Portfolio Management

INTRODUCTION From The Rational Edge: The first in a new series of articles on portfolio management, this introduction expresses IBM’s viewpoint about the foundations and essentials of portfolio management, and discusses ideas and assets that support and enable effective portfolio management practices. A good way to begin understanding what portfolio management is (and is not) may be to define the term portfolio. In a business context, we can look to the mutual fund industry to explain the term's origins. Morgan Stanley's Dictionary of Financial Terms offers the following explanation: If you own more than one security, you have an investment portfolio. You build the portfolio by buying additional stocks, bonds, mutual funds, or other investments. Your goal is to increase the portfolio's value by selecting investments that you believe will go up in price. According to modern portfolio theory, you can reduce your investment risk by creating a diversified portfolio that includes enough different types, or classes, of securities so that at least some of them may produce strong returns in any economic climate.

Note that this explanation contains a number of important ideas: •

A portfolio contains many investment vehicles.

•

Owning a portfolio involves making choices -- that is, deciding what additional stocks, bonds, or other financial instruments to buy; when to buy; what and when to sell; and so forth. Making such decisions is a form of management.

•

The management of a portfolio is goal-driven. For an investment portfolio, the specific goal is to increase the value.

•

Managing a portfolio involves inherent risks.

Over time, other industry sectors have adapted and applied these ideas to other types of "investments," including the following: Application portfolio management: This refers to the practice of managing an entire group or major subset of software applications within a portfolio. Organizations regard these applications as investments because they require development (or acquisition) costs and incur continuing maintenance costs. Also, organizations must constantly make financial decisions about new and existing software applications, including whether to invest in modifying them, whether to buy additional applications, and when to "sell" -- that is, retire -- an obsolete software application.

Product portfolio management: Businesses group major products that they develop and sell into (logical) portfolios, organized by major line-of-business or business segment. Such portfolios require ongoing management decisions about what new products to develop (to diversify investments and investment risk) and what existing products to transform or retire (i.e., spin off or divest). Project or initiative portfolio management, an initiative, in the simplest sense, is a body of work with: •

A specific (and limited) collection of needed results or work products.

•

A group of people who are responsible for executing the initiative and use resources, such as funding.

•

A defined beginning and end.

Managers can group a number of initiatives into a portfolio that supports a business segment, product, or product line. These efforts are goal-driven; that is, they support major goals and/or components of the enterprise's business strategy. Managers must continually choose among competing initiatives (i.e., manage the organization's investments), selecting those that best support and enable diverse business goals (i.e., they diversify investment risk). They must also manage their investments by providing continuing oversight and decision-making about which initiatives to undertake, which to continue, and which to reject or discontinue.

INTRODUCTION TO INDIAN BANK A premier bank owned by the Government of India • • • • • • •

Established on 15th August 1907 as part of the Swadeshi movement Serving the nation with a team of over 22000 dedicated staff Total Business crossed Rs. 76000 Crores as on 31.03.2007 Operating Profit increased to Rs.1358.59 Crores as on 31.03.2007 Net Profit increased to Rs.759.77 Crores as on 31.03.2007 Net worth improved to Rs.3621 Crores as on 31.03.2007 1476 Branches spread all over India

International Presence • •

Overseas branches in Singapore and Colombo including a Foreign Currency Banking Unit at Colombo 229 Overseas Correspondent banks in 69 countries

Diversified banking activities - 3 Subsidiary companies • • •

Indbank Merchant Banking Services Ltd IndBank Housing Ltd. IndFund Management Ltd

A front runner in specialized banking •

• •

88 Forex Authorized branches inclusive of 3 Specialized Overseas Branches at Chennai , Bangalore and Mumbai exclusively for handling forex transactions arising out of Export, Import, Remittances and Non Resident Indian business 5 specialized NRI Branches exclusively for servicing NonResident Indians 1 Small Scale Industries Branch extending finance exclusively to SSI units

Leadership in Rural Development •

•

•

Loan products like Artisan Card, Kisan Card, Kisan Bike Scheme, Yuva Kisan Vidya Nidhi Yojana to meet diverse credit needs of farmers. Provision of technical assistance and project reports in Agriculture to entrepreneurs through Agricultural Consultancy & Technical Services (ACTS) 2 Specialised Agricultural Finance branches to finance High Tech Agricultural Projects.

A pioneer in introducing the latest technology in Banking • • • • • • • • • • • •

100% Business Computerisation 168 Centres throughout the country covered under 'Anywhere Banking' Core Banking Solution(CBS) in 1204 branches and 77 extension counters. 429 connected Automated Teller Machines(ATM) in 99 cities/towns 24 x 7 Service through 8500 ATMs under shared network Internet and Tele Banking services to all Core Banking customers e-payment facility for Corporate customers Cash Management Services Depository Services Reuter Screen, Telerate, Reuter Monitors, Dealing System provided at all Overseas Branches I B Credit Card Launched I B Gold Coin

Indian Bank enters into a Strategic Alliance with Pnb Principal Chennai, January 25, 2006: Indian Bank is enlarging its activities to deliver value-added services to its customers. The Bank is presently selling the Insurance products, both Life and Non-life as a Corporate Agent. The Bank is concentrating on optimizing the 3 Ps, People, Process and Products to give maximum advantage to its customers and to face the market competition by exploiting the emerging opportunities. Indian Bank today announced a strategic alliance with Pnb Principal Insurance Advisory Co., Pvt. Ltd. in the insurance advisory business and Pnb Principal Financial Planners Pvt. Ltd. in the financial planning business. As the alliance will enable access to the Financial products of 30 Insurance companies both life and non-life and an equal number of Investment solutions to the Bank’s Customers under one roof, the Bank’s emphasis would be to serve as an “agent to its customers”.

As per the scope of the alliance with Pnb Principal Insurance Advisory Co., Pvt. Ltd., Indian Bank has taken an equity stake in the Company. This partnership will also deliver risk management solutions to Indian Bank customers through the Insurance advisory route. The solutions offered will include risk assessment, insurance portfolio analysis & placement, insurance portfolio administration, and claims management. As per Indian Bank’s strategic alliance with Pnb Principal Financial Planners Pvt. Ltd., the Bank will distribute the investment solutions offered by Pnb Principal Financial Planners through its extensive branch network. Pnb Principal Financial Planners will provide support in the area of financial planning, investment advisory, research, systems and business development to Indian Bank. The strategic

alliance will enable customers of Indian Bank to access a wide range of superior investment solutions. Announcing the partnership with Indian Bank, Sanjay Sachdev, Country Manager-India, Principal International said, “Banks have currently emerged as the largest distribution channel for financial investment options. We are pleased to associate ourselves with Indian Bank. This partnership with Indian Bank will make a range of investment solutions more accessible to retail investors of Indian Bank.” Dr. K.C. Chakrabarty, Chairman and Managing Director, Indian Bank said,” The alliance with Pnb Principal in the areas of Risk Management, Insurance and Investment will help in providing a One-stop solution to the 15 million strong customers of Indian Bank throughout the country. The Tie-up will help realize our cherished goal of making our Bank, “the best people to bank with”.

Elaborating, Mr. B Sambamurthy, Executive Director has said that this is a part of Bank’s mission to provide all financial products under one roof. This tie-up brings a paradigm shift from being an agent of Insurance Company to one of being a customer agent.

METHODOLOGY

Portfolio Management is used to select a portfolio of new product development projects to achieve the following goals: •

Maximize the profitability or value of the portfolio

•

Provide balance

•

Support the strategy of the enterprise

Portfolio Management is the responsibility of the senior management team of an organization or business unit. This team, which might be called the Product Committee, meets regularly to manage the product pipeline and make decisions about the product portfolio. Often, this is the same group that conducts the stage-gate reviews in the organization. A logical starting point is to create a product strategy - markets, customers, products, strategy approach, competitive emphasis, etc. The second step is to understand the budget or resources available to balance the portfolio against. Third, each project must be assessed for profitability (rewards), investment requirements (resources), risks, and other appropriate factors. The weighting of the goals in making decisions about products varies from company. But organizations must balance these goals: risk vs. profitability, new products vs. improvements, strategy fit vs. reward, market vs. product line, long-term vs. short-term.

Several types of techniques have been used to support the portfolio management process: •

Heuristic models

•

Scoring techniques

•

Visual or mapping techniques

The earliest

Portfolio

Management

techniques optimized projects'

profitability or financial returns using heuristic or mathematical models. However, this approach paid little attention to balance or aligning the portfolio to the organization's strategy. Scoring techniques weight and score criteria to take into account investment requirements, profitability, risk and strategic alignment. The shortcoming with this approach can be an over emphasis on financial measures and an inability to optimize the mix of projects. Mapping techniques use graphical presentation to visualize a portfolio's balance. These are typically presented in the form of a twodimensional graph that shows the trade-off's or balance between two factors such as risks vs. profitability, marketplace fit vs. product line coverage, financial return vs. probability of success, etc.

The chart shown above provides a graphical view of the project portfolio risk-reward balance. It is used to assure balance in the portfolio of projects neither too risky nor conservative and appropriate levels of reward for the risk involved. The horizontal axis is Net Present Value; the vertical axis is Probability of Success. The size of the bubble is proportional to the total revenue generated over the lifetime sales of the product. While this visual presentation is useful, it can't prioritize projects. Therefore, some mix of these techniques is appropriate to support the Portfolio Management Process. This mix is often dependent upon the priority of the goals.

The recommended approach is to start with the overall business plan that should define the planned level of R&:D investment, resources (e.g., headcount, etc.), and related sales expected from new products. With multiple business units, product lines or types of development, we recommend a strategic allocation process based on the business plan. This strategic allocation should apportion the planned R&D investment into business units, product lines, markets, geographic areas, etc. It may also breakdown the R&D investment into types of development, e.g., technology development,

platform

development,

new

products,

and

upgrades/enhancements/line extensions, etc. Once this is done, then a portfolio listing can be developed including the relevant portfolio data. We favor use of the development productivity index (DPI) or scores from the scoring method. The development productivity index is calculated as follows: (Net Present Value x Probability of Success) / Development Cost Remaining. It factors the NPV by the probability of both technical and commercial success. By dividing this result by the development cost remaining, it places more weight on projects nearer completion and with lower uncommitted costs. The scoring method uses a set of criteria (potentially different for each stage of the project) as a basis for scoring or evaluating each project. An example of this scoring method is shown with the worksheet below.

Weighting factors can be set for each criterion. The evaluators on a Product Committee score projects (1 to 10, where 10 are best). The worksheet computes the average scores and applies the weighting factors to compute the overall score. The maximum weighted score for a project is 100. This portfolio list can then be ranked by either the development priority index or the score. An example of the portfolio list is shown below and the second illustration shows the category summary for the scoring method.

Once the organization has its prioritized list of projects, it then needs to determine where the cutoff is based on the business plan and the planned level of investment of the resources avaialable. This subset of the high priority projects then needs to be further analyzed and checked. The first step is to check that the prioritized list reflects the planned breakdown of projects based on the strategic allocation of the business plan. Pie charts such as the one below can be used for this purpose.

Other factors can also be checked using bubble charts. For example, the risk-reward balance is commonly checked using the bubble chart shown earlier. A final check is to analyze product and technology roadmaps for project relationships. For example, if a lower priority platform project was omitted from the protfolio priority list, the subsequent higher priority projects that depend on that platform or

platform technology would be impossible to execute unless that platform project were included in the portfolio priority list. Finally, this balanced portfolio that has been developed is checked against the business plan as shown below to see if the plan goals have been achieved - projects within the planned R&D investment and resource levels and sales that have met the goals. With the significant investments required to develop new products and the risks involved, Portfolio Management is becoming an increasingly important tool to make strategic decisions about product development and the investment of company resources. In many companies, current year revenues are increasingly based on new products developed in the last one to three years.

MEANING OF PORTFOLIO MANAGEMENT  Portfolio is a collection of asset.  The asset may be physical or financial like Shares Bonds, Debentures, and Preference Shares etc.  The individual investor or a fund manager would not like to put all his money in the shares of one company, for that would amount to great risk.  Main objective is to maximize portfolio return and at the same time minimizing the portfolio risk by diversification.  Portfolio management is the management of various financial assets, which comprise the portfolio.  According to Securities and Exchange Board of India (Portfolio manager) Rules, 1993; “ portfolio” means the total holding of securities belonging to any person;  Designing portfolios to suit investor requirement often involves making several projections regarding the future, based on the current information.  When the actual situation is at variance from the projections portfolio composition needs to be changed.  One of the key inputs in portfolio building is the risk bearing ability of the investor.  Portfolio management can be having institutional, for example, Unit Trust, Mutual Funds, Pension Provident and Insurance

Funds,

Investment

Investment Companies.

Companies

and

non-

 Institutional e.g. individual, Hindu undivided families, Noninvestment Company’s etc.  The

large

institutional

investors

avail

services

of

professionals.  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.  The portfolio manager performs the job of security analyst.  In case of medium and large sized organization, job function of portfolio manager and security analyst are separate.  Portfolios are built to suit the return expectations and the risk appetite of the investor.

INVESTMENT PORTFOLIO MANAGEMENT AND PORTFOLIO THEORY Portfolio theory is an investment approach developed by University of Chicago economist Harry M. Markowitz (1927 - ), who won a Nobel Prize in economics in 1990. Portfolio theory allows investors to estimate both the expected risks and returns, as measured statistically, for their investment portfolios. Markowitz described how to combine assets into efficiently diversified portfolios. It was his position that a portfolio's risk could be reduced and the expected rate of return could be improved if investments having dissimilar price movements were combined. In other words, Markowitz explained how to best assemble a diversified portfolio and proved that such a portfolio would likely do well. There are two types of Portfolio Strategies: A. Passive Portfolio Strategy A strategy that involves minimal expectation input, and instead relies on diversification to match the performance of some market index. B. Active Portfolio Strategy A strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly

BASIC CONCEPTS AND COMPONENTS FOR PORTFOLIO MANAGEMENT Now that we understand some of the basic dynamics and inherent challenges organizations face in executing a business strategy via supporting initiatives, let's look at some basic concepts and components of portfolio management practices.

1.The Portfolio First, we can now introduce a definition of portfolio that relates more directly to the context of our preceding discussion. In the IBM view, a portfolio is: One of a number of mechanisms, constructed to actualize significant

elements

in

the

Enterprise

Business

Strategy.

It contains a selected, approved, and continuously evolving, collection of Initiatives which are aligned with the organizing element of the Portfolio, and, which contribute to the achievement of goals or goal components identified in the Enterprise Business Strategy. The basis for constructing a portfolio should reflect the enterprise's particular needs. For example, you might choose to build a portfolio around initiatives for a specific product, business segment, or separate business unit within a multinational organization.

2.The Portfolio Structure As we noted earlier, a portfolio structure identifies and contains a number of portfolios. This structure, like the portfolios within it, should align with significant planning and results boundaries, and with business components. If you have a product-oriented portfolio structure, for example, then you would have a separate portfolio for each major product or product group. Each portfolio would contain all the initiatives that help that particular product or product group contribute to the success of the enterprise business strategy.

3.The Portfolio Manager This is a new role for organizations that embrace a portfolio management approach. A portfolio manager is responsible for continuing oversight of the contents within a portfolio. If you have several portfolios within your portfolio structure, then you will likely need a portfolio manager for each one. The exact range of responsibilities (and authority) will vary from one organization to another,1 but the basics are as follows: •

One portfolio manager oversees one portfolio.

•

The portfolio manager provides day-to-day oversight.

•

The portfolio manager periodically reviews the performance of, and conformance to expectations for, initiatives within the portfolio.

•

The portfolio manager ensures that data is collected and analyzed about each of the initiatives in the portfolio.

•

The portfolio manager enables periodic decision making about the future direction of individual initiatives.

4. Portfolio Reviews and Decision Making As initiatives are executed, the organization should conduct periodic reviews of actual (versus planned) performance and conformance to original expectations. Typically, organization managers specify the frequency and contents for these periodic reviews, and individual portfolio managers oversee their planning and execution. The reviews should be multi-dimensional, including both tactical elements (e.g., adherence to plan, budget, and resource allocation) and strategic elements (e.g., support for business strategy goals and delivery of expected organizational benefits). A significant aspect of oversight is setting multiple decision points for each initiative, so that managers can periodically evaluate data and decide

whether

to

continue

the

work.

These

"continue/change/discontinue" decisions should be driven by an understanding (developed via the periodic reviews) of a given initiative's

continuing

value,

expected

benefits,

and

strategic

contribution, Making these decisions at multiple points in the initiative's lifecycle helps to ensure that managers will continually examine and assess changing internal and external circumstances, needs, and performance.

5. Governance Implementing portfolio management practices in an organization is a transformation

effort

that

typically

involves

developing

new

capabilities to address new work efforts, defining (and filling) new roles to identify portfolios (collections of work to be done), and delineating

boundaries

among

work

efforts

and

collections.

Implementing portfolio management also requires creating a structure to provide planning, continuing direction, and oversight and control for all portfolios and the initiatives they encompass. That is where the notion of governance comes into play. The IBM view of governance is: An abstract, collective term that defines and contains a framework for organization, exercise of control and oversight, and decision-making authority, and within which actions and activities are legitimately and properly executed; together with the definition of the functions, the roles, and the responsibilities of those who exercise this oversight and decision-making. Portfolio management governance involves multiple dimensions, including: •

Defining and maintaining an enterprise business strategy.

•

Defining and maintaining a portfolio structure containing all of the organization's initiatives (programs, projects, etc.).

•

Reviewing and approving business cases that propose the creation of new initiatives.

•

Providing oversight, control, and decision-making for all ongoing initiatives.

•

Ownership of portfolios and their contents.

Each of these dimensions requires an owner -- either an individual or a collective -- to develop and approve plans, continuously adjust direction, and exercise control through periodic assessment and review of conformance to expectations. A good governance structure decomposes both the types of work and the authority to plan and oversee work. It defines individual and collective roles, and links them to an authority scheme. Policies that are collectively developed and agreed upon provide a framework for the exercise of governance. The complexities of governance structures extend well beyond the scope of this article. Many organizations turn to experts for help in this area because it is so critical to the success of any business transformation effort that encompasses portfolio management. For now, suffice it to say that it is worth investing time and effort to create a sound and flexible governance structure before you attempt to implement portfolio management practices.

6.Portfolio management essentials Every practical discipline is based on a collection of fundamental concepts that people have identified and proven (and sometimes refined or discarded) through continuous application. These concepts are useful until they become obsolete, supplanted by newer and more effective ideas. For example, in Roman times, engineers discovered that if the upstream supports of a bridge were shaped to offer little resistance to the current of a stream or river, they would last longer. They applied this principle all across the Roman Empire. Then, in the Middle Ages, engineers discovered that such supports would last even longer if their downstream side was also shaped to offer little resistance to the current. So that became the new standard for bridge construction. Portfolio management, like bridge-building, is a discipline, and a number of authors and practitioners have documented fundamental ideas about its exercise. Recently, based on our experiences with clients who have implemented portfolio management practices and on our research into the discipline, we have started to shape an IBM view of fundamental ideas around portfolio management. We are beginning to express this view as a collection of "essentials" that are, in turn, grouped around a small collection of portfolio management themes.

For example, one of these themes is initiative value contribution. It suggests that the value of an initiative (i.e., a program or project) should be estimated and approved in order to start work, and then assessed periodically on the basis of the initiative's contribution to the goals and goal components in the enterprise business strategy. These assessments determine (in part) whether the initiative warrants continued support.

OBJECTIVES OF PORTFOLIO MANAGEMENT The basic objective of Portfolio Management is to maximize yield and minimize risk. The other objectives are as follows: a) Stability of Income:

An investor considers stability of

income from his investment. He also considers the stability of purchasing power of income. b) Capital Growth:

Capital appreciation has become an

important investment principle. Investors seek growth stocks which provide a very large capital appreciation by way of rights, bonus and appreciation in the market price of a share. c) Liquidity:

An investment is a liquid asset. It can be

converted into cash with the help of a stock exchange. Investment should be liquid as well as marketable. The portfolio should contain a planned proportion of high-grade and readily salable investment. d) Safety: safety means protection for investment against loss

under reasonably variations. In order to provide safety, a careful review of economic and industry trends is necessary. In other words, errors in portfolio are unavoidable and it requires extensive diversification.

e) Tax Incentives:

Investors try to minimize their tax liabilities

from the investments. The portfolio manager has to keep a list of such investment avenues along with the return risk, profile, tax implications, yields and other returns.

There are three goals of portfolio management:

1. Maximize the value of the portfolio 2. Seek balance in the portfolio 3. Keep portfolio projects strategically aligned It provides a set of portfolio management tools to help achieve these goals. With multiple business units, product lines or types of development, we recommend a strategic allocation process based on the business plan. The Master Project Schedule provides a summary of all-active as well as proposed projects and classifies them by status (active, proposed, on-hold) and by business unit/product line to align projects with the strategic allocation. The Master Project Schedule also provides additional portfolio information to prioritize projects using either a scorecard method or the development productivity index (DPI *). In addition to this prioritization, PD-Trek provides a Risk-Reward Bubble Chart and a Project Type Pie Chart to assure balance. A Product or Technology Roadmap template is provided to help visualize platform and technology relationships to assure critical project relationships are not overlooked with this prioritization. This will allow management to develop a balanced approach to selecting and continuing with the appropriate mix of projects to satisfy the three goals.

FUNCTIONS OF PORTFOLIO MANAGEMENT The basic purpose of portfolio management is to maximize yield and minimize risk. Every investor is risk averse. In order to diversify the risk by investing into various securities following functions are required to be performed. The functions undertaken by the portfolio management are as follows: 1. To frame the investment strategy and select an investment mix to achieve the desired investment objective; 2. To provide a balanced portfolio which not only can hedge against the inflation but can also optimize returns with the associated degree of risk; 3. To make timely buying and selling of securities; 4. To maximize the after-tax return by investing in various taxes saving investment instruments.

STEPS IN PORTFOLIO MANAGEMENT

Performance Evaluation

Portfolio Revision

Portfolio Execution

STEPS Selection of Asset Mix

Identification Of Objectives

Portfolio Strategy

1) IDENTIFICATION OF THE OBJECTIVES 

The starting point in this process is to determine the characteristics of the various investments and then matching them with the individuals need and preferences.



All the personal investing is designed in order to achieve certain objectives.



These objectives may be tangible such as buying a car, house etc. and intangible objectives such as social status, security etc.



Similarly, these objectives may be classified as financial or personal objectives.



Financial objectives are safety, profitability and liquidity.



Personal or individual objectives may be related to personal characteristics of individuals such as family commitments, status, depends, educational requirements, income, consumption and provision for retirement etc.

2) FORMULATION OF PORTFOLIO STRATEGY 

The aspect of Portfolio Management is the most important element of proper portfolio investment and speculation.



While planning, a careful review should be conducted about the financial situation and current capital market conditions.



This will suggest a set of investment and speculation policies to be followed.



The statement of investment policies includes the portfolio objectives, strategies and constraints.



Portfolio strategy means plan or policy to be followed while investing in different types of assets.



There are different investment strategies.



They require changes as time passes, investor’s wealth changes, security price change, investor’s knowledge expands.



Therefore, the optional strategic asset allocation also changes.



The strategic asset allocation policy would call for broad diversification through an indexed holding of virtually all securities in the asset class.

3) SELECTION OF ASSET MIX 

The most important decision in portfolio management is selection of asset mix.



It means spreading out portfolio investment into different asset classes like bonds, stocks, mutual funds etc.



In other words selection of asset mix means investing in different kinds of assets and reduces risk and volatility and maximizes returns in investment portfolio.



Selection of asset mix refers to the percentage to the invested in various security classes.



The security classes are simply the type of securities as under:



»

money market instrument

»

fixed income security

»

equity shares

»

real estate investment

»

international securities

Once the objective of the portfolio is determined the securities to be included in the portfolio must be selected.



Normally the portfolio is selected from a list of high-quality bonds that the portfolio manager has at hand.



The portfolio manager has to decide the goals before selecting the common stock.



The goal may be to achieve pure growth, growth with some income or income only. Once the goal has been selected, the portfolio manager can select the common stocks.

4)

PORTFOLIO EXECUTION: 

The process of portfolio management involves a logical set of steps common to any decision, plan, implementation and monitor.



Applying this process to actual portfolios can be complex.



Therefore, in the execution stage, three decisions need to be made, if the percentage holdings of various asset classes are currently different from desired holdings.



The portfolio than, should be rebalanced. If the statement of investment policy requires pure investment strategy, this is only thing, which is done in the execution stage.



However,

many

portfolio

managers

engage

in

the

speculative transactions in the belief that such transactions will generate excess risk-adjusted returns. 

Such speculative transactions are usually classified as timing or selection decisions.



Timing decisions over or under weight various asset classes, industries or economic sectors from the strategic asset allocation.



Such timing decisions are known as tactical asset allocation and selection decision deals with securities within a given asset class, industry group or economic sector.



The investor has to begin with periodically adjusting the asset mix to the desired mix, which is known as strategic asset allocation.



Then the investor or portfolio manager can make any tactical asset allocation or security selection decision.

5)

PORTFOLIO REVISION



Portfolio management would be an incomplete exercise without periodic review.



The portfolio, which is once selected, has to be continuously reviewed over a period of time and if necessary revised depending on the objectives of investor.



Thus, portfolio revision means changing the asset allocation of a portfolio.



Investment portfolio management involves maintaining proper combination of securities, which comprise the investor’s portfolio in a manner that they give maximum return with minimum risk.



For this purpose, investor should have continuous review and scrutiny of his investment portfolio.



Whenever adverse conditions develop, he can dispose of the securities, which are not worth.



However, the frequency of review depends upon the size of the portfolio, the sum involved, the kind of securities held and the time available to the investor.



The review should include a careful examination of investment objectives, targets for portfolio performance, actual results obtained and analysis of reason for variations.



The review should be followed by suitable and timely action.



There are techniques of portfolio revision.



Investors buy stock according to their objectives and return-risk framework.



These fluctuations may be related to economic activity or due to other factors.



Ideally investors should buy when prices are low and sell when prices rise to levels higher than their normal fluctuations.



The investor should decide how often the portfolio should be revised.



If revision occurs to often, transaction and analysis costs may be high.



If revision is attempted too infrequently the benefits of timing may be foregone.



The important factor to take into consideration is, thus, timing for revision of portfolio.

6) PORTFOLIO PERFORMANCE EVALUATION:



Portfolio management involves maintaining a proper combination of securities, which comprise the investor’s portfolio in a manner that they give maximum return with minimum risk.



The investor should have continues review and scrutiny of his investment portfolio.



These rates of return should be based on the market value of the assets of the fund.



Complete evaluation of the portfolio performance must include examining a measure of the degree of risk taken by the fund.



A portfolio manager, by evaluating his own performance can identify sources of strength or weakness.



It can be viewed as a feedback and control mechanism that can make the investment management process more effective.



Good performance in the past might have resulted from good luck, in which case such performance may not be expected to continue in the future.



On the other hand, poor performance in the past might have been result of bad luck.



Therefore, the first task in performance evaluation is to determine whether past performance was good or poor.



Then the second task is to determine whether such performance was due to skill or luck.



Good performance in the past may have resulted from the actions of a highly skilled portfolio manager.



The performance

of

portfolio

should

be

measured

periodically, preferably once in a month or a quarter. 

The performance of an individual stock should be compared with the overall performance of the market.

TYPES OF PORTFOLIO MANAGEMENT: The two types of portfolio management services are available o the investors:

Discretionary portfolio Management

Non-discretionary portfolio Management

1. The Discretionary portfolio management services (DPMS):  In this type of services, the client parts with his money in favor of manager, who in return, handles all the paper work, makes all the decisions and gives a good return on the investment and for this he charges a certain fees.  In this discretionary PMS, to maximize the yield, almost all portfolio managers parks the funds in the money market securities such as overnight market, 182 days treasury bills and 90 days commercial bills.  Normally, return on such investment varies from 14 to 18 per cent, depending on the call money rates prevailing at the time of investment.

2.

The Non-discretionary portfolio management services:  The manager function as a counselor, but the investor is free to accept or reject the manager’s advice; the manager for a services charge also undertakes the paper work.  The manager concentrates on stock market instruments with a portfolio tailor made to the risk taking ability of the investor.

EQUITY PORTFOLIO MANAGEMENT

It is logical that the expected return of a portfolio should depend on the expected return of the security contained in it. There are two approaches to the selection of equity portfolio. One is technical analysis and the other is fundamental analysis. Technical analysis assumes that the price of a stock depends on supply and demand in the stock market. All financial and market information of given security is already reflected in the market price. Charts are drawn to identify price movements of a given security over a period of time. These charts enable the investors to predict the future movement of the price of security. Equity portfolio is a risky portfolio, but at the same time the return is also higher. Equity portfolio provides highest returns. An efficient portfolio manager can obviously give more weight age to fundamental analysis than the technical analysis.

The fundamental analysis includes the study of ratio analysis, past and present track record of the company, quality of management, government policies etc. There may be several combinations of investment portfolio. Allocation of funds for equity portfolio is a question of top most importance to any portfolio manager. Among all risky investments, selection of the best possible combination and allocation of funds among these selected investment groups are of great importance.

BONDS PORTFOLIO MANAGEMENT

The individual investors can invest in bond portfolio. The portfolio can be spared over variety of securities. Investment in bond is less risky and safe as compared to equity investment. However, the return on bond is very low. There are no much fluctuations in bond prices. Therefore, there is no capital appreciation in this case. Some bonds are tax saving which help the investor to reduce his tax liability. There is no much liquidity in bonds, investment in bond portfolio is less risky and safe but, return is reasonable, low liquidity and tax saving are some of the more important features of bond portfolio investment. However, it is suitable for normal investors for getting average return over their investment. Bond portfolio includes different types of bond, tax free bonds and taxable bonds.

Tax free bonds are issued by public sector undertaking or Government on which interest s compounded half yearly and payable accordingly. They have a maturity of 7 to 10 years with the facility for buyback. The tax free bonds means the interest income on these bonds is not taxable. Therefore, the interest rates on these bonds are very low. However, taxable bonds yield higher interest compounded half yearly and also payable half yearly. They also have buy back facilities similar to taxable bonds.

ADVANTAGES OF PORTFOLIO MANAGEMENT

Individuals will benefits immensely by taking portfolio management services for the following reason: a) Whatever may be the status of the capital market; over the long period capital markets have given an excellent return when compared to other forms of investment. The return from bank deposits, units etc., is much less than from stock market.

b) The Indian stock markets are very complicated. Though there are thousands of companies that are listed only a few hundred, which have the necessary liquidity. It is impossible for any individual whishing to invest and sit down and analyses all these intricacies of the market unless he does nothing else.

c) Even if an investor is able to visualize the market, it is difficult to investor to trade in all the major exchanges of India, look after his deliveries and payments. This is further complicated by the volatile nature of our markets, which demands constant reshuffling of port

IMPORTANCE OF PORTFOLIO MANAGEMENT

⇒

In the past one-decade, significant changes have taken place in the investment climate in India.

⇒

Portfolio management is becoming a rapidly growing area serving a broad array of investors- both individual and institutional-with investment portfolios ranging in asset size from thousands to cores of rupees.

⇒

It is becoming important because of: i.

Emergence of institutional investing on behalf of individuals. A number of financial institutions, mutual funds, and other agencies are undertaking the task of investing money of small investors, on their behalf.

ii.

Growth in the number and the size of invisible funds–a large part of household savings is being directed towards financial assets.

iii.

Increased market volatility- risk and return parameters of financial assets are continuously changing because of frequent changes in governments industrial and fiscal policies, economic uncertainty and instability.

iv.

Greater use of computers for processing mass of data.

v.

Professionalization of the field and increase use of analytical methods (e.g. quantitative techniques) in the investment decision-making, and

vi.

Larger direct and indirect costs of errors or shortfalls in meeting portfolio objectives- increased competition and greater scrutiny by investors.

QUALITIES OF PORTFOLIO MANAGER 1. Sound general knowledge:  Portfolio management is an existing and challenging job.  He has to work in an extremely uncertain and conflicting environment.  In the stock market every new piece of information affects the value of the securities of different industries in a different way.  He must be able to judge and predict the effects of the information he gets.  He must have sharp memory, alertness, fast intuition and self-confidence to arrive at quick decisions.

2. Analytical Ability:  He must have his own theory to arrive at the value of the security.  An analysis of the security’s values, company, etc. is continues job of the portfolio manager.  A good analyst makes a good financial consultant.  The

analyst

can

know

the

strengths,

weakness,

opportunities of the economy, industry and the company.

3. Marketing skills:  He must be good salesman.  He has to convince the clients about the particular security.  He has to compete with the Stock brokers in the stock market.  In this Marketing skills help him a lot.

4. Experience:  In the cyclical behavior of the stock market history is often repeated, therefore the experience of the different phases helps to make rational decisions. 

The experience of different types of securities, clients, markets trends etc. makes a perfect professional manager.

CODE OF CONDUCT- PORTFOLIO MANAGERS:

1. A portfolio manager shall, in the conduct of his business, observe high standards of integrity and fairness in all his dealings with his clients and other portfolio managers. 2. The money received by a portfolio manager from a client for an investment purpose should be deployed by the portfolio manager as soon as possible for that purpose and money due and payable to a client should be paid forthwith. 3. A portfolio manager shall render at all time high standards of services exercise due diligence, ensure proper care and exercise independent professional judgment. The portfolio manager shall either avoid any conflict of interest in his investment or disinvestments decision, or where any conflict of interest arises; ensure fair treatment to all his customers. He shall disclose to the clients, possible sources of conflict of duties and interest, while providing unbiased services. A portfolio manager shall not place his interest above those of his clients. 4. A portfolio manager shall not make any statement or become privy to any act, practice or unfair competition, which is likely to be harmful to the interests of other portfolio managers or it likely to place such other portfolio managers in a disadvantageous position in relation to the portfolio manager himself, while competing for or executing any assignment.

5. A portfolio manager shall not make any exaggerated statement, whether oral or written, to the client either about the qualification or the capability to render certain services or his achievements in regard to services rendered to other clients. 6. At the time of entering into a contract, the portfolio manager shall obtain in writing from the client, his interest in various corporate bodies, which enables him to obtain unpublished price-sensitive information of the body corporate. 7. A portfolio manager shall not disclose to any clients or press any confidential information about his clients, which has come to his knowledge. 8. The portfolio manager shall where necessary and in the interest of the client take adequate steps for registration of the transfer of the client’s securities and for claiming and receiving dividend, interest payment and other rights accruing to the client. He shall also take necessary action for conversion of securities and subscription of/or rights in accordance with the client’s instruction. 9. Portfolio manager shall ensure that the investors are provided with true and adequate information without making any misguiding or exaggerated claims and are made aware of attendant risks before they take any investment decision.

10.He should render the best possible advice to the client having regard to the client’s needs and the environment, and his own professional skills. 11.Ensure that all professional dealings are affected in a prompt, efficient and cost effective manner.

FACTORS AFFECTING THE INVESTOR There may be many reasons why the portfolio of an investor may have to be changed. The portfolio manager always remains alert and sensitive to the changes in the requirements of the investor. The

following are the some factors affecting the investor, which make it necessary to change the portfolio composition. 1. Change in Wealth  According to the utility theory, the risk taking ability of the investor increases with increase in wealth.  It says that people can afford to take more risk as they grow rich and benefit from its reward. 

But, in practice, while they can afford, they may not be willing.

 As people get rich, they become more concerned about losing the newly got riches than getting richer.  So they may become conservative and vary risk- averse.  The fund manager should observe the changes in the attitude of the investor towards risk and try to understand them in proper perspective.  If the investor turns to be conservative after making huge gains, the portfolio manager should modify the portfolio accordingly.

2. Change in the Time Horizon  As time passes, some events take place that may have an impact on the time horizon of the investor.  Births, deaths, marriages, and divorces – all have their own impact on the investment horizon.

 There are, of course, many other important events in the person’s life that may force a change in the investment horizon.  The happening or the non-happening of the events will naturally have its effect. 

For example, a person may have planned for an early retirement, considering his delicate health.

 But, after turning 55 years of age, if his health improves, he may not take retirement. 3. Change in Liquidity Needs  Investors very often ask the portfolio manager to keep enough scope in the portfolio to get some cash as and they want.  This forces portfolio manager to increase the weight of liquid investments in the asset mix. 

Due to this, the amounts available for investment in the fixed income or growth securities that actually help in achieving the goal of the investor get reduced.

 That is, the money taken out today from the portfolio means that the amount and the return that would have been earned on it are no longer available for achievement of the investor’s goals. 4. Changes in Taxes

 It is said that there are only two things certain in this worlddeath and taxes.  The only uncertainties regarding them relate to the date, time, place and mode.  Portfolio manager have to constantly look out for changes in the tax structure and make suitable changes in the portfolio composition.  The rate of tax under long- term capital gains is usually lower than the rate applicable for income. If there is a change in the minimum holding period for long-term capital gains, it may lead to revision. The specifics of the planning depend on the nature of the investments.

5. Others  There can be many of other reasons for which clients may ask for a change in the asset mix in the portfolio.  For example, there may be change in the return available on the investments that have to be compulsorily made with the government say, in the form of provident fund.  This may call for a change in the return required from the other investments.

PORTFOLIO MANAGEMENT SCHEMES (PMS) PRESENT SCENARIO



“The regulatory environment has totally changed now and with SEBI fixing strict norms for companies launching PMS, only the serious players are going to enter his business.”



The PMS members today have full transparency: managers are required to maintain individual accounts showing all dealings in a client’s portfolio.



They must also advise him on all transactions.



Secondly, all PMS Managers have to send their clients at least a quarterly report giving the status of their portfolio and the transactions that have taken place.



The client-PMS manager contract is as per SEBI ground rules.



It has several checks to protect investor’s interest like laying the custodial responsibility on the manager and preventing any alterations in the scheme without the client’s consent.



Finally, managers have to send half-yearly reports to SEBI on their portfolio management activities.



Experienced handling of cash and money power apart, PMS also takes care of a number of the headaches endemic with investing in the markets.



The biggest one is custodial services.



All PMS Managers act as custodians of shares and are responsible for the load of paper work related to the share transfer, documentation work, postal work and even ensuring that dividends are credited to clients account.



SEBI directives also put the onus on the PMS promoters to take follow-up action in case shares are lost or damaged.



Difficulties such as late transfer and postal theft are reduced in case of brokers, because they not only have direct access to registrars but also have branch offices to ensure quicker transfers.



All these services come for a fee, of course.



While the actual PMS charges vary from a high of 7% of the amount invested to a low of around 3.5%, follow-up services charges extra.



As in all schemes, there is a downside to putting cash into portfolio management as well.



The most important is the fact that despite all the SEBI checks.



PMS Managers are not allowed to assured any fixed returns.



This really discharges the managers for any responsibility if the scheme does badly.



So investors have to be very careful in choosing the promoters.

 Problem

inherent in most schemes on offer will be

misused of investor’s funds to some extent.



Funds collected from investors will aid the brokers concerned in their own games in the market.

PROSPECTS OF POTFOLIO MANAGEMENT

⇒

At present, there are a very few agencies which render this type of services in an organized and professional way.

⇒

However, their share in the total volume is very small.

⇒

There is no constraint on the demand for this type of financial service as every entity would be saving and investing and interested in optimizing the rate of return.

⇒

The size of capital market is increasing.

⇒

There is an increase in the number of stock exchanges.

⇒

New instruments are being introduced in the capital market.

⇒

The equity cult is spreading in the interiors and rural areas.

⇒

The percentage of investment of the household savings is bound to go up.

⇒

It is conservatively estimated that during the eighth plan resources to the tune of over Rs.50000crore will be mobilized through the stock market.

⇒

India today has 20 million investors, as compared to 2 million in 1980.

.

SECURITIES AND EXCHANGE BOARD OF INDIA RULES, 1993 REGARDING PORTFOLIO MANAGERS No person to act as portfolio manager without certificate.

»

No person shall carry on any activity as a portfolio manager unless he holds a certificate granted by the Board under this regulation.

»

Provided that such person, who was engaged as portfolio manager prior to the coming into force of the Act, may continue to carry on activity as portfolio manager, if he has made an application for such registration, till the disposal of such application.

»

Provided further that nothing contained in this rule shall apply in case of merchant banker holding a certificate granted by the board of India Regulations, 1992 as category I or category II merchant banker, as the case may be.

»

Provided also that a merchant banker acting as a portfolio manager under the second provision to this rule shall also be bound by the rules and regulations applicable to a portfolio manager.

Conditions for grant or renewal of certificate to portfolio manager. »

The board may grant or renew certificate to portfolio manager subject to the following conditions namely:

a) The portfolio manager in case of any change in its status and constitution, shall obtain prior permission of the board to carry on its activities; b) He shall pay the amount of fees for registration or renewal, as the case may be, in the manner provided in the regulations; c) He shall make adequate steps for redressed of grievances of the clients within one month of the date of receipt of the complaint and keep the board informed about the number, nature and other particulars of the complaints received; d) He shall abide by the rules and regulations made under the Act in respect of the activities carried on by the portfolio manager.

Period of validity of the certificate. »

The certificate of registration on its renewal, as the case may be, shall be valid for a period of here years from the date of its issue to the portfolio manager.

SECURITIES AND EXCHANGE BOARD OF INDIA REGULATIONS, 1993



Registration of Portfolio Managers:

1. Application for grant of certificate

 An application by a portfolio manager for grant of a certificate shall be made to the board on Form A.  Notwithstanding anything contained in sub regulation (1), any application made by a portfolio manager prior to coming into force of these regulations containing such particulars or as near thereto as mentioned in form A shall be treated as an application made in pursuance of sub-regulation and dealt with accordingly.

2. Application of confirm to the requirements

 Subject to the provisions of sub-regulation (2) of regulation 3, any application, which is not complete in all respects and does not confirm to the instructions specified in the form, shall be rejected:  Provided that, before rejecting any such application, the applicant shall be given an opportunity to remove within the

time specified such objections as may be indicated by the board. 3. Furnishing of further information, clarification and personal

representation.

 The Board may require the applicant to furnish further information or clarification regarding matters relevant to his activity of a portfolio manager for the purposes of disposal of the application.  The applicant or, its principal officer shall, if so required, appear before the Board for personal representation. 4. Consideration of application.  The Board shall take into account for considering the grant of certificate, all matters which are relevant to the activities relating to portfolio manager and in particular whether the applicant complies with the following requirements namely:  The applicant has the necessary infrastructure like to adequate office space, equipments and manpower to effectively discharge his activities;

 The applicant has his employment minimum of two persons who have the experience to conduct the business of portfolio manager;

 A person, directly or indirectly connected with the applicant has not been granted registration by the Board in case of the applicant being a body corporate;  The applicant, fulfils the capital adequacy requirements specified in regulation 7  The applicant, his partner, director or principal officer is not involved in any litigation connected with the securities market and which has an adverse bearing on the business of the applicant;  The applicant, his director, partner or principal officer has not at any time been convinced for any offence involving moral turpitude or has been found guilty of any economic offences;  The applicant has the professional qualification from an institution recognized by the government in finance, law, and accountancy or business management.

PRIMARY SURVEY Purpose of the study:

To ascertain investor awareness about services provided by portfolio management institutions and the interest shown by investor to invest in portfolio management services.

To know whether they are interested to hire such services in future and if not, why?

SPECIMEN QUESTIONNAIRE Survey on investor’s views about Portfolio Management

Name: Age: Occupation: »

Are you aware of services offered by portfolio manager? Yes

»

No

If yes, what types of services you are aware of ? Management of Mutual fund investment Management of Equities Management of Money market investment Advisory or consultancy services Others (If other please specify)

»

Would you want to hire a portfolio manager at present or in future? Yes

No

»

If yes, for what type of services? Investments in Mutual Funds

Investments in Equities

Investments in Money market

Investments in other[s] (If other please specify)

Advisory or consultancy service »

If No, why? __________________________________________________ __________________________________________________

»

What is the Percentage of commission that you are ready to pay to portfolio manager for services provided by him in ? Equities

Money market investment

Mutual fund investment

Advisory

or

consultancy

services Other investment (If other please specify) »

Do you think there will be growth in portfolio management in future?

If Yes why?

If No, why? »

What type of services would you want from portfolio manager in future? __________________________________________________ __________________________________________________

»

Suggestions if any: __________________________________________________ __________________________________________________ __________________________________________________ ____________ Signature

FINDINGS This case study has been conducted on various age groups of individual investors on portfolio management. These consist of age group ranging from 18-30, 30-45, 45-60 and 60 & above. Following interpretation has been made on the basis of the information collected from individual investor’s of various age groups through questionnaire:  Age group of 18-30 is more aware about services offered by portfolio manager whereas age group of 60 & above is less aware of such services.  Management of mutual fund investment, management of equities, management of money market investment, advisory and consultancy services are the services provided by the portfolio management institution. Amongst these, advisory and consultancy services are the services that the individual investors are more aware of.  Due to lack of experience and market knowledge, the age group of 45-60 is more interested to hire portfolio manager at present in order to manage their portfolio. The age group ranging from 18-30 is more interested in making investment in equities whereas group ranging from 60 & above are more interested in making investment in mutual fund. On the other

hand, age group of 30-45 and 45-60 are least interested in any of the services provided by portfolio management institution. Reasons specified for the presence of disinterest in any of these services were that the investors are having good hold on their investment. Also they possess good knowledge with regards to market fluctuations, investment portfolio’s and other factors relating to portfolio management.  All the age groups of individual investors in portfolio management believe that there is a better scope for portfolio management in future. Investors would prefer the introduction of services like advisory and consultancy services, investment in mutual funds in the near future.

CONCLUSION With the help of given project I got an in-depth knowledge about the working of portfolio management. Also I got an insight as too how to invest in portfolio management, which scheme provide better return as compared to other and who are the portfolio management players in the Indian market. It can be concluded from the project that future of portfolio management is bright provided proper regulations prevail and investor’s needs are satisfied by providing variety of schemes. The interest of investors is protected by SEBI. Portfolio management is governed by SEBI Act. Due to the benefits available to the individual’s such as reduction in risk, expert professional management, diversified portfolios, tax benefits etc. young generation (i.e. age group bet. 18-30) is willing to invest in different investment avenues through portfolio manager or through mutual funds which are again managed by portfolio managers. On the other hand, age group of 60 & above are least interested in making investment in different avenues through portfolio managers. They believe in investing and managing their portfolio on their own. However, it can be said that the future of portfolio management is bright in years to come.