. The risk may be more in some investment avenues and less in others.

Risk connected with the investment are, liquidity risk, inflation risk, market risk, business risk, political risk etc. Thus, the objective of an investor should be to minimize the risk and to maximize the return out of the investment made.

INVESTMENT ALTERNATIVES: Wide varieties of investment avenues are now available in India. An investor can himself select the best avenue after studying the merits and demerits of different avenues. Even financial advertisements, newspaper supplements on financial matters and investment journals offer guidance to investors in the selection of suitable investment avenues. Investment avenues are the outlets of funds. A bewildering range of investment alternatives are available, they fall into two broad categories, viz, financial assets and real assets. Financial assets are paper (or electronic) claim on some issuer such as the government or a corporate body. The important financial assets are equity shares, corporate debentures, government securities, deposit with banks, post office schemes, mutual fund shares, insurance policies, and derivative instruments. Real assets are represented by tangible assets like residential house, commercial property, agricultural farm, gold, precious stones, and art object. As the economy advances, the relative importance of financial assets tends to increase. Of course, by and large the two forms of investments are complementary and not competitive. Investors are free to select any one or more alternative avenues depending upon their needs. All categories of investors are equally interested in safety, liquidity and reasonable return on the funds invested by them. In India, investment alternatives are continuously increasing along with new developments in the financial market. Investment is now possible in corporate securities, public provident fund, mutual fund etc. Thus, wide varieties of investment avenues are now available to the investors. However, the investors should be very careful about their hard earned money. An investor can select the best avenue after studying the merits and demerits of the following investment alternatives: 1) Shares 2) Debentures and Bonds

3) Public Deposits 4) Bank Deposits 5) Post Office Savings 6) Public Provident Fund (PPF) 7) Money Market Instruments 8) Mutual Fund Schemes 9) Life Insurance Schemes 10) Real Estates 11) Gold-Silver 12) Derivative Instruments 13) Commodity Market (commodities) For sensible investing, investors should be familiar with the characteristics and features of various investment alternatives. These are the various investment avenues; where individual investors can invest their hard earn money. As my project title is restricted to shares only, there might be some limitations.

SHARES: ‘Share means a share in the share capital of a company. A company is a business organization. The shares which are issued by companies are of two types i.e. Equity shares and Preference shares. It is registered as per Companies Act, 1956. Every company has share capital. The share capital of a company is divided into number of equal parts and each of such part is known as a 'share'. A public limited company has to complete three stages. The first is registration. The second is raising capital and the third is commencement of business. A public limited company issues shares to the public for raising capital. The first public issue is known as Initial Public Offerings (IPO). The shares can be issued at par, premium or discount. Each share has a face value of Rs. 1, 2, 5 or 10. In order to issue shares a prospectus is prepared and it is got approved from Securities and Exchange Board of India (SEBI). These shares are listed with the stock

exchange so that the shareholders can sale these shares in the market. The company has to make an application to the stock exchange for listing of shares. The shares are also called as "stock". Nowadays, shares are issued in DEMAT form. It means shares are credited to a separate account of the applicant opened with depository participant. This is also called paperless security because shares are not issued in physical form. Demat account is compulsory when the shares are issued through Book Building Process, Book Building is a method of public issue of shares by a company in which the price is determined by the investors subject to a price band or range of prices given by the company. Investment in shares is more risky because the share prices go on changing day by day. Today, the market is more 'volatile' means more fluctuating. The share prices may go up or go down. If the stock market falls the share prices will go down and the investor will lose money in the investment However, the return on investment in shares is higher. The return on investment in shares is in the form of regular dividend, capital appreciation, bonus and rights. There is also liquidity in this kind of investment. The shares can be sold in stock market and money can be collected within 3 to 4 days. Investment in shares is not a tax saving investment.’ Companies (Private and Public) need capital either to increase their productivity or to increase their market reach or to diversify or to purchase latest modern equipments. Companies go in for IPO and if they have already gone for IPO then they go for FPO. The only thing they do in either IPO or FPO is to sell the shares or debentures to investors (the term investor here represents retail investors, financial institutions, government, high net worth individuals, banks etc.). Investors in Mumbai are so familiar to the ups and downs in the stock markets, but still no one has loosed the confidence over the investment in shares. Even a small investors keeping long term view in mind, are investing some part of their hard earn money inshares. Many investors are playing in market on the basis of the cash balance or the margin funding allowed by the depository (service provider). In Mumbai there are two secondary markets they are as follows, 1. Bombay stock exchange (BSE) 2. National stock exchange (NSE)

Investors in Mumbai are playing in both the markets i.e. primary market and secondary market. Shares constitute the ownership securities and are popular among the investing class. Investment in shares is risky as well as profitable. Transactions in shares take place in the primary and secondary markets. Large majority of investors (particularly small investors) prefer to purchase shares through brokers and other dealers operating on commission basis. Purchasing of shares is now easy and quick due to the extensive use of computers and screen based trading system (SBTs). Orders can be registered on computers. The shares available for investment are classified into different categories. Shares certificates in physical form are no more popular in India due to DEMAT facility. It gives convenience in handling and transfer of shares. For this, DEMAT account can be opened in the bank which provides depository services. The shares are listed and traded on stock exchanges which facilitate the buying and selling of stocks in the secondary market. The prime stock exchanges in India are The Stock Exchange Mumbai, known as BSE and the National Stock Exchange India ltd known as NSE. The purpose of a stock exchange is to facilitate the trading of securities between buyers and sellers, thus providing a marketplace. Investing in equities is riskier and definitely demands more time than other investments. There are two ways in which investment in equities can be made: i. Through the primary market (by applying for shares that are offered to the public) ii. Through the secondary market (by buying shares that are listed on the stock exchanges)

DEFINITION OF STOCK EXCHANGE: "Stock exchange means anybody or individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities." It is an association of member brokers for the purpose of self-regulation and protecting the interests of its members. It can operate only, if it is recognized by the Government under the securities contracts (regulation) Act, 1956. The recognition is granted under section 3 of the Act by the central government, Ministry of Finance.

NATURE AND FUNCTIONS OF STOCK EXCHANGE: There is an extraordinary amount of ignorance and of prejudice born out of ignorance with regard to nature and functions of Stock Exchange. As economic development proceeds, the scope for acquisition and ownership of capital by private individuals also grow. Along with it, the opportunity for Stock Exchange to render the service of stimulating private savings and challenging such savings into productive investment exists on a vastly great scale. These are services, which the Stock Exchange alone can render efficiently. The Stock Exchanges in India have an important role to play in the building of a real shareholders democracy. To protect the interest of the investing public, the authorities of the Stock Exchanges have been increasingly subjecting not only its members to a high degree of discipline, but also those who use its facilities-Joint Stock Companies and other bodies in whose stocks and shares it deals. The activities of the Stock Exchange are governed by a recognized code of conduct apart from statutory regulations. Investors both actual and potential are provided, through the daily Stock Exchange quotations. The job of the Stock Exchange and its members is to satisfy the need of market for investments to bring the buyers and sellers of investments together, and to make the 'Exchange' of Stock between them as simple and fair as possible.

NEED FOR A STOCK EXCHANGE: As the business and industry expanded and economy became more complex in nature, a need for permanent finance arose. Entrepreneurs require money for long term needs, whereas investors demand liquidity. The solution to this problem gave way for the origin of 'stock exchange', which is a ready market for investment and liquidity. As per the Securities Contract Act, 1956, "STOCK EXCHANGE" means anybody of individuals whether incorporated or not constituted for the purpose of regulating or controlling the business of buying, selling or dealing in securities.

BY-LAWS: Besides the above act, the securities contracts (regulation) rules were also made in 1957 to regulate certain matters of trading on the stock exchanges. There are also by-laws of exchanges, which are concerned with the following subjects. Opening / closing of the stock exchanges, timing of trading, regulation of blank transfers, regulation of Badla or carryover business, control of the settlement and other activities of the stock exchange, fixation of margins, fixation of market prices or making up prices, regulation of Taravani business (jobbing), etc., regulation of brokers trading, Brokerage charges, trading rules on the exchange, arbitration and settlement of disputes, Settlement and clearing of the trading etc.

PROFILE OF NATIONAL STOCK EXCHANGE (NSE): The NSE was incorporated in November 1992 with an equity capital of Rs.25crs. The International Securities Consultancy (IS C) of Hong Kong helped in setting up NSE. ISC prepared the detailed business plans and installation of hardware and software systems. The promotions for NSE were Financial Institutions, Insurances Companies, Banks and SEBI Capital Market Ltd., Infrastructure Leasing and Financial Services Ltd. and Stock Holding Corporation Ltd. It has been set up to strengthen the move towards professionalization of the capital market as well as provide nationwide securities trading facilities to investors. NSE is not an exchange in the traditional sense where brokers own and manage the exchange. A two tier administrative setup involving a company board and a governing board of the exchange is envisaged. NSE is a national market for shares of Public Sector Units Bonds, Debentures and Government securities, since infrastructure and trading facilities are provided.

NSE-NIFTY: "Nifty" means National Index for Fifty Stocks. The NSE on April 22, 1996 launched a new equity Index. The NSE-50. The new Index which re places the existing NSE-100 Index is expected to serve as an appropriate Index for the new segment of futures and options. The NSE-50 comprises 50 companies that represent 20 broad Industry groups with an aggregate market capitalization of around Rs.1,70,000 crs. All companies included in the Index have a market capitalization in excess of Rs.500 crs each and should have traded for 85% of trading daysat an impact cost of less than 1.5%.The base period for the index is the close of prices on Nov3, 1995 which makes one year of completion of operation of NSE's capital market segment. The base value of the Index has been set at 1000.

NSE-MIDCAP INDEX: The NSE midcap Index or the Junior Nifty comprises 50 stocks that represents 21 board Industry groups and will provide proper representation of the midcap segment of the Indian capital Market. All stocks in the Index should have market capitalization of greater than Rs.200 crs and should have traded 85% of the trading days at an impact cost of less 2.5%. The base period for the index is Nov 4, 1996 which signifies two years for completion of operations of the capital market segment of the operation. The base value of the Index has been set at 1000.

Average daily turn over of the present scenario 2,58,212 (Lacs) and number

of average daily trades 2,160 (Lacs). At present, there are 24 stock exchanges recognized under the Securities Contract (Regulation) Act, 1956. They are: Sr. No.

NAME OF THE STOCK EXCHANGE

YEAR



Bombay Stock Exchange

1875



Hyderabad Stock Exchange

1943



Ahmedabad Share and Stock Broker Association

1957



Calcutta Stock Exchange Association Limited

1957



Delhi Stock Exchange Association Limited

1957

Sr. No.

NAME OF THE STOCK EXCHANGE

YEAR



Madras Stock Exchange Association Limited

1957



Indoor Stock Broker Association

1958



Bangalore Stock Exchange

1963



Cochin Stock Exchange

1982



Pune Stock Exchange Limited

1982



U.P. Stock Exchange Association Limited

1982



Ludhiana Stock Exchange Association Limited

1983



Jaipur Stock Exchange Limited

1984



Gauhathi Stock Exchange Limited

1984



Mangalore Stock Exchange

1985



Maghad Stock Exchange Limited, Patna

1986



Bhuvanesh Stock Exchange Association Limited

1989



Over the Stock Exchange Limited

1989



Saurashtra Kutch Stock Exchange Limited

1990



Vadodara Stock Exchange Limited

1991



Coimbatore Stock Exchange Limited

1991



Meerut Stock Exchange Limited

1991



National Stock Exchange Limited

1992



Integrated Stock Exchange

1999

PROFOLE OF BOMBAY STOCK EXCHANGE: This Stock Exchange, Mumbai, popularly known as "BOMBAY STOCK EXCHANGE (BSE)"was established in 1875 as ''The Native Share and Stock Brokers Association", as a voluntary non-profit making association. It has evolved over the years into its present status as the premiere Stock Exchange in the country. It may be noted that the Stock Exchange is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was founded in 1878.

The exchange, while providing an efficient and transparent market for trading in securities, upholds the interests of the investors and ensures redressal of their grievances, whether against the companies or its own member brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programmes. A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public representatives and an executive director is the apex body, which decides the policies and regulates the affairs of the exchange. The Executive director as the chief executive officer is responsible for the day to day administration of the exchange.

BSE INDICES: In order to enable the market participants, analysts etc., to track the various ups and downs in the Indian stock market, the Exchange introduced in 1986 an equity stock index called BSESENSEX that subsequently became the barometer of the moments of the share prices in the Indian stock market. It is a "Market capitalization-weighted" index of 30 component stocks representing a sample of large, well established and leading companies. The base year of SENSEX is 1978-79. The SENSEX is widely reported in both domestic and international markets through print as well as electronic media. SENSEX is calculated using a market capitalization weighted method. As per this methodology, the level of the index reflects the total market value of all 30 component stocks from different industries related to particular base period. The total market value of a company is determined by multiplying the price of its stock by the number of shares outstanding. Statisticians call an index of a set of combined variables (such as price and number of shares) a composite Index. An Indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over a time. It is much easier to graph a chart based on Indexed values than one based on actual values world over majority of the well known Indices are constructed using "Market capitalization weighted method". In practice, the daily calculation of SENSEX is done by dividing the aggregate market value of the 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX.

The Divisor keeps the Index comparable over a period of time and it is the reference point for the entire Index maintenance adjustments. SENSEX is widely used to describe the mood in the Indian Stock markets. Base year average is changed as per the formula: Base year average is changed as per the formula New base year average = old base year average *(new market value/old market value) Nowadays, behavioral finance is becoming an integral part of the decision making process, because it greatly affects investors’ behavior regarding decision making. Hence, a better understanding of behavioral finance will assist the investors to select a better investment portfolio. In addition, several economic and financial theories assume that investors act rationally; however, they are only human. They act according to market sentiments and some even follow their gut feeling when making financial decisions (Raiz, Hunjra and Azam, 2012 and Abdeldayem b, 2015). Since the traditional finance theory arises to play a limited role in understanding and interpreting certain issues such as: (1) why do individual investors trade in the stock market, (2) how do they perform the task, (3) how do they choose and build their portfolios to conform their conditions, and (4) why do returns differ so quickly even across stocks and portfolios for reasons other than risk, therefore, the behavioral finance emerged to answer such questions and help to interpret why and how individual investors behave in their choice of investment (Prabhakaran and Karthika, 2011). Several studies show behavior finance perspective on individual investor, such as Slovic (1986), Lopes(1987), Schubertl et al. (1999), and Abdeldayem and Assran (2015). Those authors argue that individual investor would demonstrate different risk attitude when facing alternative investments. While, the question of what is the impact of investors’ perception of risk on portfolio management remains unanswered. Furthermore, determinants of risk attitudes of individual investors are of great interest in the behavioral finance. Behavioral finance focuses on the individual attributes, Psychological or otherwise, that shape common financial and investment practices. Unlike traditional assumptions of expected utility maximization with rational investors in efficient markets, behavioral finance assumes people are normal. Despite great interest in this area, not much research looks at the

under lying factors that may lead to individual differences and play a significant role in determining people’s financing and investment strategies in emerging markets. Risk perception can be managed if the investors are aware of their level of risk perception (Singh and Bhowal, 2008). While making investment decisions, the investors make proper tradeoffs between risks and return (Fischer and Jordan, 2006). In a specific situation, people who are risk- seekers and are concerned about high returns are likely to have low risk perception, whereas those who are risk-averse have high risk perception; consequently affecting the investment behavior (Rana et al, 2011). Portfolio management concerns the constructions and maintenance of a collection of investment. It is investment of funds in different securities in which the total risk of the portfolio is minimized, while expecting maximum return from it. It mainly involves reducing risk rather than increasing return. Return is obviously important though, and the ultimate objective of portfolio manager is to accomplish a chosen level of return by bearing the least possible risk. Moreover, risk can be also considered as a deviation of an expected outcome. In investing we can look at risk as a deviation of expected investment returns. This deviation can be either positive or negative. The probability and magnitude of the deviation is what an investor is concerned a bout. There are many factors that can affect risk and there are portfolio management tools to measure and mitigate the risk factors. Hence, understanding the types of investment risk allows an investor to manage risk and optimize returns. Accordingly, in this research effort we look at the different types of investment risk and how a portfolio management can help to improve the probability of positive outcomes instead of negative outcomes.

INTRODUCTION OF PORTFOLIO: “Portfolio means combined holding of many kinds of financial securities i.e. shares, debentures, government bonds, units and other financial assets.” The term investment portfolio refers to the various assets of an investor which are to be considered as a unit. It is not merely a collection of unrelated assets but a carefully blended asset combination within a unified framework. It is necessary for investors to take all decisions as regards their wealth position in a context of portfolio. Making a portfolio means putting ones eggs in different baskets with varying element of risk and return. The object of portfolio is to reduce risk by diversification and maximize gains.

Thus, portfolio is a combination of various instruments of investment. It is also a combination of securities with different risk-return characteristics. A portfolio is built up out of the wealth or income of the investor over a period of time with a view to manage the risk-return preferences. The analysis of risk-return characteristics of individual securities in the portfolio is made from time to time and changed that may take place in combination with other securities are adjusted accordingly. The object of portfolio is to reduce risk by diversification and maximize gains.

PORTFOLIO MANAGEMENT: Portfolio management means selection of securities and constant shifting of the portfolio in the light of varying attractiveness of the constituents of the portfolio. It is a choice of selecting and revising spectrum of securities to it in with the characteristics of an investor. Portfolio management includes portfolio planning, selection and construction, review and evaluation of securities. The skill in portfolio management lies in achieving a sound balance between the objectives of safety, liquidity and profitability. Timing is an important aspect of portfolio revision. Ideally, investors should sell at market tops and buy at market bottoms. Investors may switch from bonds to share in a bullish market and vice-versa in a bearish market. Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk. Portfolio management is an art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. Portfolio management in common parlance refers to the selection of securities and their continuous shifting in the portfolio to optimize the returns to suit the objectives of the investor. This however requires financial expertise in selecting the right mix of securities in changing market conditions to get the best out of the stock market. In India, as well as in many western countries, portfolio management service has assumed the role of specialized service now a days and a number of professional merchant bankers compete aggressively to provide the best to high net-worth clients, who have little time to manage their investments. The idea is catching up with

the boom in the capital market and an increasing number of people are inclined to make the profits out of their hard earned savings. Markowitz analysed the implications of the fact that the investors, although seeking high expected returns, generally wish to avoid risk. It is the basis of all scientific portfolio management. Although the expected return on a portfolio is directly related to the expected returns on component securities, it is not possible to deduce a portfolio riskiness simply by knowing the riskiness of individual securities. The riskiness of portfolio depends upon the attributes of individual securities as well as the interrelationships among securities. A professional, who manages other people's or institution's investment portfolio with the object of profitability, growth and risk minimization is known as a portfolio manager. He is expected to manage the investor's assets prudently and choose particular investment avenues appropriate for particular times aiming at maximization of profit. Portfolio management includes portfolio planning, selection and construction, review and evaluation of securities. The skill in portfolio management lies in achieving a sound balance between the objectives of safety, liquidity and profitability. Timing is an important aspect of portfolio revision. Ideally, investors should sell at market tops and buy at market bottoms. They should be guarded against buying at high prices and selling at low prices. Timing is a crucial factor while switching between shares and bonds. Investors may switch from bonds to shares in a bullish market and vice-versa in a bearish market. Portfolio management service is one of the merchant banking activities recognized by Securities and Exchange Board of India (SEBI). The portfolio management service can be rendered either by the SEBI recognized categories I and II merchant bankers or portfolio managers or discretionary portfolio manager as defined in clause (e) and (f) of rule 2 SEBI (portfolio managers) Rules 1993. According to the definitions as contained in the above clauses, a portfolio manager means any person who pursuant to contract or arrangement with a client, advises or directs of undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be. A merchant banker acting as a portfolio Manager shall also be bound by the rules and regulations

as applicable to the portfolio manager. Realizing the importance of portfolio management services, the SEBI has laid down certain guidelines for the proper and professional conduct of portfolio management services. As per guidelines only recognized merchant bankers registered with SEBI are authorized to offer these services. Portfolio management or investment helps investors in effective and efficient management of their investment to achieve their financial goals. The rapid growth of capital markets in India has opened up new investment avenues for investors. The stock markets have become attractive investment options for the common man. But investors should be able to effectively and efficiently manage investments in order to keep maximum returns with minimum risk. A portfolio manager by virtue of his knowledge, background and experience is expected to study the various avenues available for profitable investment and advise his client to enable the latter to maximize the return on his investment and at the same time safeguard the funds invested.

CONSTRUCTION OF PORTFOLIO: Portfolio construction means determining the actual composition of portfolio. It refers to the allocation of funds among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governing such allocation. Therefore, the objective of the theory is to elaborate the principles in which the risk can be minimized subject to a desired level of return on the portfolio or maximize the return subject to the constraints of a certain level of risk. The portfolio manager has to set out all the alternative investments along with their projected return and risk, and choose investments which satisfy the requirements of the investor and cater to his preferences. It is a critical stage because asset mix is the single most determinant of portfolio performance. Portfolio construction requires a knowledge of the different aspects of securities. The components of portfolio construction are (a) Asset allocation (b) Security selection and (c) Portfolio structure. Asset allocation means setting the asset mix. Security selection involves choosing the appropriate security to meet the portfolio targets and portfolio structure involves setting the amount of each security to be included in the portfolio.

Investing in securities presupposes risk. A common way of reducing risk is to follow the principle of diversification. Diversification is investing in a number of different securities rather than concentrating in one or two securities. The diversification assures the benefit of obtaining the anticipated return on the portfolio of securities. In a diversified portfolio, some securities may not perform as expected but other securities may exceed expectations with the effect that the actual results of the portfolio will be reasonably close to the anticipated results.

TYPES OF PORTFOLIO: When it comes to investing there are many options available to individuals. A person can invest in stocks, bonds, mutual funds, etc. Once a person invests in multiple products their performance needs to be tracked and strategies made to ensure the investor reaps the most profit possible. This is where the investment portfolio comes into play. According to Investor Awareness, it is a term that describes all investments owned. To take this definition a little farther, an investment portfolio is a significant aspect in diversification. Maintaining a diverse portfolio helps to mitigate loss because the investor has not placed all of their eggs in one basket. There are different types of investment portfolios. Perhaps the most common type’s individuals are exposed to are: Conservative, Balanced and Aggressive Growth. A portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goals. Items that are considered a part of Investors portfolio can include any asset that they own - from real items such as art and real estate, to equities, fixed-income instruments and their cash and equivalents. For the purpose of this section, Investors will focus on the most liquid asset types: equities, fixed-income securities and cash and equivalents. The asset mix they choose according to their aims and strategy will determine the risk and expected return of their portfolio. 

Aggressive Investment Portfolio

In general, aggressive investment strategies - those that shoot for the highest possible return - are most appropriate for investors who, for the sake of this potential high return,have a high risk tolerance and a longer time horizon. Aggressive portfolios generally have a higher investment in equities. Aggressive investment portfolios are for investors not afraid of high risk. This type of portfolio may incorporate mutual funds that aim for high capital gain, equities, stocks, bonds,

cash and maybe some commodities. In the short-term, growth will be very small and some loss will be observed. As a result, aggressive portfolios perform better in the long term - about five years or longer. An actively traded aggressive portfolio will typically gain maximum returns for the investor. The loss factor is why only individuals who are willing to take a high financial risk should seek an aggressive investment portfolio.

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Balanced or Moderate Investment Portfolio

A moderately aggressive portfolio is meant for individuals with a longer time horizon and an average risk tolerance. Investors who find these types of portfolios attractive are seeking to balance the amount of risk and return contained within the fund. The portfolio would consist of approximately 50-55% equities, 35-40% bonds, 5-10% cash and equivalents. The Moderate Portfolio's primary investment objective is to seek long-term capital appreciation and also the Moderate Portfolio seeks current income. 

Conservative Investment Portfolio

The conservative investment strategies, which put safety at a high priority, are most appropriate for investors who are risk averse and have a shorter time horizon. Conservative portfolios will generally consist mainly of cash and cash equivalents, or high-quality fixed-income instruments. The main goal of a conservative portfolio strategy is to maintain the real value of the portfolio, or to protect the value of the portfolio against inflation. The portfolio shown below would yield a high amount of current income from the bonds and would also yield long-term capital growth potential from the investment in high quality equities. The conservative investment portfolio is geared towards preserving capital. A minimal risk investment strategy is used. This type of portfolio is ideal for retirees who are focused more on having assets available than a stream of income from interest. Since the primary goal is to preserve capital, investors can dip into their principal to supplement living expenses instead of relying on the portfolio's earned income. The Conservative Portfolio's primary investment objective is to seek preservation of capital and current income. The Conservative Portfolio also seeks capital appreciation. Under normal market conditions, the Conservative Portfolio will invest approximately 65% of its total assets in fixed income securities and cash and approximately 35% of its total assets in equity securities. The

Conservative Portfolio can invest up to 100% of its total assets in fixed income securities and or some time up to 20% of its total assets in equity securities.

RESEARCH METHODOLOGY Investing in various types of assets is an interesting activity that attracts people from all walks of life irrespective of their occupation, economic status, education and family background. When a person has more money than he requires for current consumption, he would be coined as a potential investor. The investor who is having extra cash could invest it in securities or in any other assets like gold or real estate or could simply deposit it in his bank account. In the past, investment avenues were limited to real estate, gold, schemes of post office and banks. At present, a wide variety of investment avenues are open to the investors to suit their needs and nature. The required level of return and risk tolerance level decide the choice of the investor. This paper deals with investors’ preference towards Mutual Funds and equity shares. This paper also covers the most important attribute for investment consideration, the purpose of investment, type of Mutual Fund preferred, preferred mode of investment (SIP/one time investment) for mutual funds and preferred mode of trading in case of investment in equity shares.

TITLE OF THE STUDY The present study is tilted as “The project report on Portfolio Management and Risk Perception in Equity Market. The study is made with the special preference to Investment.

OBJECTIVES OF THE STUDY The following are the objectives of the present study: 

To know about various risks involved in Investment

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To get detail information of Portfolio Management and Risk Perception involved in Investments

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To study in detail about various kind of portfolios and their management

DATA METHODOLOGY 

For the purpose of the present study both primary and secondary were used

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Secondary data collected from books, magazines, journals, news reports, website, and various publish articles

 LIMITATIONS OF THE STUDY The study has got all the limitation of using secondary data because inferences were made based on that.

 CHAPTER LAYOUT The present study is arranged as follows: 

Chapter-I; Introduction- Gives introduction to the “A project report on comparison between investment in equity and mutual fund”.

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Chapter-II; Research Methodology- Gives introduction to the report.

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Chapter-III; Deals with the Theoretical view of “A project report on comparison between equity and mutual fund”.

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Topic under study is given in forth chapter.

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Chapter-V; summarizes the results of the study

LITERATURE REVIEW The published work relating to the topic is reviewed by the Researcher. The relevant literature is reviewed on the basis of Books, Periodicals, News Papers and Websites. The detailed review is given below:Various studies on Investment pattern & Investment behavior of investors had been conducted in foreign countries. However, in Indian context, the number is quite few. Depending on the various issues of investment, the review has been discussed in brief as follows: Deepa Mangala and R.K.Mittal (2005) in their article, “Anomalous Price behavior – An Evidence of Monthly effect in Indian Stock Market”, published in the Indian Journal of Commerce, April-June, 2005, concluded that the mean return for the first half of a trading month is significantly higher than the mean returns for the second half. The increased liquidity might induce the demand for equities resulting in the monthly effect. Ranganathan (2003), has stated the investor behavior from the marketing world and financial economics has

brought together to the surface an exciting area for study and research:

behavioral finance. The realization that this is a serious subject is, however, barely dawning. Analysts seem to treat financial markets as an aggregate of statistical observations, technical and fundamental analysis. A rich view of research waits this sophisticated understanding of how financial markets are also affected by the „financial behavior‟ of investor’s. With the reforms of industrial policy, public sector, financial sector and the many developments in the Indian money market and capital market, mutual funds that has become an important portal for the small investors, is also influenced by their financial behavior. Hence, this study has made an attempt to examine the related aspects of the fund selection behavior of individual investors towards Mutual funds, in the city of Mumbai. From the researchers and academicians point of view, such a study will help in developing and expanding knowledge in this field. Shrotriya (2003) conducted a survey on investor preferences in which he depicted the linkage of investment with the factor so considered while making investment. He says “There are various

factors and their linkage also. These factors help us how to ensure safety, liquidity, capital appreciation and tax benefits along with returns.” Dijk (2007) has conducted 25 years of research on the size effect in international equity returns. Since Banz's (1981) original study, numerous papers have appeared on the empirical regularity that small firms have higher risk-adjusted stock returns than large firms. A quarter of a century after its discovery, the outlook for the size effect seems bleak. Yet, empirical asset pricing models that incorporate a factor portfolio mimicking underlying economic risks proxied by firm size are increasingly used by both academics and practitioners. Applications range from event studies and mutual fund performance measurement to computing the cost of equity capital. The aim of this paper is to review the literature on the size effect and synthesize the extensive debate on the validity and persistence of the size effect as an empirical phenomenon as well as the theoretical explanations for the effect. We discuss the implications for academic research and corporate finance and suggest a number of avenues for further research. Vasudev (2007) analyzed the developments in the capital markets and corporate governance in India since the early 1990s when the government of India adopted the economic liberalization programme. The legislative changes significantly altered the theme of Indian Companies Act 1956, which is based on the Companies Act1948 (UK). The amendments, such as the permission for nonvoting shares and buybacks, carried the statute away from the earlier “business model” and towards the 'financial model' of the Delaw are variety. Simultaneously, the government established the Securities Exchange Board of India (SEBI), patterned on the Securities and Exchange Commission of US. Through a number of other policy measures, the government steered greater investments in the stock market and promoted the stock market as a central institution in the society. The article points out that the reform effort was inspired, at least in part, by the government’s reliance on foreign portfolio inflows into the Indian stock market to fund the country’s trade and current account deficits. Johnson (2008) has stated that Product quality is probably under-valued by firms because there is little consensus about appropriate measures and methods to research quality. The authors suggest that published ratings of a product's quality are a valid source of quality information with important strategic and financial impact. The authors test this thesis by an event analysis of abnormal returns to stock prices of firms whose new products are evaluated in the Wall Street

Journal. Quality has a strong immediate effect on abnormal returns, which is substantially higher than that for other marketing events assessed in prior studies. In dollar terms, these returns translate into an average gain of $500 million for firms that got good reviews and an average loss of$200 million for firms that got bad reviews. Moreover, there are some important asymmetries. Rewards to small firms with good reviews of quality are greater than those to large firms with good reviews. On the other hand, large firms are penalized more by poor reviews of quality than they are rewarded for good reviews. The authors discuss the research, managerial, investing, and policy implications. Patnaik and shah (2008) has analyzed on the preferences of foreign and domestic institutional investors in Indian stock markets. Foreign and domestic institutional investors both prefer larger, widely dispersed firms and do not chase returns. However, we and evidence of strong differences in the behavior of foreign and domestic institutional investors. Bhatnagar (2009) has analyzed of Corporate Governance and external finance in transition economies like India. The problem in the Indian corporate sector is that of disciplining the dominant shareholder and protecting the minority shareholders. Clearly, the problem of corporate governance abuses by the dominant shareholder can be solved only by forces outside the company itself particularly that of multilateral financial institutions in the economic development. India has relied heavily on external finance as their domestic saving rates have been much lower than their investment rates. The less promising prospects for the global supply of external finance the need for an increase in the multilateral financial institutions. India being a transition economy is changing from a centrally planned economy to a free market. It is undergoing economic liberalization, macroeconomic stabilization where immediate high inflation is brought under control, and restructuring and privatization in order to create a financial sector and move from public to private ownership of resources. These changes often may lead to increased inequality of incomes and wealth, dramatic inflation and a fall of GDP.

Mayank (2009) has analyzed the role of two important forces - the regulator and the capital market as determinant of external finance in transition economies analyses the changing pattern and future prospectus of external finance to India and reviews the role of external finance. Under

this framework, the study evaluates current Indian corporate governance practices in light of external finance. Barents Group LLC (1997) studied that India‟s household savings and foreign investors are key sources of this capital and can and will be increasingly attracted to more efficient, safe and transparent market. Retail investors in India are mostly short-term traders, and day trading is not uncommon. To the extent that buying publicly traded equities is perceived as a risky and speculative short-term activity, many potential investors will simply avoid capital market instruments altogether in deciding to allocate savings. R. Dixon and R.K. Bhandari (1997) said in their study that consequently derivative instruments can have a significant impact on financial institutions, individual investors and even national economies. Using derivatives to hedge against risk carries in itself a new risk was brought sharply into focus by the collapse of Barings Bank. There is a clear call for international harmonization and its recognition by both traders and regulators. There are calls also for a new international body to be set up to ensure that derivatives, while remaining an effective tool of risk management, carry a minimum risk to investors, institutions and national/global economies. Considers the expanding role of banks and securities houses in the light of their sharp reactions to increases in interest rates and the effect their presence in the derivatives market may have on market volatility. Patrick McAllister and John R. Mansfield (1998) stated that derivatives have been an expanding and controversial feature of the financial markets since the late 1980s. They are used by a wide range of manufacturers and investors to manage risk. This paper analyses the role and potential of financial derivatives investment property portfolio management. The limitations and problems of direct investment in commercial property are briefly discussed and the main principles and types of derivatives are analyzed and explained. The potential of financial derivatives to mitigate many of the problems associated with direct property investment is examined. Yoon Je Cho (1998) showed in his study that increasing turnover figures in the Indian stock exchanges from 1994-95 to 1996-97, implying that they are dominated by speculative

investments, which is not unusual in emerging markets. However, trading volumes in the Indian capital market are fairly large compared to those in other emerging markets. The substantial increase in turnover may be attributed primarily to the expansion of the NSE‟s trading network. But this also reflects the fact that the Indian stock market is dominated by speculative investments for short-term capital gains, rather than long-term investment. Abdulla Yameen (2001) delivered massage, investors will need to be alert to any new development in capital market and take advantage of the Investor Education and Awareness Campaign program which to be undertaken by the Capital Market Section to acquaint of the risks and rewards of investing on the Capital market. Speech was also focused on to create a new breed of financial intermediaries, which will deal on the market for their clients. These intermediaries have to be professionals with quite advanced knowledge on stock exchange operations, techniques, law and companies valuation. Investors depend to a large extent on their professional advice when investing on the market. Furthermore, these intermediaries must be men of integrity and honesty as they would deal with clients‟ money Confidence of investors in these professionals is a key to the success of the capital market. Makbul Rahim (2001) argued in his speech that the regulatory framework must provide the right environment for the development and the growth of the market. High standards of probity and professional conduct have to be maintained and reach world class standards. Integrity is very important as well confidence. The development of a proper free flow of information and disclosure helps investors to make informed investment decisions. P. M. Deleep Kumar and G. Raju (2001) showed that the capital market is becoming more and more risky and complex in nature so that ordinary investors are unable to keep track of its movement and direction. The study revealed that the Indian market is probably more volatile than developed country markets, which is probably why a much higher proportion of savings in developed countries go into equities. More than half of individual shareowners in India belonged to just five cities. The distribution of share ownership by States and Union Territories show that just five States accounted for 74.7 per cent of the country‟s share ownership population and 71.7 per cent of the aggregate value of the shareholdings of individuals in India. Among the five States Maharashtra tops the list with Gujarat as a distant second followed by West Bengal, Delhi

and Tamil Nadu. In the midpoint of the study also argued that introduction of derivatives is the first step to hedge the risk of unfavourable movement in the market. This will also lower transaction cost and provides depth and liquidity to the market. Peter Carr and Dilip Madan (2001) disclosed that generally does not formally consider derivatives securities as a potential investment vehicles. Derivatives are considered at all, they are only viewed as tactical vehicles for efficiently re-allocating funds across broad asset classes, such as cash, fixed income, equity and alternative investments. They studied that under reasonable market conditions, derivatives comprise an important, interesting and separate asset class, imperfectly correlated with other broad asset classes. If derivatives are not held in our economy then the investor confines his holdings to the bond and the stock and the optimal derivatives position is zero. Prof. Peter McKenzie (2001) in his speech at seminar investors have a c÷hoice instead of placing their money in only one company they can pick areas of growth and move their money, buying and selling and placing it where it is going to be most profitable. The individual investor does not have to make an individual decision where to place his savings. These decisions are made by an expert fund manager, which would spread the risk by spreading the investments across different sectors of the economy. Hong Kong Exchanges and Clearing Ltd. (2002) surveyed on derivatives retail investors, and argued first based on empirical evidence that years of trading experience and usual deal size have a positive correlation. Second, Male investors traded to trade more frequently than female investors. Third, the usual deal size of investor with higher personal income traded to be larger. Fourth majority of respondents are motivated by their stock trading experience to start derivatives trading. Fifth, trading for profit is the key reason for derivatives trading other than high rate of return, hedging, etc. Sixth, the most significant motivating factors are more liquid market and more transparent market. Seventh, majority of traders are infrequent in trade- 3 times or less in a month and Index futures is the most popular product to trade most frequently. Ninth, a large proportion of the investors invest in exchange cash products than derivatives or investment avenues.

Through empirical evidence form investor‟s opinion, study argued that the liquidity of derivatives products other than futures is low. High transaction costs or margin requirement is the barrier for active participation in derivatives market. But also shows that more active traders do not have much complaint towards transaction costs and margin requirement. S. M. Imamual Haque and Khan Ashfaq Ahmad (2002) argued that the sluggish trends in primary equity markets need to be reverse by restoring investors‟ confidence in market. Savings for retirement essential seek long term growth and for that investment in equity is desirable. It is a well established fact that investments in equities give higher returns than debt and it would, therefore, be in the interest of the banks to invest in equities. Warren Buffet (2002) argued that derivatives as time bombs, both for the parties that deal in them and the economic system. He also argued that those who trade derivatives are usually paid, in whole or part, on “earnings” calculated by mark-to-market accounting. But often there is no real market, and “mark-to-model” is utilized. This substitution can bring on large scale mischief. In extreme cases, mark-to-model degenerates into mark-to-myth. Many people argue that derivatives reduce systemic problems, in that participant who can’t bear certain risks are able to transfer them to stronger hands. He said that the derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Swarup K. S. (2003) empirically found that equity investors first enter capital market though investment in primary market. The main reason for slump in equity offering is lack of investor confidence in the primary market. It appeared from the analysis that the investors give importance to own analysis as compared to brokers‟ advice. They also consider market price as a better indicator than analyst recommendations. Accordingly number of suggestive measures in terms of regulatory, policy level and market oriented were suggested to improve the investor confidence in equity primary markets. Leyla Şenturk Ozer, Azize Ergeneli and Mehmet Baha Karan (2004) studied that the risk factor is one of the main determinants of investment decisions. Market participants that are rational investors ultimately should receive greater returns from more risky investments. They also concluded that the crisis and resulting deep recession in 2002 changed many things,

including market confidence of investors and financial analysts. In addition to decreasing trading volume of Istanbul Stock Exchange (ISE), the number of individual investors reduced and investment horizon of investors shortened and liquid instruments. JenniferReynolds-Moehrle (2005) used a sample of derivative user and non-user firms; they came to know that analysts‟ forecast accuracy increased and that unexpected earnings are incorporated into subsequent earnings forecasts to a greater extent subsequent to disclosure of sustained hedging activity. Additionally, the findings indicated an increase in the earnings return relation in the hedging activity period. Rajeswari, T. R. and Moorthy, V. E. R. (2005) said that expectations of the investors influenced by their perception and human generally relate perception to action. The study revealed that the most preferred vehicle is bank deposit with mutual funds and equity on fourth and sixth respectively. The survey also revealed that the investment decision is made by investors on their own, and other sources influencing their selection decision are newspapers, magazine, brokers, television and friends or relatives. Chris Veld and Yulia V. Veld-Merkoulova (2006) found that investors consider the original investment returns to be the most important benchmark, followed by the risk-free rate of return and the market return. Study found that investors with longer time horizon would generally be better off investing in stocks compared to investors with shorter time horizon. They knew through the question on risk perceptions that investors who are more risk tolerant would benefit from relatively larger investment in stocks. Their study showed the investors optimize their utility by choosing the alternative with the lowest perceived risk. G.N.Bajpai (2006) showed that continuously monitors performance through movements of share prices in the market and the threats of takeover improves efficiency of resource utilization and thereby significantly increases returns on investment. As a result, savers and investors are not constrained by their individual abilities, but facilitated by the economy’s capability to invest and save, which inevitably enhances savings and investment in the economy. Thus, the capital market converts a given stock of investible resources into a larger flow of goods and services and augments economic growth. The study concluded the investors and issuers can take comfort and

undertake transactions with confidence if the intermediaries as well as their employees (i.) follow a code of conduct and deal with probity and (ii) are capable of providing professional services. J. K. Nayak (2006) interpreted the preferred mode of investment is first equity, banks, mutual fund and then any other in a descending order. It means Investor’s faith has increased and their risk taking ability has also increased. One thing that could be drawn from this study is that problems are mostly broker related and therefore that is one area where reforms are required. The investors feel that the amount of knowledge available on the equity market is not satisfactory. Investors, it appears, need to be educated more. Investors still considered the capital market as highly risky. But from the investment pattern from the descriptive statistics it seems that the number of people willing to invest in capital market has increased. Narender L. Ahuja (2006) expressed Futures and options trading helps in hedging the price risk and also provides investment opportunity to speculators who are willing to assume risk for a possible return. They can also help in building a competitive edge and enable businesses to smoothen their earnings because non-hedging of the risk would increase the volatility of their quarterly earnings. At the same time, it is true that too much speculative activity in essential commodities would destabilize the markets and therefore, these markets are normally regulated as per the laws of the country. Randall Dodd and Stephany Griffith-Jones (2006) studied that derivatives markets serve two important economic purposes: risk shifting and price discovery. Derivatives markets can serve to determine not just spot prices but also future prices (and in the options the price of the risk is determined). In the research, interviews with representatives from several major corporations revealed that they sometimes prefer to use options as a means to hedge. They also argued derivatives have a potential to encourage international capital inflows. K. Ravichandran (2007) argued the younger generation investors are willing to invest in capital market instruments and that too very highly in Derivatives segment. Even though the knowledge to the investors in the Derivative segment is not adequate, they tend to take decisions with the help of the brokers or through their friends and were trying to invest in this market. He also argued majority the investors want to invest in short-term funds instead of long-term funds that prefer wealth maximization instruments followed by steady growth instruments. Empirical study

also shows that market risk and credit risk are the two major risks perceived by the investors, and for minimizing that risk they take the help of newspaper and financial experts. Derivatives acts as a major tool for reducing the risk involved in investing in stock markets for getting the best results out of it. The investors should be aware of the various hedging and speculation strategies, which can be used for reducing their risk. Awareness about the various uses of derivatives can help investors to reduce risk and increase profits. Though the stock market is subjected to high risk, by using derivatives the loss can be minimized to an extent. Nicole Branger and Beate Breuer (2007) showed that investors can benefit from including derivatives into their portfolios. For retail investors, however, a direct investment in derivatives is often too complicated. They argued if the investor can trade only in the stock and money market account, the exposure of his portfolio to volatility risk will be zero, and the relation between the exposure to stock diffusion risk and jump risk will be fixed. They proved through documentation both theoretically and empirically that investors can increase their utility significantly by trading plain vanilla options. And also told that in a complete market and with continuous trading, it does not matter which derivatives an investor uses to realize his optimal asset allocation. But with incomplete markets, and in particular, discrete trading, on the other hand, the choice of derivatives may actually matter a lot. This problem particularly sever for retail investor, who are hindered from implementing their optimal payoff profile by too high minimum investment amounts, high transaction costs or margin requirements, short-selling restrictions and may be also lack of knowledge. Philipp Schmitz and Martin Weber (2007) exposed that the trading behavior is also influenced if the underlying reaches some exceptional prices. The probability to buy calls is positively related to the holding of the underlying in the portfolio, meaning that investors tend to leverage their stock positions, while the relation between put purchases and portfolio holdings of the underlying is negative. They also showed higher option market trading activity is positively correlated with past returns and volatility, and negatively correlated with book-to-market ratios. In addition they report that investors open and close long and short call positions if past week's return is positive and write puts as well as close bought and written put positions if the past returns are negative.

B. Das, Ms. S. Mohanty and N. Chandra Shil (2008) studied the behavior of the investors in the selection of investment vehicles. Retail investors face a lot of problem in the stock market. Empirically they found and concluded which are valuable for both the investors and the companies having such investment opportunities. First, different investment avenues do not provide the same level of satisfaction. And majority of investors are from younger group. Gupta and Naveen Jain (2008) found that majority of the investors are from younger group and as per occupation, salaried persons are more inclined towards investment. Study also argued education qualification is the major influenced factor in investment. Their most preferred investment is found to be shares followed by mutual funds. Empirically they found and argued the Indian stock market is considerably dominated by the speculating crowd, the large scale of day trading and also fact the futures trading in individual stocks is several times the value of trading in cash segment. They also found the largest proportions of the investors are worried about too much volatility of the market. For trader and speculators, price volatility is an opportunity to make quick profits. In the study, high proportions of investors have a very favorable opinion about the capital market regulation. Prasanna P. K. (2008) empirically fond that foreign investors invested more in companies with a higher volume of shares owned by general public. Foreign investors choose the companies where family shareholding of promoters is not essential. The study concluded that corporate performance is the major influencing factor for investment decision for any investor. As far as financial performance is concerned the share return and earnings per share are significant factors influencing investment decision. The study concluded that it is required to understand when FII withdraw their funds and when they pump in more money. Deleep Kumar P M and Deyanandan M N (2009) analyzed the opinion of retail investors on the major market reforms as well as their investment performance. The study revealed introduction of derivatives trading and internet trading are found useful by only a marginal group of investors. The empirical results of the study concluded that even though SEBI claims itself to be the champion of investor protection, it has not been successful in instilling a sense of confidence in the minds of majority of investors.

G. Ramakrishna Reddy and Ch. Krishnudu (2009) summarized that a majority of the investors are quite unaware of corporate investment avenues like equity, mutual funds, debt securities and deposits. They are highly aware of traditional investment avenues like real estate, bullion, bank deposits, life insurance schemes and small saving schemes. Study argued the primary motive of investment among the small and individual investors is to earn a regular income either in form of interest or dividend on the investment made. The other motives like capital gains, tax benefits, and speculative profits are stated to be the secondary motives of investment. From empirical research they argued to motivate the people to invest their savings in the stock market to be achieved only if the regulatory authorities succeed in providing a manipulation free stock market. K. Logeshwari and V. Ramadevi (2009) advocated that a commodities market provides a platform for the investors as well as hedgers to protect their economic interests as well as increase their investible wealth. Commodity prices are generally less volatile than the stocks. Therefore it’s relatively safer to trade in commodities. But the volume being traded in commodities is much less than the stock market. This is because of the two reasons that the investors are less aware about the commodities market and their risk perception. Nidhi Walia and Ravi Kiran (2009) studied that to satisfy the needs of investors’ mutual funds are designing more lucrative and innovative tools considering the appetite for risk taking of individual investors. A successful investor is one who strives to achieve not less than rate of return consistent with risk assumed. They also argued as per observation by survey responses of the individual investor’s fact is clear that overall among other investment avenues capital market instruments are at the priority of investors but level of preference varies with different category/ level of income, and an association exists between income status of investors and their preference for capital market instrument with return as objective. Vinay Mishra and Harshita Bhatnagar (2009) documented that Derivatives are considered to be extremely versatile financial instruments, as they help to manage risks, lower funding costs, enhance yields and diversify portfolios. The contributions made by derivatives have been so great that they have been credited with having changed the face of finance in the world. Derivatives markets are an integral part of capital markets in developed as well as in emerging market economies. These instruments assist business growth by disseminating effective price

signals concerning exchange rates, indices and reference rates or other assets, thereby, rendering both cash and derivatives markets more efficient. Ashutosh Vashishtha and Satish Kumar (2010) studied encompasses scope an analysis of historical roots of derivative market of India. The emergence of derivatives market is an ingenious feat of financial engineering that provides an effective and less costly solution to the problem of risk that is embedded in the price unpredictability of the underlying asset. In India, since its inception derivatives market has exhibited exponential growth both in terms of volume and number of traded contracts. They argued that NSE and BSE has added more products in their derivatives segment but still it is far less than the depth and variety of products prevailing across many developed capital markets. Daniel Dorn (2010) concluded market for OTC derivatives have grown rapidly during the last decade in many Asian and European countries. Investors often face a choice between dozens of OTC options that differ only slightly in their attributes. He argued that professional advice can help uninformed investor better navigate the menu of choices, unless issuers raise complexity or offer advisors incentives to share in industry profit. David Nicolaus (2010) studied that retail derivatives allow retail investors to pursue sophisticated trading, investment strategies and hedging financial instruments. Retail investors‟ motivation for improving the after tax return of their household portfolio represents a major driver of the derivatives choice of the products and that provide only little equity exposure for the investor. The derivatives reveal the divergent belief of retail investors about the future price level of the underlying as these can be tailored to specific demand of the investor. He argued the potential role of search costs and financial advice on the portfolio decisions of retail investors, the flexibility of retail derivatives and low issuance costs are likely to emphasize the existing frictions in financial retail markets such as an increase of strategies and heuristics used by retail investors to cope with the complex decision situation or an inadequate disclosure of conflicts of interest in financial retail markets. Gaurav Kabra, Prashant Mishra and Manoj Dash (2010) studied key factors influencing investment behaviour and ways these factors impacts investment risk tolerance and decision making process among men and women and those different age groups. They said that not all

investments will be profitable, as investor will not always make the correct investment decisions over the period of years. Through evidence they proved that security as the most important criterion; there is no significant difference of security, opinion, hedging in all age group. But there is significant difference of awareness, benefits and duration in all age group. From the empirical results they concluded the modern investor is a mature and adequately groomed person. Rajiv Gupta (2010) argued in Capital Market 2009-10 IPO-QIP Report there have been several noticeable trends over the past five years. First, the size of offerings by Indian issuers has been growing and there are more and larger size global offerings reflecting the maturing and increasing depth of the Indian capital markets. Second, India has become a destination and region in its own right for 13 raising capital - previously companies could not raise more than a few hundred million, but now have capital issues like Reliance Power, in excess of Rs. 13,200 crore ($ 3 billion). While the ADR/GDR markets remain attractive, fewer companies are using that route as Indian markets have become strong and have the appetite for large transactions. Third, Indian capital markets now attract companies across sectors, rather than in any single sector. R R Rajamohan (2010) analyzed the role of the financial knowledge is important in decision making in information intensive assets like stocks and other risky securities. Hence, reading habit, as a proxy for financial knowledge. Younger people have greater labor flexibility than older people; if the returns on their investments turn out to be low, they could work more or retire later. Hence age an important factor to be considered in household portfolio analysis. Sheng-Hung Chen and Chun-Hung Tsai (2010) wanted to identifying key factors influencing individual investor’s decision to make portfolio choices is of importance to understand their heterogeneous investment behavior. Through conjoint analysis examine how individual investors derive their preferences for financial assets. Study stated female investors tend to be more detail oriented; elder is more likely to have low level of risk tolerance; the level of education is thought to impact on a person’s ability to accept risk; increasing income level of individual investor is associated with increased levels of risk tolerance. At last they argued single investors are more risk tolerance than married investors.

Shyan-Rong Chou, Gow-Liang Huang and Hui-Lin Hsu (2010) expressed that faced with the series of financial events leading to the current turmoil, unpleasant investor experience has become common and personal experiences and reports of such are demonstrated in risk and attitudes to risk. The paper showed that investors are able to choose an investment with potential risk and returns to suit their own preferences. Products of lower potential profit are tolerated when the risk associated with those products is similarly low. In their study they found that attitude to risk is very similar for both the genders. The study shows most stock trading is transacted by individual rather than institutional investors, therefore the capital gains and losses from stock price fluctuations are felt first-hand by individual investors. Yu-Jane Liu, Ming-Chun Wang and Longkai Zhao (2010) found options are important investment financial instruments as their flexibility makes financial market complete. Accordingly, options are complicated for those who do not educate themselves on the subject. Study found a trader who is more professional, sophisticated, and experienced is less susceptible to isolate his decision-making sets and simplify complicated investment strategies to form his portfolios. The study revealed that traders in option markets don‟t trade call/put contracts to such a great degree. In general, most investors prefer to trade front-month or near-the-money. Trading in a futures market for option traders, this suggests that almost half of the investors are trading in both options and futures market. Gopikrishna Suvanam & Amit Trivedi (2011) studied derivative trading is essential tool for the health of markets as they enhance price discovery and supplement liquidity. In a span of a year and a half after that index options, stock options and lastly stock futures were introduced, derivatives volumes have grown to multiples of cash market volumes and have been a mode of speculation and hedging for market participants, not possible otherwise through cash markets. The investor invests for a certain period, the issuer of the product constantly uses derivatives segment to hedge his positions to create the desired payoff for its clients. M. Sathish, K. J. Naveen and V. Jeevanantham (2011) studied in the options available to investors are different and the factors motivating the investors to invest are governed by their socio-economic. They argued that instead of investing directly, the investors particularly, small investors may go for indirect investment because they may not be in a position to undertake fundamental and technical analysis before they decide about their investment options. Their

empirical study showed that majority of the investors of mutual funds is also belongs to equities who give the first preference to that avenue which gives good return. From the study, concluded that lack of knowledge as the primary reason for not investing in investment vehicle. S. Gupta, P. Chawla and S. Harkant (2011) stated financial markets are constantly becoming more efficient providing more promising solutions to the investors. Study also proved that occupation of the investor is not affected in investment decision. The most preferred investment avenue is insurance with least equity market. The study also argued that return on investment and safety are the most preferred attributes for the investment decision instead of liquidity. S. Saravanakumar, S. Gunasekaran and R. Aarthy (2011) showed the upswing in capital market allows the investors to harvest handsome return in their investments, but day-trader in stock market hard to take advantage in bullish and bearish market conditions by holding long or short positions. Now the derivative instruments offer them to hedge against the adverse conditions in the stock market. They argued that secondary market is the most preferred than primary market and cash market is the most preferred market than derivatives market because of high risk when derivatives market is preferred than cash market for higher return. Dhananjay Rakshit, (2008) in his article “Capital Market in India and Abroad – A Comparative Analysis”, published in Indian Journal of Accounting, December, 2008 concluded that Indian Market is being continuously preferred by the foreign investors and the only cause of concern is its high analyzed volatility. Deepa Mangala and R.K.Mittal (2005) in their article, “Anomalous Price behavior – An Evidence of Monthly effect in Indian Stock Market”, published in the Indian Journal of Commerce, April-June, 2005, concluded that the mean return for the first half of a trading month is significantly higher than the mean returns for the second half. The increased liquidity might induce the demand for equities resulting in the monthly effect. M.S.Narasimhan and L.V.Ramana in their article “Pricing of Initial Public Offerings: Indian Experience, with equity issues”, published in Portfolio Management, Research Series in Applied Finance, the ICFAI Journal of Applied Finance, concluded that 

Homogeneity in the degree of underpricing across time periods is observed.



The extent to which premium issues are underpriced is greater than in the case of the first trading day.



Under pricing is not related to the time interval between the offer day and the first trading day.

They further concluded that companies offering their stock at a premium prefer to play it safe in spite of the freedom granted to them operating at suboptimum levels to derive a satisfaction of the issue being fully subscribed may be a major factor in determining the pricing process. James H. Lorie, Peter Dodd and Mary Hamilton, (1985) Kimpton, in their book, “The Stock Market – Theories and Evidence”, IFCAI Publication, Hyderabad, 1985 pointed out that the value of a corporation’s stock is determined by expectations regarding future earnings of the corporation and by the rate at which those earnings are discounted. In a world of no uncertainty, all securities would offer a certain return equal to the real rate of return in capital. Ranganathan K. (2006) in his article “A Study of Fund Selection Behavior of Individual Investors towards Mutual Funds: With Reference To Mumbai City” published in ICFAI Journal of Behavioral Finance, 2006, noted that financial markets are affected by the financial behavior of investors. She observed that consumer behavior from the marketing world and financial economics had brought together a need to study an exciting area of ‘behavioral finance’. this study was an attempt to examine the related aspects of the fund selection behavior of individual investors towards mutual funds in the city of Mumbai. Singh J. and S. Chander (2006) in their article “Investors Preference for Investment in Mutual Funds: An Empirical Evidence” Published in The ICFAI Journal of Behavioral Finance, 2006. Pointed out that since interest rates on investments like public provident fund, national saving certificate, bank deposits, etc. are falling, the question to be answered is: What investment alternative should a small investor adopt? Direct investment in capital market is an expensive proposal, and keeping money in saving schemes is not advisable. One of the alternatives is to invest in capital market through mutual funds. This help the investor avoid the risks involved in direct investment. Considering the state of mind of the general investor, this article figured out the preference attached to different investment avenues by the investors. The preference of mutual funds schemes over others for investment. The source from which the investor gets

information about mutual funds and the experience with regard to returns from mutual funds. The results showed that the investors considered gold to be the most preferred form of investment, followed by NSC and post office schemes. Hence, the basic psyche of an Indian investor, who still prefers to keep his savings in the form of yellow metal, is indicated. Investors belonging to the salaried category, and in the age group of 20-35, years showed inclination towards close-ended growth (equity-oriented) schemes over the other scheme types. A majority of the investors based their investment decision on the advice of brokers, professionals and financial advisors. The findings also revealed the varied experience of respondents regarding the returns received from investments made in mutual funds. Mittal M. and A. Dhade (2007) in their research paper “Gender Difference In Investment Risk-Taking: An Empirical Study” published in The ICFAI Journal of Behavioral Finance, 2007, Observed that risk-taking involves the selection of options that might result in negative outcomes. While present is certain, future is uncertain. Hence, all investment involves risk. Decourt (2007) indicated that the process of making investment decisions is based on the ‘behavioral economies’ theory which uses the fundamental aspects of the ‘Prospect Theory’ developed by Kahneman and Tversky (1979). Mittal M. and R. K. Vyas (2008) in their article “Personality Type and Investment Choice: An Empirical Study” published in The ICFAI UNIVERSITY Journal of Behavioral Finance, 2008. Observed that investors have certain cognitive and emotional weaknesses which come in the way of their investment decisions. According to them, over the past few years, behavioral finance researchers have scientifically shown that investors do not always act rationally. They have behavioral biases that lead to systematic errors in the way they process information for investment decision. Many researchers have tried to classify the investors on the basis of their relative risk taking capacity and the type of investment they make. Empirical evidence also suggests that factors such as age, income, education and marital status affect an individual’s investment decision. Jignesh B. Shah and Smita Varodkar in their article “Capital Market: Trends in India and abroad – impact of IPO Scam on Indian Capital Market”, published in the Souvenir, All India Accounting Conference, November, 22-23, S.D.School of Commerce, Gujarat University, Ahmadabad, concluded that the recent IPO Scam indicates that even a highly automated system will not prevent mal practices. But steps should be taken by SEBI to restrict such IPO Scam by

applying know your customer (KYC) and unique identification number to market players and investors. P. K. Das (2006) in his Research paper “A Review of Tax Planning for Educational Expenses on Children”, published in The Journal of Accounting and Finance, April September 2006 concluded that Proper Tax Planning is very much helpful in minimizing the burden of Income Tax for incurring expenses on children education as well as having total exemption available. He suggested that the investor should keep a proper account of all relevant expenses incurred on the education of children, during the same financial year so that planning can be made, as required, to get Deductions And Exemptions. J. S. Pasricha And Umesh C. Singh (2001) in there article “Foreign Institutional Investors and Stock Market Volatility”, published in the Indian journal of commerce, july september 2001 concluded that the era of Foreign Institutional Investors (FIIs) in India originated in 1993 as a consequence of the major policy initiative towards Globalization of economy by Government of India. FIIs operating in India comprise of pension funds, mutual funds, trusts, assets management companies, portfolio managers, etc. according to their study it has been founded that FIIs have remained net investors in the country except during 1998-99 and their investment has been steadily growing since their entry in the Indian markets. They are here to stay and have become the integral part of Indian capital market. Although their investment in relation to market capitalization is quite low, they have emerged as market movers. The market has been moving, in consonance with their investment behavior. However, their entry has led to greater institutionalization of the market and their activities have provided depth to it. They have also contributed towards making Indian markets modern comparable with the international standards. This has brought transparency in the market operations and simplified the procedures. The FIIs investment has always been the subject of debate in terms of desirability. This is so because FII money is known to be ‘hot money’ that would flee at the first sign of trouble. In the light of this, their research paper tries to analyse the impact of FII’s investment on Indian capital market. S. Saravana Kumar (2010) in his article “An Analysis of Investor Preference Towards Equity and Derivatives” published in The Indian journal of commerce, July-September 2010 concluded that the most of the investor are aware of high risk involved in the derivative market. To reduce the risk in the market, the investors should strictly follow the stop loss method. The study reveals

that most of the investor prefers cash market where the script can be held for long term and the risk is less and it is transferable to others with minimal time period. Even though risk is higher, some investors prefer derivative market where return is also higher. The investors are suggested that before going for investment proper study about the script is essential. The study has highlighted a few suggestions for removing constrain in the crucial variables which directly affect the investor and company. The investors are highly satisfied with equity shares because of many reasons, i.e., liquidity, low investment, capital appreciation etc. Lalit Mohan Kathuria and Kanika Singhania (2010) in their research paper “Investor Knowledge and Investment Practices of Private Sector Bank Employees” published in The Indian journal of commerce, July-September 2010 concluded that The present study was conducted with an objective to analyze the level of knowledge regarding various investment avenues and present investment practices of employees of private sector banks in Ludhiana city. A sample of 150 respondents was selected from 19 private sector banks in Ludhiana. The Findings of the study revealed that print media and websites were the two most important sources of information that helped the respondents to make investment decisions. Thus, the marketers of investment avenues should keep advertising in the print as well as electronic media. It was surprising to note that a large majority of the respondents had invested in secured mode of investments like employee provident fund, public provident fund, and post office saving schemes. Another highlighting finding of the study was that even the bank employees considered insurance as an investment tool rather than risk coverage instrument. Also, another significant finding was that only four per cent of the respondents made their investment decisions with the help of investment planner. There is an immense need to raise the level of awareness about the various investment avenues among the bank employees, as based upon the scoring model; only forty per cent of the respondents had high level of awareness regarding various investment avenues. Neeraj Maini and Sanjeev Sharma (2009) in their research paper “Capital Market Reforms and Investors Satisfaction: A Study of Retail Investors of Punjab” published in The Indian journal of commerce, July-September 2009 concluded that the investors seemed to be quite satisfied with the SEBI’s guidelines in relation to the capital market regulatory measures but on the other hand

they have also showed their dissatisfaction in relation to some guidelines. They also suggested that there is a need of educating the investors. Gupta L.C. & Jain (2008) in their article “The Changing Investment Preferences of Indian Households” survey 2008, conducted by society for capital market research and development, new Delhi. Pointed out that ‘too much volatility’, ‘too much price manipulation’, ‘unfair practices of brokers’ and ‘corporate mismanagement and frauds’ as the main worries of investors. Abdul Aziz Ansari and Samiran Jana (2009) in their article “Stock Price Decision of Indian Investors” published in The Indian journal of commerce, July-September 2009 concluded that there will be two kinds of investors – rational traders and noise traders. His study shows that rational traders are using both fundamental analysis and technical analysis as stock selection tools, which does not support the view of finance theorist. In an uncertain situation decision making process of noise trader will go through mental biases – self attribution bias, loss aversion bias, confirmation bias and overconfidence bias. As a result the noise traders will belief that some irrelevant information will be more important for price decision and they will trade more. This study has proved that some of the rational traders decision process also guided by all these biases. So rational traders also will not be able to predict the mental behavior of noise traders and effect of sentiment will be at Indian stock market. A. Lalitha and M. Surekha (2008) in their article “Retail Investor in Indian Capital Market : Profile, Pattern of Investment and Profitability” published in The Indian journal of commerce, July-September 2008 concluded that the retail investor is here to stay and the capital markets may well emerge as strong contenders for traditional investment avenues like bank/post office deposits. They also focused on investor’s education and investment decision of retail investors. Joseph Anbarasu D, Clifford Paul S and Annette B (2011) in their article “An Empirical Study on Some Demographic Characteristics of Investors and its Impact on Pattern of their Savings and Risk Coverage Through Insurance Schemes” published in The IUP Journal of Risk & Insurance, January 2011 concluded that The saving pattern of the people is crucial to the government in designing policies to promote savings and investment. Their study reveals that the people are aware about the importance of saving, but the awareness about investment

opportunities is low. Steps have to be taken by the government and private companies to increase the awareness by advertising campaigns. Investment companies need to offer schemes that are affordable by the low income, uneducated, unsalaried and families with children. Investment companies should make the provision and increase benefits, for their schemes, to allow people to invest in the monthly mode, which is preferred by most investors. If people invest in long term saving schemes and infrastructure, the national saving rate will increase, which in turn will lead to a more prosperous India. Krishnamoorthi C. (2009) in his research paper “Changing Pattern of Indian Households: Savings in Financial Assets” published in RVS Journal of management, 2009 concluded that irrespective of the developments in the capital market/economic conditions, investors like to invest regularly and this investment behavior is highly related to educational background. Their occupation, reading habit of investment news and the time taken for investment decision making process. Muhlesen M (1997) in his article “Improving India’s Saving Performance” published in Finance & Development, 1997 said that India’s saving rate is relatively high, compared to other countries. He concludes that with a view to increase the efficiency of savings, allocation and financing the heavy infrastructure needs of the Indian economy, particular attention should be paid to long-term saving instruments. Sarita aggrawal and Monika Rani (2011) in their article “Attitude Towards Insurance Cover” published in The IUP Journal of Risk & Insurance, January 2011 concluded that:

People are mostly aware about the life insurance and also the insurance companies.



Private companies offer very attractive plans and policies to the public.



After analysis it has been found that the LIC is still on the top, it means that LIC still rules the economy.



Survey revealed that people prefer public sector for the insurance than the private sector insurance, the reason behind this is the trust and faith in LIC.



People from every occupation, age, income level and qualification want to secure their future by taking a policy, besides good return on investment and rebate on tax.

Harsh Roongta (2011) in his article “ULIPs: New Look, New Feel” published in IUP Publication The Analyst, February 2011 concluded that investment continues to be a push activity in India and consumers willing to pay for advise are a small percentage of the overall consumer. ULIPs will have necessarily have to be sold as long-term protection cum savings products. R. L. Narayanan (2011) in his article “Concern for Retail Investors in Rising Markets: Trade Cautiously” published in Dalal street Investment journal, 24 April 2011 concluded that Though the Indian market is among the leaders in the emerging market pack, the current year is not good for the emerging markets. A concern about high inflation and high interest rates is palpable in most markets and India is no exception. As the markets have rallied back sharply from the lows of the year, invest cautiously as opportunities will always be there, though valuation and macro factor remain a concern. When the markets are rising retail investors should be careful about spiraling crude prices, interest costs and inflation, since all the four cannot rise simultaneously. Chalam G. V. (Dr) (2003) in his article “Investors Behavioral Pattern of Investment and Their Preferences of Mutual Funds.” Published in SOUTHERN ECONOMIST, Feb 1, 2003 concluded that off all the sections of the society, the household group contributes much of the capital, forming the lifeblood for the economy. According to his analysis, the mutual fund business in India is still in its embryonic form as they currently account for only 15 % of the market capitalization. The success of mutual funds business largely depends on the product innovation, marketing, customer service, fund management and committed manpower. The investment pattern of the investors reveals that a majority of the investors prefer real estate investments followed by mutual fund schemes, gold and other precious metals. Agarwal S. P. (Dr) (2001) in his article “Public Provident Fund Account – A Matchless Investment Scheme.” Published in SOUTHERN ECONOMIST, Feb 15, 2001 concluded that Public Provident Fund (PPF) account is most beneficial investment for all categories i.e. salaried class, retired persons or businessmen either tax-payers or non-taxpayers. Parthapratim Pal (1998) in his article “Foreign Portfolio Investment in Indian Equity Markets: Has The Economy Benefited?” published in Economic and Political Weekly, march 14, 1998 concluded that instead of lifting the level of domestic savings and investment, financial

liberalization in general has rather increased financial instability. Financial activities have increased financial deepening, but without benefiting industry and commerce. Gopal Nathani (2011) in his article “Good news for portfolio management scheme (PMS) investors” published in TAXMANN’S corporate professionals Today, Analytical studies, Direct tax laws, May 1 to 15, 2011 concluded that the taxation of income from share transaction is a vexed issue. The author opines that the portfolio investment route is not just profit making, but it is a means to a secured maximized return. The very object to undertake investment through portfolio manager within defined parameters is itself a sufficient pointer to hold that the profit made on sale of such investments would be capital in nature being chargable under the head ‘capital gains’. Rajesh Dhawan (2011) in his article “Gold ETF – An investment option” published in TAXMANN’S corporate professionals Today, investment planning, May 1 to 15, 2011 concluded that gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion (0.995 purity). The investors holding will be denoted in units, which will be listed on a stock exchange. The author have attempts to explain: how ETFs works, and what are its advantages. He opines that given the uncertainty in global markets and the consequent volatility in equity markets, investor should warm up to the idea of including gold ETFs in their asset allocation plan. Philip Z. Maymin and Gregg S. Fisher (2011) in their article “Preventing Emotional Investing: An Added Value of an Investment Advisor” published in The Journal of Wealth Management, Spring 2011 concluded that an important service provided by investment advisors, and apparently desired by individual investors, is the barrier the advisor provides to prevent the individual from aggressively trading and thereby losing money. The authors analyze a unique, comprehensive, multi-decade dataset of all communications with clients by a boutique investment advisory and investment management firm to explore the behavior of individuals involved in financial decision making. They propose and test a theory of self-regulation to explain both the appeal and the value of investment managers to individual investors, and they find that all of the predictions of the theory are borne out by the data.

DATA ANALYSIS AND INTERPRETATION CASE STUDIES PORTFOLIO ANALYSIS A company’s portfolio has an uncanny habit of growing. Growing as companies grow, growing as customer demands change, growing to take advantage of new technologies. But R&D budgets are limited, and the capacity of the company to continue to service mature offerings can be restricted over time. Understanding your portfolio and categorizing your offerings into core and non-core, market leading or market following, opportunities to invest or opportunities to divest is critical. Determining migration and product retirement strategies are as important as launching new offerings to meet changing market demands. BWCS has developed a proprietary method which enables a company to categorise products and services into a solutions framework which fits with your corporate and marketing strategy. The resulting framework can be used to communicate what the solutions do for your customers, how they are to be developed and where there are opportunities to be more efficient in development funding. Our framework enables the sales teams to provide targeted feedback, guiding your R&D efforts to match the demands of the market. Our deliverables include roadmaps for individual portfolio elements, highlighting how the efforts of your R&D teams must be directed to truly drive your products forwards and deliver competitive advantage. BWCS worked with a major European Defence and security player to rationalize a portfolio of offerings which had grown up independently in four national markets. Our deliverable was a durable framework within which offerings could be categorized and easily communicated, and future development planned. Where there was duplication and overlap between different national offerings, we identified market leading elements to support difficult prioritisation decisions. Often these were operational methodologies – rather than clever bits of code – and highlighting

the competitive advantage created in this way was a key finding. Our financial analysis of the companies past and planned performance enabled investment decisions to be based on future revenues, rather than the development teams’ technology ambitions, and our roadmaps provided the framework for managing implementation. Portfolio Strategy Matrix Keith Ambachsteer has developed a matrix shown in the following Exhibit which pull together the elements of timing and selectivity. It can be useful guide for developing your portfolio strategy. Keith Ambachsteer, “Portfolio Theory and Security Analyst”, Financial Analysts Journal, NovDec 1972. Portfolio Mix Strategy Ability to select undervalued securities

/

Ability to forecast overall

Good

Poor

market 

Good 



Concentrate holdings

Concentrate

holdings

in selected

in

selected

undervalued securities

undervalued securities

rather than diversify

rather than diversify

broadly.

broadly. 

Shift beta above and

Keep beta stable at the

below the desired

desired

long-term average

average.

long-term

based on market forecasts. 

Hold

a

diversified securities.

broadly list

of



Hold

a

diversified securities.

broadly list

of



Poor

Shift beta above and



Keep beta stable at

below desired average,

desired

based

average.

on

market

long-term

forecasts.

Measures for Evaluation of Portfolios Many investors mistakenly base the success of their portfolios on returns alone. Few investors consider the risk involved in achieving those returns. Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, there are three sets of performance measurement tools to assist with portfolio evaluations. The Treynor, Sharpe, and Jensen ratios combine risk and return performance into a single value, but each is slightly different. Which one is best? Perhaps, a combination of all three. Treynor Measure Jack L. Treynor was the first to provide investors with a composite measure of portfolio performance that also included risk. Treynor's objective was to find a performance measure that could apply to all investors regardless of their personal risk preferences. Treynor suggested that there were really two components of risk: the risk produced by fluctuations in the stock market and the risk arising from the fluctuations of individual securities.

Treynor introduced the concept of the security market line, which defines the relationship between portfolio returns and market rates of returns whereby the slope of the line measures the relative volatility between the portfolio and the market (as represented by beta). The beta coefficient is the volatility measure of a stock portfolio to the market itself. The greater the line's slope, the better the risk-return tradeoff. The Treynor measure, also known as the reward-to-volatility ratio, is defined as: (Portfolio return - Risk - Free Rate)/Beta

The numerator identifies the risk premium, and the denominator corresponds to the portfolio risk. The resulting value represents the portfolio's return per unit risk. To illustrate, suppose that the 10-year annual return for the S&P 500 (market portfolio) is 10% while the average annual return on Treasury bills (a good proxy for the risk-free rate) is 5%. Then, assume the evaluation is of three distinct portfolio managers with the following 10-year results: Managers

Annual Average Return

Beta

Manager A

10%

0.90

Manager B

14%

1.03

Manager C

15%

1.20

The Treynor value for each is as follows: Calculation

Treynor Value

T(market)

(010-0.05)/1

0.05

T(manager A)

(0.10-0.05)/0.90

0.056

T(manager B)

(0.14-0.05)/1.03

0.087

T(manager C)

(0.15-0.05)/1.20

0.083

The higher the Treynor measure, the better the portfolio. If the portfolio manager (or portfolio) is evaluated on performance alone, manager C seems to have yielded the best results. However, when considering the risks that each manager took to attain their respective returns, Manager B demonstrated the better outcome. In this case, all three managers performed better than the aggregate market. Because this measure only uses systematic risk, it assumes that the investor already has an adequately diversified portfolio and, therefore, unsystematic risk (also known as diversifiable risk) is not considered. As a result, this performance measure is most applicable to investors who hold diversified portfolios. Sharpe Ratio

The Sharpe ratio is almost identical to the Treynor measure, except that the risk measure is the standard deviation of the portfolio instead of considering only the systematic risk as represented by beta. Conceived by Bill Sharpe, this measure closely follows his work on the capital asset pricing model (CAPM) and, by extension, uses total risk to compare portfolios to the capital market line. The Sharpe ratio is defined as: (Portfolio Return – Risk – Free Rate)/Standard Deviation Using the Treynor example from above, and assuming that the S&P 500 had a standard deviation of 18% over a 10-year period, we can determine the Sharpe ratios for the following portfolio managers: Manager

Annual Return

Portfolio Standard Deviation

Manager X

14%

0.11

Manager Y

17%

0.20

Manager Z

19%

0.27

Calculation

Sharpe Value

S(market)

(0.10-0.05)/0.18

0.278

S(manager X)

(0.14-0.05)/0.11

0.818

S(manager Y)

(0.17-0.05)/0.20

0.600

S(manager Z)

(0.19-0.05)/0.27

0.519

Again, we find that the best portfolio is not necessarily the portfolio with the highest return. Instead, a superior portfolio has the superior risk-adjusted return or, in this case, the fund headed by manager X. Unlike the Treynor measure, the Sharpe ratio evaluates the portfolio manager on the basis of both rate of return and diversification (it considers total portfolio risk as measured by standard deviation in its denominator). Therefore, the Sharpe ratio is more appropriate for well-diversified portfolios because it more accurately takes into account the risks of the portfolio.

Jensen Measure Similar to the previous performance measures discussed, the Jensen measure is calculated using the CAPM. Named after its creator, Michael C. Jensen, the Jensen measure calculates the excess return that a portfolio generates over its expected return. This measure of return is also known as alpha. The Jensen ratio measures how much of the portfolio's rate of return is attributable to the manager's ability to deliver above-average returns, adjusted for market risk. The higher the ratio, the better the risk-adjusted returns. A portfolio with a consistently positive excess return will have a positive alpha while a portfolio with a consistently negative excess return will have a negative alpha. The formula is broken down as follows: Portfolio Return – Benchmark Portfolio Return Where, Benchmark Portfolio Return= Risk – Free Rate of Return + Beta(Return of Market – RiskFree Rate of Return) If we assume a risk-free rate of 5% and a market return of 10%, what is the alpha for the following funds? Manager

Average Rate of Return

Beta

Manager D

11%

0.90

Manager E

15%

1.10

Manager f

15%

1.20

We calculate the portfolio's expected return: ER(D)

0.05+0.90(0.10-0.05)

0.0950 or 9.5% return

ER(E)

0.05+1.10(0.10-0.05)

0.1050 or 10.5% return

ER(F)

0.05+1.20(0.10-0.05)

0.1100 or 11% return

We calculate the portfolio's alpha by subtracting the expected return of the portfolio from the actual return: Alpha D

11%-9.5%

1.5%

Alpha E

15%-10.5%

4.5%

Alpha F

15%-11%

4.0%

Which manager did best? Manager E did best because although manager F had the same annual return, it was expected that manager E would yield a lower return because the portfolio's beta was significantly lower than that of portfolio F. Both the rate of return and risk for securities (or portfolios) will vary by time period. The Jensen measure requires the use of a different risk-free rate of return for each time interval. To evaluate the performance of a fund manager for a five-year period using annual intervals would require also examining the fund's annual returns minus the risk-free return for each year and relating it to the annual return on the market portfolio minus the same risk-free rate. Conversely, the Treynor and Sharpe ratios examine average returns for the total period under consideration for all variables in the formula (the portfolio, market, and risk-free asset). Similar to the Treynor measure, however, Jensen's alpha calculates risk premiums in terms of beta (systematic, undiversifiable risk) and, therefore, assumes the portfolio is already adequately diversified. Portfolio performance measures are a key factor of the investment decision. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture, which may inadvertently lead to clouded decisions.

RISK PERCEPTION PSYCHOLOGICAL APPROACH

The psychological approach began with research in trying to understand how people process information. These early works maintained that people use cognitive heuristics in sorting and simplifying information, leading to biases in comprehension. Later work built on this foundation and became the psychometric paradigm. This approach identifies numerous factors responsible for influencing individual perceptions of risk, including dread, novelty, stigma, and other factors. Research also shows that risk perceptions are influenced by the emotional state of the perceiver. The valence theory of risk perception only differentiates between positive emotions, such as happiness and optimism, and negative ones, such as fear and anger. According to valence theory, positive emotions lead to optimistic risk perceptions whereas negative emotions influence a more pessimistic view of risk. Heuristics and biases: The earliest psychometric research was done by psychologists Daniel Kahneman and Amos Tversky, who performed a series of gambling experiments to see how people evaluated probabilities. Their major finding was that people use a number of heuristics to evaluate information. These heuristics are usually useful shortcuts for thinking, but they may lead to inaccurate judgments in some situations – in which case they become cognitive biases. Cognitive Psychology: The majority of people in the public express a greater concern for problems which appear to possess an immediate effect on everyday life such as hazardous waste or pesticide-use than for long-term problems that may affect future generations such as climate change or population growth. People greatly rely on the scientific community to assess the threat of environmental problems because they usually do not directly experience the effects of phenomena such as climate change. The exposure most people have to climate change has been impersonal; most people only have virtual experience through documentaries and news media in what may seem like a “remote” area of the world. However, coupled with the population’s wait-and-see attitude, people do not understand the importance of changing environmentally destructive behaviors even when experts provide detailed and clear risks caused by climate change. Psychometric paradigm:

Research within the psychometric paradigm turned to focus on the roles of affect, emotion, and stigma in influencing risk perception. Melissa Finucane and Paul Slovic have been among the key researchers here. These researchers first challenged Starr's article by examining expressed preference – how much risk people say they are willing to accept. They found that, contrary to Starr's basic assumption, people generally saw most risks in society as being unacceptably high. They also found that the gap between voluntary and involuntary risks was not nearly as great as Starr claimed. ANTHROPOLOGY/SOCIOLOGY APPROACH The anthropology/sociology approach posits risk perceptions as produced by and supporting social institutions. In this view, perceptions are socially constructed by institutions, cultural values, and ways of life. Cultural theory: One line of the Cultural Theory of risk is based on the work of anthropologist Mary Douglas and political scientist Aaron Wildavsky first published in 1982. In cultural theory, Douglas and Wildavsky outline four “ways of life” in a grid/group arrangement. Each way of life corresponds to a specific social structure and a particular outlook on risk. Grid categorizes the degree to which people are constrained and circumscribed in their social role. The tighter binding of social constraints limits individual negotiation. Group refers to the extent to which individuals are bounded by feelings of belonging or solidarity. The greater the bonds, the less individual choice are subject to personal control. Four ways of life include: Hierarchical, Individualist, Egalitarian, and Fatalist. Risk perception researchers have not widely accepted this version of cultural theory. Even Douglas says that the theory is controversial; it poses a danger of moving out of the favored paradigm of individual rational choice of which many researchers are comfortable. National Culture and Risk Survey: The First National Culture and Risk Survey of cultural cognition found that a person's worldview on the two social and cultural dimensions of "hierarchy-egalitarianism," and "individualismsolidarism" was predictive of their response to risk. INTERDISCIPLINARY APPROACH Social amplification of risk framework:

The Social Amplification of Risk Framework (SARF), combines research in psychology, sociology, anthropology, and communications theory. SARF outlines how communications of risk events pass from the sender through intermediate stations to a receiver and in the process serve to amplify or attenuate perceptions of risk. All links in the communication chain, individuals, groups, media, etc., contain filters through which information is sorted and understood. The framework attempts to explain the process by which risks are amplified, receiving public attention, or attenuated, receiving less public attention. The framework may be used to compare responses from different groups in a single event, or analyze the same risk issue in multiple events. In a single risk event, some groups may amplify their perception of risks while other groups may attenuate, or decrease, their perceptions of risk. The main thesis of SARF states that risk events interact with individual psychological, social and other cultural factors in ways that either increase or decrease public perceptions of risk. Behaviors of individuals and groups then generate secondary social or economic impacts while also increasing or decreasing the physical risk itself. These ripple effects caused by the amplification of risk include enduring mental perceptions, impacts on business sales, and change in residential property values, changes in training and education, or social disorder. These secondary changes are perceived and reacted to by individuals and groups resulting in third-order impacts. As each higher-order impacts are reacted to, they may ripple to other parties and locations. Traditional risk analyses neglect these ripple effect impacts and thus greatly underestimate the adverse effects from certain risk events. Public distortion of risk signals provides a corrective mechanism by which society assesses a fuller determination of the risk and its impacts to such things not traditionally factored into a risk analysis.

CASE STUDIES For evaluating an investing avenue, the following criteria are relevant.



Rate of return



Risk



Marketability



Tax shelter



Conveinence

Rate of Return The rate of return on an investment for a period (which is usually a period of one year) is defined as follows: Rate of Return = Annual Income + (Ending Price - Beginning Price) / Beginning Price To illustrate, consider the following information about a certain equity share: 

Price of the beginning of the year

:Rs.60.00



Dividend paid toward the end of the year

:Rs.2.40



Price at the end of the year

:Rs.66.00

The rate of return on this share is calculated as follows: 2.40 + (66.0 – 60.0) / 60.00 = 0.14 or 14% It is helpful to split the rate of return into two components, viz., current yield and capital gains/ losses yield as follows: Annual Income / Beginning + Ending Price – Beginning Price / Beginning Price

Current Yield

Capital Gains/ losses yield

The rate of return of 14 percent in the example above may be broken down as follows: 2.40/ 60.00 + (66.00 - 60.00)/ 60.00 =

4%

Current Yield

+

10%

Capital Guys Yield

Risk The rate of return from investment like equity shares, real estate, silver, and gold can vary rather widely. The risk of an investment refers to the variability of it’s rate of return. How much

do individual outcomes deviates from the expected value? A simple measure of dispersion is the range of values, which is simply the difference between the highest and the lowest values. Other measures used commonly in finance are as follows: 

Variance

:This is the mean of the squares of deviations individual returns around

their

average value.



Standard Deviation :This is the square root of variance.



Beta market swings.

:This reflects how volatile is the return from an investment relative to