analysis of indian derivative market and portfolio construction

A REPORT

ON

ANALYSIS OF INDIAN DERIVATIVE MARKET AND

PORTFOLIO CONSTRUCTION

BY

Nibedita Mishra

07BS2527

1

A REPORT

ON

ANALYSIS OF INDIAN DERIVATIVE MARKET AND

PORTFOLIO CONSTRUCTION

BY

Nibedita Mishra

07BS2527

A report submitted in partial fulfillment of the requirements of

2-year Full Time MBA Program

At

ICFAI Business School, Bangalore

Faculty Guide: Company Guide:

Dr. Padma Srinivasan Mr. Balaji Rao Faculty Assistant Vice

President

ICFAI Business School, Karvy finapolis,

Bangalore. Bangalore.

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ACKNOWLEDGEMENT

I would like to take this opportunity to extend my sincere gratitude to my Company Guide, Mr. Balaji Rao, Assistant Vice-President of Karvy Stock Broking Ltd., Bangalore for providing me the opportunity to conduct a project under his esteemed guidance.

I would like to express my most sincere gratitude to my Faculty Guide Dr. Padma Srinivasan, Faculty IBS-Bangalore for the invaluable guidance, uninterrupted supervision, encouragement and motivation she had extended for this project. I am indebted to her guidance and valuable suggestion.

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ABSTRACT

The project undertaken is analysis of derivatives in Indian market and how derivatives in Indian market are been used by investors what are the various strategies followed by them according to market fluctuations.

First part is to understand the market movements in Indian derivatives market, the various types of derivatives in Indian market and a comparison between them, the types of contracts in derivatives such as forward contracts, future contracts, option contracts, swaps.

I have explained straddle strategy and how one investor can mitigate its losses and maximize its returns by using this strategy.

With this the various advantages of derivatives like leverage and liquidity, also some uses of derivatives such as speculation, arbitrage and hedging.

Second part of the project is about portfolio management. It deals with the construction of an optimal portfolio on the basis of risk-return

evaluation, loss minimization and profit maximization. In this part why portfolios are made and what are points to be considered in making a

portfolio are explained. With this which sectors to be taken and under that sector what are the companies to be taken are described.

Portfolios are made for Stocks, Mutual Funds and on asset allocation.

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TABLE OF CONTENTS

SERIAL NO. CONTENT PAGE NO.Acknowledgement IiiAbstract Iv

1 INTRODUCTION 1.1 Company Background 1 1.2 Project Description 3 1.3 Objective 4 1.4 Methodology 4 1.5 Limitations of the study 42 DERIVATIVES 2.1 Derivatives in India 5 2.2 Derivatives Market Players 5 2.3 Forwards & Futures 6 2.4 Options 7 2.5 Straddle Strategy 113 SWOT ANALYSIS OF INDIAN

DERIVATIVE MARET15

4 PORTFOLIO CONSTRUCTION 4.1 Objective of Portfolio Construction 16 4.2 Diversification of Portfolio 16 4.3 Types 17 4.4 Industry Analysis 17 4.5 Company Analysis 23 4.6 Portfolios constructed on Stocks 30 4.7 Portfolio on asset allocation 36 4.8 Mutual Fund 41 4.8.1 Constructed portfolios in Mutual Funds 445 Data Analysis 526 Findings 577 Conclusion 588 References 59

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1. INTRODUCTION:

1.1 Company Profile: -

Karvy is a premier financial services provider and came among the top 5 in India in all its business segments.

In 1982, it began with a small group of practicing Chartered Accountants who founded the flagship company-Karvy Consultants Limited.

Karvy covers the financial services such as Stock Broking, Depository Participants, Distribution of Financial Products- Mutual Funds, Bonds, Fixed Deposits, Equities, Insurance Broking, Commodities Broking, Personal Finance and Advisory services, Merchant Banking and Corporate Finance, Placement of Equity, IPOs, among others.

Karvy has a Professional Management team and ranks among the best in Technology, Operations and Research of various Industrial Segments.

Over the last 20 years Karvy has travelled the success route, towards building a reputation as an integrated financial; services provider, offering a wide spectrum of services.

Karvy highly qualified man power, cutting-edge technology, comprehensive infrastructure and total customer-focus has secured for us the position of an emerging financial services giant enjoying the confidence and support of an enviable clientele across diverse fields in the financial world.

Milestones:

1982: Audit and taxation services 1985: Share registry and transfer (R&T)

Business recently hived off to a joint venture of 50:50 with Computershare Ltd., Australia

1990: Retail broking operations (cash segment) commenced on the HSE. 1990-95: Distribution of investment products (Mutual funds, IPOs, Bonds etc)

Commenced NSE operations 1997: Custodial services launched 2001-02: Equity Derivatives broking commenced

Expanding Institutional segment clientele Setting up of the research desk and Private Client Group at Mumbai

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Management Team: -

• K Sridhar • V Mahesh • V Ganesh • S Gopichand • J Ramaswamy • M S Manohaar • S Ganapatahy Subramanian

Achievements: -

• Among the top 5 stock brokers in India (4% of NSE volumes) • India's No. 1 Registrar & Securities Transfer Agents • Among the top 3 Depository Participants • Largest Network of Branches & Business Associates • ISO 9002 certified operations by DNV• Among top 10 Investment bankers • Largest Distributor of Financial Products • Adjudged as one of the top 50 IT uses in India by MIS Asia • Full- Fledged IT driven operations

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1.2 Project Description:

The project undertaken is analysis of derivatives in Indian market and how derivatives in Indian

market are been used by investors. What are the various strategies followed by them according to

market fluctuations.

First part is to understand the market movements in Indian derivatives market, the various types of derivatives in Indian market and a comparison between them, the types of contracts in derivatives such as forward contracts, future contracts, option contracts, swaps.

With this the various advantages of derivatives like leverage and liquidity, also some uses of derivatives such as speculation, arbitrage and hedging.

Analysis of Indian derivatives starts with taking volume and price of index futures, index

options, stock futures and stock options from existence to till date from these data factors like

growth and correlation between the index movements with derivatives can be found out. Hence

project overall helps us in understanding the market movements with the help of market

indicators and proper positions can be taken by using trading strategies.

I have explained straddle strategy and how it is used to maximize returns and to minimize losses

of an investor.

Second part of the project is about portfolio management.

It deals with the construction of an optimal portfolio on the basis of risk-return evaluation, loss minimization and profit maximization.

In this part why portfolios are made and what are points to be considered in making a portfolio are explained. With this which sectors to be taken and under that sector what are the companies to be taken are described.

Based on the following 3 points portfolios are made. Those are

1. The risk taking capacity2. The return objective 3. The waiting period

In a last line how to get maximum return with taking minimum risk is the main objective of

portfolio construction.

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1.3 Objectives:

To understand the market movements in Indian derivatives market. To construct an optimal portfolio with maximum return taking minimum risk. To study the risk management of various stocks and portfolio with the index futures by

using different strategies.

To get a clear knowledge of the market, in terms of risk and return factor of derivatives.

The project will further help us in understanding more about pricing strategies and

techniques used in futures and options market.

It will further enhance our knowledge in terms of futures and options trading.

Futures are one of the upcoming segments in the Stock market, and knowledge of the

same for trading becomes essential for every trader.

1.4 Methodology:

The methodology to be adopted while executing the project will be as follows.

Collecting secondary data from websites, analyst reports, annual reports, news articles and PROWESS.

Understanding the demand and supply of natural resources and their impact on the markets as a whole.

Understanding various fluctuations in markets due to various impacts. Understand the relationship between economy and various markets. Documenting the findings.

1.5 Limitations:

The required return we will get is only the prediction not the exact one. If the market conditions are not fluctuated the calculated returns are true. Time is major limitations here. Controlling risk and avoiding losses cannot be avoided completely. Complete awareness of the product from the investors perspective

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2. DERIVATIVES:

Derivatives:

Derivative is a product whose value is derived from the value of one or more basic

variables, called bases (underlying asset, index or reference rate) in a contractual manner. The underlying asset can be equity, Forex, commodity or any other asset. Derivative contracts have several variants. The most common variants are forwards,

futures, options and swaps.

2.1 Derivatives in India:

Derivatives markets broadly can be classified into two categories, those that are traded on the exchange and those traded one to one or ‘over the counter’. They are known as

Exchange Traded Derivatives

OTC Derivatives (Over The Counter)

2.2 Derivatives market players:

Hedgers: The objective of these kinds of traders is to reduce the risk. They are not in the derivatives market to make profits. They are in it to safeguard their existing positions. Apart from equity markets, hedging is common in the foreign exchange markets where fluctuations in the exchange rate have to be taken care of in the foreign currency transactions or could be in the commodities market where spiraling oil prices have to be tamed using the security in derivative instruments.

Speculators: They are traders with a view and objective of making profits. They are willing to take risks and they bet upon whether the markets would go up or come down.

Arbitrageurs: Riskless Profit Making is the prime goal of Arbitrageurs. Buying in one market and selling in another, buying two products in the same market are common. They could be making money even without putting their own money in and such opportunities often come up in the market but last for very short timeframes. This is because, as soon as the situation arises arbitrageurs take advantage and demand-supply forces drive the markets back to normal.

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2.3 Forwards and futures: Every futures contract is a forward contract. They:

Are entered into through exchange, traded on exchange and clearing corporation/house provides the settlement guarantee for trades.

Are of standard quantity; standard quality (in case of commodities).

Have standard delivery time and place.

COMPARISON OF FORWARDS AND FUTURES:

Features Forward Contract Future Contract

Operational Mechanism Not traded on

exchange

Traded on exchange

Contract Specifications Differs from trade to

trade.

Contracts are standardized contracts.

Counterparty Risk Exists Exists, but assumed by Clearing

Corporation/ house.

Liquidation Profile Poor Liquidity as

contracts are tailor

maid contracts.

Very high Liquidity as contracts are

standardized contracts.

Price Discovery Poor; as markets are

fragmented.

Better; as fragmented markets are

brought to the common platform.

2.4 TRADING STRATEGIES FOR OPTIONS

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Strategy is a plan how to enter into a market and when to exit and what could be the possible

outcome of profit and what could be the maximum loss that we may incur by implementing

There are many strategies available for trading options. A few like

Long call Long put

Short put

Short call

These strategies are explained in brief in order to get a fair idea to trade in different markets like

bullish, bearish and flat.

Strategy 1:-

Long call

Profit Unlimited ,increase as the spot price increases

Loss Limited to the premium paid

Break even Strike price +premium

Time decay Hurts

Use Very bullish outlook

Volatility Volatility increase helps the position

Margin No

12

Profit +ve

Profit +ve

BEP

STRIKE PRICE

PROFIT +VE

PROFIT -VE

Price

Pay off diagram

Here downside risk can be hedged by taking protective put.

Strategy 2:

Long put

Profit Unlimited increases as spot price decreases

Loss Limited to the premium paid

Break even Strike price - premium

Time decay Hurts

Use Very bullish

Volatility Volatility increases helps the profit

Margin No

13

STRIKE PRICE

PROFIT +VE

PROFIT -VE BEP

PRICE ->

Pay off diagram

Here upside risk can be hedged by taking protective call

Strategy3:

Short put

Profit Limited to premium

Loss Unlimited increases as the spot price decreases

Break even Strike price – premium

Time decay Helps

Use Bullish outlook

Volatility Volatility decrease helps the position

Margin Yes

PREMIUM

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BEP

STRIKE PRICE

PRICE --

PROFIT +VE

PROFIT -VE

Pay off diagram

Strategy 4:

Short call

Profit Limited to the premium received

Loss Unlimited, increases as the spot price increases

Break even Strike + premium

Time decay Helps

Use Bearish outlook

Volatility Volatility decrease helps the position

Margin Yes

PREMIUM

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Profit +ve

Profit -ve

BEP

STRIKE PRICE

PRICE

Pay off diagram

2.5 STRADDLE STRATEGY

It is defined as an options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date.

Call only

Profit or

Losses Stock Price

Put only

• An investor should consider buying Index Straddles when he is convinced that a particular index will make a major directional move but is not sure in which direction.

• An index straddle involves both index call and index put with both the options having the same strike price and expiration month.

Long Straddle (or Buy Straddle):

The long straddle is also known as buy straddle or simply "straddle” is a neutral strategy in options trading that involve the simultaneously buying of a put and a call of the same underlying stock, striking price and expiration date.

Profit or

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Net effect on both a call and a put option with the same strike price and expiration

Losses

0 30 40 50

Stock Price

-400$ at expiration

Long straddles are unlimited profit, limited risk options trading strategies that are used when the options trader thinks that the underlying securities will experience significant volatility in the near term.

Unlimited Profit Potential:

Large profit is attainable with the long straddle when the underlying stock price makes a strong move either upwards or downwards at expiration.

The formula for calculating profit is given below:

Maximum Profit = Unlimited

Profit Achieved When Price of Underlying > Strike Price of Long Call + Net Premium Paid OR Price of Underlying < Strike Price of Long Put - Net Premium Paid

Profit = Price of Underlying - Strike Price of Long Call - Net Premium Paid OR Strike Price of Long Put - Price of Underlying - Net Premium Paid

Limited Risk:

Maximum loss for the long straddle occurs when the underlying stock price on expiration date is trading at the strike price of the options bought. At this price, both options expire worthless and the options trader loses the entire initial debit taken to enter the trade.

The formula for calculating maximum loss is given below:

Max Loss = Net Premium Paid + Commissions Paid

Max Loss Occurs When Price of Underlying = Strike Price of Long Call/Put

Breakeven Point(s):

There are 2 break-even points for the long straddle. The breakeven points can be calculated using the following formulae.

Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid

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Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid

Case: 1

NIFTY was traded at a price of Rs.4320 in 1st April. An option trader enters a long straddle by buying an April 4320 put for Rs 63 and an April 4320 call foe Rs 63. The net debit taken to enter the trade is Rs 126, which is his maximum possible loss. The contract expired on 24th April.

On the day of expiry NIFTY was traded at a price of Rs. 4999. The 63 put was worthless but the April 63 call expired in the money and had an intrinsic value of Rs 679. Subtracting the debt of Rs. 126, the long straddle trader got a profit of Rs. 679- Rs. 126 = Rs 553

On expiration in July, if NIFTY stock is still trading at Rs 4320, both the April 63 put and the April 63 call expire worthless and the long straddle trader suffers a maximum loss which is equal to the initial debit of Rs 126 taken to enter the trade.

Short Straddle (or Sell Straddle):

The short straddle is a neutral options strategy that involves the simultaneous selling of a put and a call of the same underlying stock, striking price and expiration date.

Short Straddle Construction

Sell 1 ATM Call

Sell 1 ATM Put

Short straddles are limited profit, unlimited risk options trading strategies that are used when the options trader thinks that the underlying securities will experience little volatility in the near term.

400$

Profit or losses

0$ 30 40 50

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Stock price at

Expiration

Limited Profit:

Maximum profit for the short straddle is achieved when the underlying stock price on expiration date is trading at the strike price of the options sold. At this price, both options expire worthless and the options trader gets to keep the entire initial credit taken as profit.

The formula for calculating maximum profit is given below:

Max Profit = Net Premium Received - Commissions Paid

Max Profit Achieved When Price of Underlying = Strike Price of Short Call/Put

Unlimited Risk:

Large losses for the short straddle can be incurred when the underlying stock price makes a strong move either upwards or downwards at expiration, causing the short call or the short put to expire deep in the money.

The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs When Price of Underlying > Strike Price of Short Call + Net Premium Received OR Price of Underlying < Strike Price of Short Put - Net Premium Received

Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received OR Strike Price of Short Put - Price of Underlying - Net Premium Received + Commissions Paid

Breakeven Point(s):

There are 2 break-even points for the short straddle. The breakeven points can be calculated using the following formulae.

Upper Breakeven Point = Strike Price of Short Call + Net Premium Received

Lower Breakeven Point = Strike Price of Short Put - Net Premium Received

Case: 2

NIFTY in options was trading at a price of Rs. 4320 in 1st April. An options trader enters a short straddle by selling an April 4320 put for 65 and an April 4400 call for 65. The net amount taken to enter the trade is Rs (65+65) = Rs 130. This is the maximum possible profit

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On the date of expiry the value of NIFTY was 4999. The April 65 put expired worthless but the April 65 call expired in the money and with an intrinsic value of Rs (4999 – 4320) = Rs 599. Deducting the net of Rs 130, the short straddle trader’s loss was 599- 130= Rs 469

On expiration in April, if NIFTY index is still trading at Rs 4400, both the April 65 put and the April 65 call expire worthless and the short straddle trader gets to keep the entire initial credit of Rs 130 taken to enter the trade as profit.

3. SWOT ANALYSIS OF INDIAN DERIVATIVE MARKETS:

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4. PORTFOLIO CONSTRUCTION:

Portfolios are held directly by investors or managed by financial professionals. There are 4 basic steps involved in portfolio construction.

-Security valuation

- Asset allocation

-Portfolio optimization

-Performance measurement

4.1 Objectives of portfolio management:

- Safety of the investment

-Stable current returns

- Appreciation in the value of capital

-Marketability

-liquidity

4.2 Diversification of portfolio:-

Investing all the funds in just one or two stocks may not be desirable because of the risks involved. It is necessary to spread the investment over a flow selected securities.

There are 2 types of diversification are explained below.

1- Naïve diversification:- In this type, securities are selected in a random basis only reduces the risk of a portfolio

to a limited extent. When the numbers of securities in a portfolio are 10 of 12, the risk decreases to the level

of systematic risk in the market. When it is beyond 15, there is no decrease in total risk.2- Markowitz diversification:-

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According to Markowitz, naïve diversification may not reduce the volatility of the rate of return of a portfolio, if the prices of different securities in the portfolio move in a similar fashion.

So effective diversification is achieved only if the securities tend to fluctuate in opposing fashion that means the portfolio must have some stocks with positive betas and other with negative betas.

The purpose of effective diversification is to significantly reduce the volatility of a portfolios rate of return.

4.3 TYPES OF PORTFOLIOS:

Portfolios of Stocks

Portfolios of mutual funds

Portfolios on Asset allocation

Based on the following 3 points portfolios are made. Those are

1. The risk taking capacity2. The return objective 3. The waiting period

1. Portfolios of Stocks:

To construct this type of portfolio, first some sectors are selected based on their past performances, growth prospective.

Here are the details of some growing sectors performances.

4.4 Industry Analysis:

INDUSTRY ANALYSIS: BANKING SECTOR

With the Indian economy growing at 9% and investments riding high, the Indian banking sector is on an upswing.

Banking in India is fairly mature in terms of supply, product range but reach in rural India still remains a challenge for the private sector and foreign banks.

Currently, India has 88 scheduled commercial banks—28 public sector banks, 29 private banks and 31 foreign banks.

They have a combined network of over 53,000 branches and 17,000 ATMs. The public sector banks hold over 75% of total assets of the banking industry, with the

private and foreign banks holding 18.2% and 6.5% respectively. Interest income growth estimated to be 32.8% Operating profit is estimated to rise by around 15.6% and net profit by 27.5% in 07.

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OPM (Operating Profit Margin) and NPM (Net Profit Margin) registered a decline of 362 basis points and 52 basis points respectively due to higher interest expanded. During 2007, OPM was estimated to be 24.43%, whereas NPM was around 12.78%.

Financial Performance:

Most of the banks are going for branch expansion and ramping up employee base and are expected to face higher operating expenses in absolute terms.

However, due to efficient management of funds, stronger other income growth and high proportion of retail loans will see margins reaching higher levels.

Operating Profit Margin (OPM) of banks like Kotak, Axis, Syndicate, BOI, and PNB are estimated to improve during 2007 as against 2006. OPM of Kotak, Axis, Syndicate, BOI, and PNB are estimated to be 32.8%, 24.9%, 18.7%, 28% and 21.1% respectively.

INDUSTRY ANALYSIS: CEMENT SECTOR

The cement industry is a core sector and plays one of the major roles for the growth of the country. Cement is one of the most basic construction materials, and hence, an essential item for the infrastructure development of the country.

The strong demand for this sector is due to the following reasons:

-Strong housing demand

-Higher level of commercial construction activity

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-Increased government focus on infrastructure spending

-Higher investment in industrial projects

Indian economy grew at annual rate of 8.9% during 2007. Higher farm output and improved growth in the mining sector helped Indian economy to grow at 8.9% despite a sharp slowdown in manufacturing growth.

The developing economy and the resulting improvements in income dynamics along with factors like favorable demographics and spending patterns are driving the consumption demand.

With rising income, the consumption has also scaled a new height, giving rise to a new middle class, with higher aspiration.

The Indian cement industry is second in the world after China. 95% is consumed domestically and only 5% is exported.

Demand is growing at more than 10% per annum. More than 90% of production comes from large cement plants.

There are a total of 130 large and more than 350 small cement manufacturing units in the country.

Cement industry in India is poised for strong growth, driven by continued investments in housing and infrastructure.

The increase in sales was 14% during 2007 compared with 2006. It is mostly contributed by industry majors like ACC, Ambuja, Grasim and Ultratech.

Huge investments planned for infrastructure both by government and private sector, booming housing construction and expansion in corporate production facilities is likely to fast forward the growth in the Indian cement industry.

The increase in EBITDA by 11% also shows the operational effectiveness of the cement industry as a whole. Interest expenses have registered a growth of 6%. Reported PAT has changed by 13%.

INDUSTRY ANALYSIS: OIL AND GAS SECTOR

India’s state-owned Oil and Natural Gas Corporation (ONGC) is the largest oil company in India’s upstream sector, accounting for three-fourths of the total production during 2007.

The sector contributes about 45% of India’s primary energy consumption. India is the sixth largest crude consumer and the ninth largest crude importer in the

world. About 30.87% and 11.21% is contributed by oil and gas sector to the overall imports and exports respectively.

India has the sixth largest refining capacity — 2.56m barrels per day, which represent 2.99% of world capacity.

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Industry Revenue:

During 2007, the net sales of the oil and gas industry jumped by 6.5% to Rs1, 658,400m from Rs1, 557,139m in 2006. The price rise of the crude oil has affected all the downstream players and the government has ordered the upstream players to support them.

The operating profit of the industry jumped from Rs145, 343.70m to Rs170, 704.40m, i.e. a growth of 17.44%, during 2007 with respect to the previous year.

The operating profit margin also showed an upward trend with an increase from 9.33% to 10.29% compared to the corresponding the previous year. Due to increase in the crude oil prices, many companies imported less oil. As a result, there was reduction in the costs associated with raw materials.

The net profit of the oil and gas industry jumped from Rs102, 147.70m in 2006 to Rs127, 937.90m during 2007, witnessing an increase of 25.24%.

The NPM of the quarter jumped from 6.56% to 7.71% during 2007 with respect to the corresponding previous year. There was reduction in the costs associated with depreciation and the provision for deferred tax was also reduced.

INDUSTRY ANALYSIS: POWER SECTOR

India’s GDP is projected to grow at 10% in the 11th Plan Period (2007-12); the desirable growth rate for power sector would be 12%.

To meet the projected demand in 2011-12, additional capacity requirement of about 78,500MW is required to be added during the plan period.

Recognizing that electricity is one of the key drivers for rapid economic growth and poverty alleviation, the industry has set itself the target of providing access to all households in the next seven years.

About 44% of the households do not have access to electricity. Hence, meeting the target of providing universal access is a daunting task, requiring

significant addition to generation capacity and expansion of the transmission and distribution network.

The industry is expected to grow at 27% in terms of sales in JFM08. The operating profit of the industry is expected to grow at 28% and net profit at

12% compared with same period of the previous year. The year 2007 was favorable for the power industry compared with the year 2006. OPM for the 2007 is estimated to be 24.43%, showing an increase of 247 basis points

compared with the same period of the previous year. Operating profit is expected to touch Rs43.84 billion, showing an increase of 30% during

the same period. Net profit for 2007 is expected to have touched Rs35.58 billion, reporting an increase of

14.3% compared to same period of the previous year. Despite the rise in net profit, NPM will record 19.83%, a decline of 51 basis points

compared to same period of the previous year. Depreciation expenses for the quarter are expected to decline by 145 basis points. On the other hand, interest and tax expenses are expected to jump by 91 and 317 basis

points.

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INDUSTRY ANALYSIS: TELECOM SECTOR

Service sector is one of the most significant sectors of the Indian economy, contributing nearly 55% to the GDP in 2006–07. The services sector in 2007 was down at 10.2% compared with 11.8% in 2006.

But it continued to be the key driver of economic activities, holding a share of more than 44% of GDP.

The Indian telecom industry revenues is expected to witness a modest growth of 27% and touch Rs142 billion in 2007 compared to 2006, crossing another milestone of 250m subscribers in October 2007.

The total number of telecom subscribers in the country touched 264m at the end of November 2007, of which 225m were mobile subscribers and 39m were fixed/landline subscribers.

The overall tele-density improved further to 23% in November 2007 compared with 22% in October 2006. Operating margins of the telecom industry is expected to decline from 35% in 2006 to 33% in 2007, reflecting an increase in their operational expenses in this period.

The net profit margin for the industry may also decline from 19% to 17% due to increased interest expenses, taxes payable and increased depreciation on new physical assets.

However, the growth in the bottom-line (net profit) of the industry may be restricted to 14% reaching Rs24 billion in 07 as a result of 26% rise in depreciation and 36% rise in taxes.

Going by the number of mobile phone subscribers, India has become the world’s fastest growing region.

Financial performance:

Sterlite Optical is expected to show the highest increase in net profits as well as a commendable improvement in margins. This is because of increase in revenue coming from the acquisition of Power Transmission business from Sterlite Industries (India) Limited. On the contrary, the net profit for HFCL is expected to decrease by 88%, following which the net profit margin may dip to 3.8% in 2007 from 14.1% in 2006.

INDUSTRY ANALYSIS: STEEL SECTOR

India is one of the largest producers of sponge iron and the 5th largest crude steel producer in the world with an overall crude steel production of about 50.72mmt in 2006-07.

Its share in global steel production was approximately 4.04% in 2006. The steel industry now accounts for a capital base of US$22.86 billion and contributes

around 6% to the gross national product, commanding a weight of 5.13 in the Index of Industrial Production and provides direct employment to more than 0.4m people.

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On the basis of companies taken for projection, a total industry sale for 2007 is estimated to be Rs353631.88m, with 9% growth on YoY basis.

India has been growing at a CAGR of more than 9% per annum in spite of infrastructure constraints.

This is due to increase in staff and power cost. The NPM decreased by 173.89 basis points due to increase in interest cost. The Net sales during 2008 are estimated register a growth of 13% to reach for Rs403647.08m.

Indian steel production was about 50.72mmt in 2006-07; it grew by 8.93% from 44.54mt in 2006-07 and consumption recorded a significant growth of 11.56% to reach 46.14mmt. These achievements indicate that a stable foundation for future development of Indian steel industry has been laid.

Import of steel rose by 23.89% from 4.31mmt in 2005-06 to 5.34mmt in 2006-07. Steel export saw very little increase; it rose by 1.66% from 4.81mmt in 2006-07 to 4.89mmt in 2006-07.

In India, the per capita consumption of steel is around 33kg as against 242kg in China and an average of over 400kg in the developed countries. Looking at India's per capita consumption of steel, one can say that there is room for growth in demand.

Major growth drivers of steel include automobiles, construction, oil and gas and consumer durable industry.

The Government of India anticipates a three-fold rise in steel production capacity to 120m tonne, making India the second-largest steel producer in the world by 2016.

There is a series of mega projects–either being implemented or in the proposal stage— which once operational, will re-write the structure of steel industry and its dynamics. The reform process will further boost the future of the industry.

INDUSTRY ANALYSIS: PHARMACEUTICAL SECTOR

The global pharmaceutical market in 2007 registered a growth of 9%. The robust performance of the pharmaceutical companies in domestic markets and

overseas markets has resulted in sales upsurge. The reasons attributed to this upsurge include strong financial performance, dividend

announcements, healthy product pipeline, significant growth in money from Foreign Converted Currency Bonds for M&A and aggressive marketing efforts. Globally, the Indian market ranks fourth in terms of volume and 13th in terms of value.

Indian pharmaceutical industry accounts for 1% of GDP. India currently holds US$7.3 billion of the US$643 billion global pharmaceutical industry. Indian pharmaceutical industry size is increasing at 10% a year.

During 2007, the industry registered 23% increase in sales and 13% jump in operating profit on the back of segmental performance and exports.

Pharmaceutical industry witnessed an increase in product approvals; Aurobindo was leading with highest number of approvals.

The Indian pharma industry is expected to become a US$11.6 billion opportunity by the end of 2009.

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The net sales of the pharmaceuticals industry will register a growth of 16% to Rs126, 039m during 2008 compared with corresponding quarter of the previous year.

Industry Revenue:

On the back of increased exports and improved segmental performance, total industry revenue rose by 23.46% to Rs112, 515.10m in 2007 as against Rs91, 128.25m in 2006.

The major growth drivers for the industry during 2007 were penetration in geographical markets to capture generics and increasing contract research and manufacturing (CRAMS) projects.

Acquisition of generic brands and launching of new products brought more revenues to the industry.

The net profit of the industry witnessed a jump by 16.73% from Rs18, 067.17m in 2006 to Rs21, 093.06m in 2007.

After the sector analysis, some stocks are picked from the growing sectors based on their past performances and fundamental studies.

4.5 COMPANY ANALYSIS:

1:

Dabur India is the fourth largest company and one of the frontrunners in the FMCG sector with interest in health care, personal care and food products. Dabur Retail’s H&B Stores brand ‘New U’ is in the process of launching some of the world’s most sought after cosmetic and personal care brands in India with an international tie up. Dabur plans to launch 150 outlets with an investment of Rs 140 Cr by 2009-10. In FMCG sector it is the major player.

2:

COMPANY NAME- AUROBINDO PHARMA SECTOR- PHARMACEUTICAL

MARKET CAP- Rs 1790.38Cr (MID CAP) CMP- Rs 308.2

P/E-5.3 EPS- Rs 55 INDUSTRY P/E-18.7

It manufactures generic pharmaceuticals and active pharmaceuticals ingredients. After month of underperformance, the pharma sector is back to the limelight because of its defensive nature and constant growth rate. Its focus is on generic business, which is more profitable. Recently Aurobindo pharma has concluded a strategic deal, for acquisition of intellectual property and

28

COMPANY NAME- DABUR INDIA LTD. SECTOR- FMCG

MARKET CAP- 9063.6 Cr (LARGE CAP) CMP-Rs 108.5

P/E-35.96 EPS- 2.92 INDUSTRY P/E-29.7

marketing authorizations, with TAD Italy, a generic company. This deal will give Aurobindo access to more than 70 ready to market products and the chance to enter the Italian generic market. This deal will maximize the potential of synergies by shifting TAD’s product manufacturing to Aurobindo’s facilities. The deduction of excise duty announced in the recent budget will boost Aurobindo’s growth potential.

3:

The company has decided to expand into drugs for HIV. Over the last couple of years, the company has outperformed the Indian pharmaceutical industry, growing at 16% per annum.

Reasons for growth in India:

-Expansion in size of sales and marketing force.

For the last financial year ended 30 Nov 2007, Abbott India recorded a turnover of Rs 620 Cr, up 16.5% over the previous year. PAT was Rs 68.4 Cr, which represents an EPS of 46.43. The DPS was 17.5 with respect to the current price of 524; this represents a PE of 10.88 and a dividend yield of over 3%.

Margins have held steady for the last couple of years. The last quarter show a muted growth at 11% year on year.

4:

NIL seems to be the best player on the Indian consumerisation story. All 4 segments of NIL are expected to show good growth on account of product innovation and value addition. It has rewarded its shareholders with good amount of dividends.

29

COMPANY NAME- ABBOTT INDIA SECTOR-PHARMACEUTICAL

MARKET CAP- Rs 814.58Cr CMP-Rs 540

P/E-6.6 EPS-Rs79 INDUSTRY P/E-18.7

COMPANY NAME- NESTLE INDIA SECTOR- FMCG


P/E- 36.6 EPS-Rs 42.9 INDUSTRY P/E-29.7

Its EV/EBITDA of 16.1 is in line with the industry standards.

NIL has 4 segments: milk products & nutrition, beverages, prepared dishes & cooking aids and chocolate & confectionary. Last year the company added 4 new brands and apart from this it has done value addition in 6 existing brands.

From the annual result it can be shown that the company has a continuous growth in sales, operating profit so as of net profit. It has an EPS of Rs 42.92 and P/E of 36.6.

5:

NTPC is the largest thermal power generating company in India. Its core business is engineering, construction and operation of power generating plants. NTPC showed a robust financial result and achieved an all time high performance levels. Of the total power generated by India, 28.5% is contributed by NTPC. It has planned Rs 13588 Cr for financial year 2008-09. It is in the process of implementing additional projects in joint ventures and strategic alliances. It also has global plans of expansion in mining, power generation, engineering and project management services. NTPC is also looking at getting into other energy sources like biomass, cogeneration, fuel cells etc to reduce its current dependence on thermal fuels.

For the last 5 years it shows an increase in sales, its operating profit and in net profit. It has also continuous increase in EPS and DPS. This stock is highly liquid and the debt/equity ratio is very less.

6:

ICICI Bank’s net income grew by 33% year on year. Larger numbers of new branches are expected to open over next 6 months. Overall we can say that the core earning is very strong for this company.

From the financial figures we can estimate that the sales of this stock have increased 50%. The EPS has increases from Rs 28 to Rs 35.

30

COMPANY NAME- NTPC SECTOR- POWER

MARKET CAP- Rs 156911.19 Cr CMP-Rs 195

P/E-Rs 22.86 EPS- 8.33 INDUSTRY P/E-33.7

COMPANY NAME- ICICI BANK SECTOR-BANKING

MARKET CAP- Rs 96219.65 CMP-Rs 764

P/E-31.44 EPS-Rs 27.95 INDUSTRY P/E- 32

India cement remains one of the biggest players in south India. It shows a marvelous profit in the last 2 years. India Cements Ltd has informed that the Company has acquired a second bulk cargo carrier (motor vessel) with capacity of 38,002 DWT from Essar Shipping Ltd of Mumbai.

India Cements Ltd (ICL) was established in Feb.'46, it is a diversified company with interests in cement, shipping and real estate development. It is the largest producer of cement in South India with 28% market share. The company has access to huge limestone resources. India Cement plans to become a pan-India player with facilities in Rajasthan, Himachal and Madhya Pradesh. The company is very attractive at current levels with P/E of just 7.

8:

Dena Bank one of the premier public sector banks, has introduced Dena Smart Card, to facilitate anywhere banking.

Dena Bank is the first bank to launch this unique customer friendly product. It is for the first time in India that a Bank is using Smart Card for storing account details.

The bank proposes to open 15 branches in the country in the current year.

From the past 5 years analysis it can be predicted that this bank shows a vast increase in profit and also net worth. The EPS increased 3 times than last year.

9:

Indian sugar industry is on the edge of upturn with lower production, reducing industry and expected rise in domestic sugar prices.

Renuka Sugar is the fifth largest sugar manufacturer and largest trader of sugar of India. The company is also the largest manufacturer of ethanol blended with gasoline in India.

31

COMPANY NAME- INDIA CEMENTS LTD SECTOR- CEMENT


P/E-7.5 EPS-Rs 25 INDUSTRY P/E-10.2

COMPANY NAME- DENA BANK SECTOR- BANKING

MARKET CAP- Rs 1162 Cr(SMALL CAP) CMP-Rs 58.3

P/E-Rs 7.8 EPS-7.93 INDUSTRY P/E- 11.8

COMPANY NAME- SHREE RENUKA SUGAR SECTOR- SUGAR

MARKET CAP- Rs 3305 Cr (MID CAP) CMP-Rs 121.25

P/E- 35 EPS-Rs 27.3 INDUSTRY P/E-18.9

Stock is currently trading at 10.4x FY09E PE compared to 12.7x for Bajaj Hindustan and 13.6x as average PE of last sugar cycle.

Bharti Airtel is a leader in the Indian telecom scenario, the telecom penetration level in India is very low around 23%. This situation is favorable for players like Bharti, who has been giving good results consistently. The company has already got 1000 IPTV customers in NCR. Bharti Airtel plans a nation-wide launch of IPTV and Dish TV.

11:

CAIRN's discovery in the Rajasthan block is a big step towards reducing reliance on imports to meet India's ever-increasing oil needs. At peak production, Cairn's crude production should account for 17% of India's total crude production. With Crude prices at $110, the company is expected to do extremely well. Recently company did a Private placement at Rs 224/share. Company buyout is also not ruled out.

12:

32

COMPANY NAME- BHARTI AIRTELSECTOR- TELECOM

MARKET CAP- Rs 159995.3 Cr(LARGE CAP) CMP-Rs 855.9

P/E-40 EPS-Rs 21.25 INDUSTRY P/E-

COMPANY NAME- CAIRN INDIA SECTOR- PETROLEUM

MARKET CAP- Rs 45582 Cr(LARGE CAP) CMP-Rs 260.8

P/E- EPS- INDUSTRY P/E-14.9

Incorporated in Jun.'61 as a private limited company, Ranbaxy Laboratories (RLL) manufactures and markets pharmaceutical dosage forms (for human health care), animal health care products, bulk drugs and intermediates, diagnostics, laboratory chemicals and reagents. It is the largest exporter of bulk drugs and pharmaceutical dosage forms in India. The board of Ranbaxy Laboratories has cleared a scheme of de-merger of the company's New Drug Discovery Research (NDDR) unit into a subsidiary, Ranbaxy Life Science Research (RLSRL). This is subject to requisite approvals.

13:

Biocon Ltd was incorporated in the year 1978. Biocon is India's largest biotech company with a presence in bio-pharmaceuticals, enzymes, customs research and clinical research. The company was promoted as a joint venture with Ireland-based MNC Biocon Biochemical. Later, Unilever Plc acquired Biocon Biochemical's stake in February 1995, but sold it to the current promoters in June 1999. For a consideration of Ç30 million Biocon has reached agreement to acquire a 70% stake in German pharmaceutical company, AxiCorp GmbH for a consideration of Ç30 million With the strategic investment in AxiCorp, Biocon establishes its first presence in Europe in order to market its injectible insulin on its own, and also to build up marketing and distribution capabilities for many other products of its portfolio.

14. TATA TEA:

The Company was incorporated on 18th October 1962, as a private limited company and was converted into a public limited company on 8th May, 1963.

Tata Tea Ltd has announced the following Audited results for the quarter ended December 31, 2007:

33

COMPANY NAME- RANBAXY LABS SECTOR- PHARMA

MARKET CAP- Rs18051 Cr(LARGE CAP) CMP-Rs 499

P/E-29 EPS-Rs 16.7 INDUSTRY P/E-18.7

COMPANY NAME- BIOCON LTD. SECTOR- PHARMA

MARKET CAP- Rs 4342 Cr CMP-Rs504

P/E-10.3 EPS-Rs 43 INDUSTRY P/E-18.7

The Company has posted a profit after tax of Rs 588.80 million for the quarter ended December 31, 2007 as compared to Rs 942.00 million for the quarter ended December 31, 2006. Total Income has increased from Rs 2987.20 million for the quarter ended December 31, 2006 to Rs 4013.80 million for the quarter ended December 31, 2007.

The Unaudited Consolidated results are as follows: The Group has posted a consolidated net profit of Rs 13073.10 million for the quarter

ended December 31, 2007 as compared to Rs 1171.90 million for the quarter ended December 31, 2006. Total Income has increased from Rs 11193.20 million for the quarter ended December 31, 2006 to Rs 11896.50 million for the quarter ended December 31, 2007.

The Company cultivates tea, coffee, cardamom, etc., plantations and manufacturing, selling and exporting instant tea and blended and packeted teas. It has a factory at Munnar (Kerala) for the manufacture of instant tea and blending and packaging factories at Bangalore (Karnataka) and Naine, Allahabad (U.P.).

15. ONGC:

During 2007, the company hit with more gas in Rajasthan. This developed positive sentiments among investors and hence the stock price jumped by 24% from Rs997.10 to Rs1236.50.

The P/E (High) was 19.65.

16. Reliance Energy: The share price of the company opened at Rs1, 349.40 and closed at Rs2, 134.60, recording an increase of 58% during 2007. During the period, the company planned to extend its foot print to African markets and also bagged an order of over Rs37, 250m. All these factors led to the increase in share price of the investor.

17. Suzlon Energy: The share price of the company opened at Rs1, 474.25 and closed at Rs1, 935.75, showing an increase of 31%. The increase is mostly due to the investors’ expectations.

18. Tata Power: The share price of the company opened at Rs910.80 and closed at Rs1, 470.95, showing an increase of 62% during the quarter 2007. The increase in revenues and investors’ expectations of excellent results led to the drastic increase of 62% in the share price.

19. Tata Teleservices: Tata Teleservices emerged as a top gainer in the equity markets. The company gained 39.9%. Stock prices scaled new heights with the company receiving GSM license from the Department of Telecommunications.

20. Reliance Communications: Reliance Communications has once again done well to register a decent gain on the bourses in the 2007, gaining 22%. Reliance Communications announced that the Ministry of Communications and IT, Government of India, made allotment of startup spectrum to the company for providing GSM services under the Unified Access Services Licenses.

21. Sun Pharmaceuticals: During the quarter, the company settled its patent row with Novartis. As a result, it resulted in jump in the stock price by 26.67% from Rs964.75 to Rs1, 222.05.

34

The P/E (High) for the company was 42.50.

4.6 Portfolio:

CONSERVATIVE PORTFOLIO

BANKING (20%) Exposure No. of Shares

Current Mkt Price

AmountSector Total

MARKET CAP

SBI 5% 29 1741 50489 LARGE CAP

ICICI BANK 5% 58 864 50112 LARGE CAP

AXIS BANK 5% 60 832 49920 LARGE CAP

DENA BANK 5% 858 58.3 49764 SMALL CAP

200285 POWER (20%) TATA POWER 5% 38 1316 50008 LARGE CAP

NTPC LTD 5% 256 195 49920 LARGE CAP

TORRENT POWER 4% 325 123.15 39975 LARGE CAP

ALSTOM PROJECTS INDIA LTD 6% 83 718.9 59668 MID CAP

199571 TELECOM (15%)

BHARTI AIRTEL 6% 70 855.9 59913 LARGE CAP

R COM 4% 71 560.9 39760 LARGE CAP

IDEA CELLULAR 5% 480 104.1 49968 LARGE CAP

149641

FMCG (12%)

35

BRITANNIA 4% 30 1320.15 39600 LARGE CAP

NESTLE INDIA 4% 26 1555 40430 LARGE CAP

TATA TEA 4% 46 875 40250 MID CAP 120280

PHARMACEUTICALS (15%)

RANBAXY LAB 4% 80 499.4 39920 LARGE CAP

AUROBINDO PHARMA 6% 180 333 59940 MID CAP

ABBOTT INDIA 5% 93 540 49290 SMALL CAP

149150 STEEL (18%) TATA STEEL 7% 90 776.25 69840 LARGE CAPJINDAL STEEL AND POWER LTD 5%

242126 50880 LARGE CAP

GODAVARI POWER & ISPAT LTD 6%

270222.2 59940 MID CAP

120720 999587 999587

MARKET CAP EXPOSURE

LARGE CAP 680735 68%

MID CAP 219798 22%

SMALL CAP 99054 10%

TOTAL 999587 100%

36

SEMI-AGGRESSIVE PORTFOLIO

BANKING (20%) Exposure No. of Shares

Current Mkt Price Amount

Sector Total Market Cap

ICICI BANK 4% 52 764 39728 LARGE CAP

UCO BANK 6% 1434 41.85 58794 MID CAP

INDUSIND BANK 6% 637 94.15 59878 MID CAP

DENA BANK 4% 686 58.3 39788 SMALL CAP

198188

POWER (20%)

RELIANCE ENERGY 5% 39 1281.15 49959 LARGE CAP

TORRENT POWER 8% 650 123 79950 MID CAP

ALSTOM PROJECTS INDIA LTD 7% 97 718.9 69646 MID CAP

199555

FMCG (20%)

NESTLE 5% 32 1555 49760 LARGE CAP

BRITANNIA 5% 38 1320 50160 LARGE CAP

GODREJ CONSUMER 5% 394 126.8 49959 MID CAP

TATA TEA 5% 57 875 49875 MID CAP


SUN PHARMA 6% 45 1328.55 59760 LARGE

37

CAP

BIOCON 8% 159 504.6 80136 MID CAP


140076

STEEL (10%)

TATA STEEL 5% 64 776.25 49664 LARGE CAP

GODAVARI POWER & ISPAT LTD 5% 225 222.2 49995 MID CAP

99659

CEMENT (10%)

INDIA CEMENT 5% 273 183 49959 MID CAP

BINANI CEMENT 5% 613 81.55 49990 MID CAP

99949

996941 996941

MARKET CAP EXPOSURE

LARGE CAP 299031 30%

MID CAP 598182 60%

SMALL CAP 99728 10%

TOTAL 996941 100%

38

AGGRESSIVE PORTFOLIO

FMCG (20%) Exposure No. of Shares

Cur. Market Price Amount

Sector Total

MARKET CAP

BRITANNAIA 4% 30 1320.15 39600 LARGE CAP

DABUR INDIA LTD 8% 766 104.5 79664 LARGE CAP

TATA TEA 4% 46 875 40250 MID CAP

GODREJ CONSUMER 4% 315 126.8 39942 MID CAP

199456


BIOCON 4% 79 504.6 39863 MID CAP

WANBURY LTD 5% 399 125.4 49875 SMALL CAP

RPG LIFE 5% 1458 34.3 50009 SMALL CAP


199687

OIL AND GAS (20%)

ONGC 6% 57 1051 59907 LARGE CAP

CAIRN INDIA LTD 7% 268 260.8 69894 LARGE CAP

ALPHA GEP(INDIA) LTD 7% 117 598 69966 SMALL CAP

199767

SUGARS(12%)

RENUKA SUGARS 7% 577 121.25 69961 SMALL CAP

EID PARRY INDIA LTD 5% 258 194 50052 SMALL CAP

120013

39

DIVERSIFIED (13%)

GRASIM IND 6% 23 2597 59731 LARGE CAP

VOLTAS 7% 385 181.8 69993 MID CAP

1218496

STEEL (15%)

JINDAL STAINLESS 7% 483 145.05 70035 MID CAP

PENNAR INDUSTRIES 8% 2421 33.05 79893 SMALL CAP

149928

998575 998575

MARKET CAP EXPOSURE

LARGE CAP 308796 31 %

MID CAP 260083 26 %

SMALL CAP 429696 43 %

TOTAL 998575 100%

40

4.7 PORTFOLIO ON ASSET ALLOCATION

Asset allocation is a tool which allocates different asset classes based on level of risk capacity and risk tolerance.

In this process, an individual must select assets that will generate adequate return to meet the financial goals at the desired level of risk.

Asset allocation is dividing the investments between various asset classes such as debt, equities, insurance, commodity, gold/silver real estate, antiques and art and speculation.

The principal reason for diversifying investments across different asset classes is to minimize the risk of a portfolio.

Once an individual has identified these asset classes, he/she needs to know how to divide his/her investments in these asset classes. The key considerations in choosing the asset classes are the level of return and the risk. Liquidity, transaction costs and ease of investment are the other considerations.

The factors that one should consider in choosing exposures to different asset classes are as follows: 1. Risk Tolerance:

Stage in life : A younger person, having a safe livelihood and few dependents, has time on his/her side can take more risk while choosing a portfolio.

Net-worth: If one owns lot of assets and have few liabilities i.e. have a high net worth one can afford to take more risk as one has a cushion of assets that can safeguard one from short-term losses occurring in due to market fluctuations.

Experience with investments: If one has prior experience in investing in financial markets and one is comfortable with short-term fluctuations then one can take more risk and hence more exposure to equity/real estate.

41

2. Investment objective: This explains the purpose for which the investments are being made. Different objectives would demand that one modify their investment portfolio to meet these goals. Objectives could be:

A person nearing his/her retirement would want a regular stream of income from the investment, while preserving the capital value, and should hence choose a safer portfolio. That means in this case the risk is low, so as the return.

If one is looking at growth along with preservation of capital, and is investing for a goal that is very important, such as saving for one's child's education, then one can take some more risk in pursuit of higher returns.

If one is looking at high growth and investing for a goal that is not very important then one can afford to take more risk.

3. Time Horizon: The time for which one would like to hold an investment also impacts the level of risk that one can undertake.

ANALYSIS:

Here in this case, I have considered 4 cases.

In first case, investment is equally distributed between all the asset classes. By the help of their expected return of asset classes, the return on portfolio is 17.14%.

In second case, instead of putting Rs 50,000 in debt only Rs 10,000 is invested and the rest amount is put in equity to increase the return on portfolio. After this the return on portfolio is 18.28%.

In third case, the investment in asset class reality and speculation has increased by Rs 20,000 each. Now the return on portfolio has become 18.91%.

In the fourth case, the amount of investment has been increased in the asset classes giving higher returns and the return on portfolio is 19.92% nearly equals to 20%.

In this way, we can maximize our return by investing more in the asset classes of higher returns and with this our risk profile of the portfolio also be increased. PORTFOLIO ON ASSET ALLOCATION

ASSET CLASS EXPECTED RETURN (%)

DEBT FDs 8

PO 8

42

PPF 8

EQUITY 18

INSURANCE 15

GOLD/ SILVER 15

REAL ESTATE 20

COMMODITIES 17

SPECULATION 27

Case1: (EQUAL FUND ALLOCATION ACROSS ALL THE ASSETS)

ASSET CLASSAMOUNT PROPORTION

%AGE ALLOCATION

RETURN % RETURN

TOTAL ASSET VALUE

DEBT 50000 14.28571429 8 4000 54000

EQUITY 50000 14.28571429 18 9000 59000

INSURANCE 50000 14.28571429 15 7500 57500

GOLD/SILVER 50000 14.28571429 15 7500 57500

REALITY 50000 14.28571429 20 10000 60000

COMMODITIES 50000 14.28571429 17 8500 58500

SPECULATION 50000 14.28571429 27 13500 63500

Total 350000 100 60000 410000

RETURN ON PORTFOLIO (%) = 17.14285714

Case 2(FUND ALLOCATION ACROSS ALL THE ASSETS)


%AGE ALLOCATION

RETURN % RETURN

TOTAL ASST VALUE

43

DEBT 10000 2.857142857 8 800 10800

EQUITY 90000 25.71428571 18 16200 106200

INSURANCE 50000 14.28571429 15 7500 57500

GOLD/SILVER 50000 14.28571429 15 7500 57500

REALITY 50000 14.28571429 20 10000 60000

COMMODITIES 50000 14.28571429 17 8500 58500

SPECULATION 50000 14.28571429 27 13500 63500

Total 350000 100 64000 414000


Case 3: (FUND ALLOCATION ACROSS ALL THE ASSETS)


%AGE ALLOCATION

RETURN % RETURN

TOTAL ASST VALUE

DEBT 10000 2.857142857 8 800 10800

EQUITY 50000 14.28571429 18 9000 59000

INSURANCE 50000 14.28571429 15 7500 57500

GOLD/SILVER 50000 14.28571429 15 7500 57500

REALITY 70000 20 20 14000 84000

COMMODITIES 50000 14.28571429 17 8500 58500

SPECULATION 70000 20 27 18900 88900

Total 350000 100 66200 416200


44

Case4: (FUND ALLOCATION ACROSS ALL THE ASSETS)


%AGE ALLOCATION

RETURN % RETURN

TOTAL ASST VALUE

DEBT 5000 1.428571429 8 400 5400

EQUITY 50000 14.28571429 18 9000 59000

INSURANCE 40000 11.42857143 15 6000 46000

GOLD/SILVER 50000 14.28571429 15 7500 57500

REALITY 50000 14.28571429 20 10000 60000

COMMODITIES 50000 14.28571429 17 8500 58500

SPECULATION 105000 30 27 28350 133350

Total 350000 100 69750 419750


45

4.8 MUTUAL FUND:

• A mutual fund is a professionally-managed firm of collective investments that collects money from many investors and puts it in stocks, bonds, short-term money market instruments, or other securities.

• After realizing capital gains or losses, the investment proceeds are then passed along to the individual investors annually, through the fund manager.

Working of a Mutual Fund:

INVESTORS

RETURNS FUND MANAGEMENT

SECURITIES

46

Investors get a blend of liquidity returns and safety

Put their money

Invest in balanced portfolioGenerate

Pass back to

• The funds that are collected from the investors are in turn invested in a portfolio of marketable securities and the value of the portfolio is updated every day.

• The investor’s share is denominated in units. The value of units changes with the change in the portfolio’s value, every day. The value of one unit of investment is called Net Asset Value or NAV.

• The investment portfolio of mutual fund is created according to the stated investment objectives of the fund.

Mutual Fund Evaluation: -

The following are the parameters used in analyzing a fund and its management: -

A- Total Return

B- Portfolio Turnover

D- Good Performers

E- Size of the Fund

F- Cash Flows

G- Analyzing Fund Management

Net Asset Value: -

The net asset value is the market value of the assets of the scheme minus its liabilities.

NAV = (Market Value of fund Investments + Receivables + Accrued Income – Liabilities –

Accrued Expenses) / Number of Units Outstanding

Mutual Fund Products: -

Mutual Funds are broadly categorized into

1.) Nature of participation: Open and Close-end funds

2.) Nature of Income Distribution: Dividend, Growth, Reinvestment of Dividends

47

Return on Investment in Mutual Funds: -

The following are the methods for computing the returns on mutual fund products:

Percentage Change in NAV: -

It is an absolute measure of return, which funds the NAV appreciation between two points of time, as a percentage. For e.g. if the NAV of a fund was Rs. 46.90 at the beginning and Rs. 55.30 at the end of the year, the percentage change in NAV

= [(55.30 – 46.90) / 46.90] X 100

= 17.91%

Formula = [(Absolute change in NAV) / NAV at the beginning] X 100

Simple Total Return: -

The total return method takes into account the dividends distributed by the mutual funds and adds it to the NAV appreciation to arrive at returns.

Suppose an investor bought units of a mutual fund scheme at a price of Rs. 12.45 per unit. The face value of the unit is Rs. 10. He redeems the investment a year later at Rs. 14.80 per unit. During the year he also receives a dividend at 5%. The rate of return can be computed as follows: -

= {[(14.8 – 12.45) + 0.50] / 12.45} X 100

= 22.89%

Total Return with Dividend Reinvestment: -

Total Return with reinvestment can be computed as follows:

= [(Value of holdings at the end of the period / Value of Holdings at the beginning of the period) – 1] X 100

Value of holdings at the beginning of the period = Number of units at the beginning X Beginning NAV

Value of holdings at the end of the period = (Number of units held at the beginning + number of units reinvested) X NAV at the end

Number of units Reinvested = Dividends / Ex-dividend NAV

48

Example: - an investor buys 75 units of a fund at Rs. 9.5 on Jan. 1, 2001. On June 30, 2001 he receives dividends at the rate of 10%. The ex-dividend NAV was Rs. 10.25. On December 31, 2001 the fund’s NAV was Rs. 11.25

The beginning value of the investment is 9.5 X 75 = Rs.712.50

No. of units reinvested = 75 / 10.25 = 7.31

End period value of investment = 82.31 X 11.25 = 925.98

The return on investment (ROI) is = [(925.98 / 712.5) – 1] X 100 = 29.96%

Mutual Fund Selection: -

The following factors are considered while selecting a mutual fund: –

1.) Size of the Fund

2.) Age of the Fund

3.) Time of the Launch

4.) Cost of Ownership

I have considered the above points in making my portfolio on mutual funds. I have taken the schemes based on their NAV, Corpus, one year return and launch date.

Form the launch date, we get to know the consistency of the scheme and its performance, from corpus it can be predicted that how much capital they are managing and from their one year’s return it can be obtained that what is their annual return, does it provide return more than any other scheme and what is amount of risk involved in it.

4.8.1 THEME- Conservative

49

Theme wise Exposure Chart % Allocated

ALL CAPS (regular) 30ALL CAPS

(opportunistic) 5

LARGE CAPS 35

LARGE & MIDCAPS 5

MID CAPS 5

BALANCED FUND 20

THEMATIC 0

TOTAL 100

INDICATIVE INVESTMENT AMOUNT Rs. 5 lakhs

INDICATIVE HOLDING PERIOD 1 year plus

THEMEWISE ALLOCATION

Sector Expos

ure

Scheme

Exposure

Theme Exposu

re

% Exposure NAV

Corpus (in Cr.)

1 Year Retur

nlaunch

date

02-05-

08(month & year)

(absolute)

ALL CAPS (Regular) 30% Fidelity Equity Fund 8% 40000 25.95 2836.49 18.82

19-04-05

Templeton India Growth Fund 6% 30000 92.24 319.85 34.55

26-08-96

UTI Equity Fund 8% 40000 40.94 1650.42 24.9320-04-

92Tata Growth Fund - Growth 8% 40000 150000 30 39.84 80.02 21.84

25-06-94

50

ALL CAPS (Opportunistic) 5% Reliance Equity Opportunities Fund 5% 25000 25000 5 23.74 1839.16 10.38

07-03-05

LARGE-CAP ORIENTED 35% Tata Select Equity Fund 9% 45000 59.49 135.83 22.43

24-05-96

Franklin India Bluechip 9% 45000 158.69 2193.81 20.65

30-11-93

HSBC Equity Fund 9% 45000 95.90 1056.84 34.01

03-12-02

Birla Advantage Fund 8% 40000 175000 35 142.54 427.91 13.84

24-02-95

LARGE & MID-CAP ORIENTED 5% TATA Pure Equity Fund 5% 25000 25000 5 79.15 315.84 26.49

7/5/1998

MID CAP ORIENTED 5%

Franklin India Prima Fund 5% 25000 25000 5 219.43 1043.62 10.17

30-11-93

BALANCED/HYBRID FUND 20% FT India Balanced Fund 6% 30000 40.34 287.74 19.96

10-12-99

Sundaram Balanced Fund 7% 35000 39.52 46.04 18.27

25-05-00

HDFC Prudence Fund 7% 35000 100000 20 134.35 2629.41 16.34

31-01-94

TOTAL 500000 500000 100

THEME - Semi Aggressive

51


ALL CAPS (regular) 25

ALL CAPS (opportunistic) 10

LARGE CAPS 25

LARGE & MIDCAPS 10

MID CAPS 15

MID & SMALL CAPS 5

THEMATIC 10

TOTAL 100

Semi Aggressive

INDICATIVE INVESTMENT AMOUNT Rs. 5 lakhs

INDICATIVE HOLDING PERIOD 1 year plus

INDICATIVE HOLDING PERIOD

1 year plus

Scheme

Exposure

Theme Exposu

re

% Exposure

NAV 2/5/20

08

Corpus (in

crore)

1 Year Retn.

Launch Date

(month & year)

(absolute)

ALL CAPS (Regular) 25% Birla Sun Life Equity Fund - Growth 8% 40000 230.01 1175.93 23.44

27-08-98

Reliance RSF - Equity - Growth 9% 45000 23.74 559.78 51.44

10-05-05

Sundaram BNP Paribas Growth Fund - Growth 8% 40000 125000 25 88.52 155.77 33.07

15-02-97

ALL CAPS (Opportunistic 10%

52

ABN AMRO Opportunities Fund - Growth 5% 25000 25.98 216.28 21.50

30-03-05

Kotak Opportunities Fund - Growth 5% 25000 50000 10 41.53 700.45 40.50

25-08-04

LARGE-CAP ORIENTED 25% Birla SunLife Frontline Equity Fund – Growth 6% 30000 66.87 329.25 27.24

30-08-02

Canara Robeco Equity Diversified Fund - Growth 6% 30000 39.45 90.07 26.73

12-09-03

Tata Select Equity Fund 7% 35000 59.49 135.83 22.43

24-05-96

Kotak 30 - Growth 6% 30000 125000 25 92.26 590.39 33.14

22-12-98

LARGE & MID-CAP ORIENTED 10% PRINCIPAL Focussed Advanced Fund 5% 25000 21.14 60.42 67.98

22-02-05

SBI Magnum Equity Fund - Dividend 5% 25000 50000 10 31.68 327.47 26.84

01-01-91

MID CAP ORIENTED 15% Franklin India Prima Fund - Growth 5% 25000 219.43 1043.62 10.17

30-11-93

SBI Magnum Global Fund 94 - Growth 5% 25000 48.70 1433.90 13.16

30-09-94

HSBC Midcap Equity Fund - Growth 5% 25000 75000 15 22.25 235.60 13.79

03-05-05

MID & SMALL CAP ORIENTED 5% SBI Magnum Multiplier Plus 93 - Growth 5% 25000 25000 5 65.78 925.59 21.44

28-02-93

53

THEMATIC / SECTOR ORIENTED 10% ICICI Prudential Infrastructure Fund 6% 30000 29.13 5390.59 51.62

16-08-05

Reliance Pharma Fund 4% 20000 50000 10 24.38 122.54 13.04

26-05-04

TOTAL 500000 500000 100

THEME - Aggressive


ALL CAPS (regular) 15

ALL CAPS (opportunistic) 20

LARGE CAPS 15

LARGE & MIDCAPS 15

MID CAPS 15

MID & SMALL CAPS 5

THEMATIC 15

TOTAL 100

54

AggressiveINDICATIVE INVESTMENT AMOUNT Rs. 5 lakhs

INDICATIVE HOLDING PERIOD 1 Year plus

THEMEWISE ALLOCATION

Sector Exposu

re

Scheme Exposur

e

Theme Exposu

re

% Exposure

NAV 2/5/20

08

Corpus (in

crore)1 Year Retn.

launch Date

(month & year)

absolute

ALL CAPS (Regular) 15% Birla SunLife Equity Fund - Growth 5% 25000 230.01 1175.93 23.44

27-08-98

Reliance RSF - Equity - Growth 5% 25000 23.74 559.78 51.44

10-05-05

JM Equity-Growth 5% 25000 75000 15 43.96 81.08 22.37

31-12-94

ALL CAPS (Opportunistic) 20% UTI Opportunities Fund - Growth 7% 35000 18.63 476.25 32.21

20-07-05

ABN AMRO Opportunities 6% 30000 25.98 216.28 21.50

30-03-05

55

Fund - GrowthTata Equity Opportunities Fund - Growth

7% 35000 100000 20 76.71 493.00 29.2431-03-

92

LARGE-CAP ORIENTED 15% HDFC Top 200 - Growth

7% 35000 143.02 2102.44 27.8431-08-

96UTI Master Growth - Growth 8% 40000 75000 15 53.88 354.10 22.72

18-02-93

LARGE & MID-CAP ORIENTED 15% Sundaram BNP Paribas Select Focus - Growth 6% 30000 83.19 700.71 37.98

19-07-02

Reliance Vision Fund - Growth 9% 45000 75000 15 221.46 3516.71 20.43 7-10-95MID CAP ORIENTED 15% HDFC Capital Builder Fund - Growth 5% 25000

79.42 654.72 20.6 31-12-93

ICICI Prudential Emerging STAR Fund - Growth

5% 25000 33.04 703.76 14.1725-09-

04Principal Resurgent India Equity Fund - Growth 5% 25000 75000 15 90.29 176.44 17.71

30-06-00

MID & SMALL CAP ORIENTED 5% SBI Magnum Sector Umbrella - Emerging Businesses - Growth 5% 25000 25000 5 35.85 209.16 22.71

17-09-04

THEMATIC / SECTOR ORIENTED 15%

56

Reliance Diversified Power Sector Fund 5% 25000 67.10 5374.20 39.86

15-04-04

Tata Infrastructure Fund 4% 20000 34.03 2420.89 42.91

22-12-04

JM Basic Fund6% 30000 75000 15 28.95 1075.92 39.86

02-06-97

TOTAL 500000 500000 100

57

5. DATA ANALYSIS:

Here, I have shown the no. of contracts and turnover in stock futures and index futures. Stock futures were introduced in November 2001 and Index futures were in June 2000. Though Index Futures were introduced earlier as compare to Stock Futures, but the no. of

trading and turnover is more in Stock Futures. We can say that Index future trading is much more liquid than Stock Future trading.

In this table below, I have shown the comparison between the no. of contracts in Index Futures and Stock futures.

58

Year Stock Futures

No. of contracts

Turnover (Rs. cr.)

2008-09 15601531 336900.92007-08 203587952 7548563.232006-07 104955401 38309672005-06 80905493 27916972004-05 47043066 14840562003-04 32368842 13059392002-03 10676843 286533

2001-02 1957856 51515

2000-01 - -

Year Index Futures

No. of contracts

Turnover (Rs. cr.)

2008-09 12063172 280100.252007-08 156598579 3820667.272006-07 81487424 25395742005-06 58537886 15137552004-05 21635449 7721472003-04 17191668 5544462002-03 2126763 43952

2001-02 1025588 21483

2000-01 90580 2365

Year No. of Contracts

Index Futures Stock Futures

2008-09 12063172 15601531

2007-08 156598579 203587952

2006-07 81487424 104955401

2005-06 58537886 80905493

2004-05 21635449 47043066

2003-04 17191668 32368842

2002-03 2126763 10676843

2001-02 1025588 1957856

2000-01 90580 0

In this graph plotted below, it is clearly visible that the no. of trading in case of stock futures is much more as compare to Index Futures.

Here, I have shown the no. of contracts and turnover in stock options and index options. Stock Options were introduced in July 2001 and Index Options were in June 2001. Earlier the no. of contracts in case of stock options was more in comparison to Index

Options, but gradually the case was reversed. We can say that now Index Options trading is much more liquid than Stock Options

trading.

59

Year Stock Options

No. of contracts

Turnover (Rs. cr.)

2008-09 699890 15864.652007-08 9460631 359136.55

2006-07 5283310 1937952005-06 5240776 1802532004-05 5045112 1688362003-04 5583071 2172072002-03 3523062 1001312001-02 1037529 251632000-01 - -

Year Index Options

No. of contracts

Turnover (Rs. cr.)

2008-09 5365231 133564.862007-08 55366038 1362110.882006-07 25157438 7919062005-06 12935116 3384692004-05 3293558 1219432003-04 1732414 528162002-03 442241 92462001-02 175900 3765

2000-01 - -

This is the table showing the no. of contracts in Index Options and Stock Options.

Year No. of contracts

Index Options Stock Options2008-09 5365231 6998902007-08 55366038 94606312006-07 25157438 52833102005-06 12935116 52407762004-05 3293558 50451122003-04 1732414 55830712002-03 442241 35230622001-02 175900 10375292000-01 0 0

From this graph below is showing the comparison between no. of trading in Index Options and in Stock Options.

This table shows the total no. of contracts in derivative segment and their growth.

60

Year Total

No. of contracts Turnover (Rs. cr.)2008-09 33729824 766430.642007-08 425013200 13090477.752006-07 216883573 73562422005-06 157619271 48241742004-05 77017185 25469822003-04 56886776 21306102002-03 16768909 4398622001-02 4196873 1019262000-01 90580 2365

TOP 10 STOCKS OF NIFTY IN FUTURE SEGMENT:

61

SYMBOL SECURITY WEIGHTAGE (%)RELIANCE RELIANCE INDUSTRIES LTD 12.47ONGC OIL AND NATURAL GAS CORP. 6.46BHARTIARTL BHARTI AIRTEL LIMITED 5.34NTPC NTPC LTD 4.89RCOM RELIANCE COMMUNICATIONS 3.96INFOSYSTCH INFOSYS TECHNOLOGIES LTD 3.51DLF DLF LIMITED 3.48SBIN STATE BANK OF INDIA 3.33ICICIBANK ICICI BANK LTD. 3.22TCS TATA CONSULTANCY SERV LT 3.06

TOP 5 MOST ACTIVE FUTURES CONTRACTS:

SERIAL NO.

CONTRACT DESCRIPTOR

NO. OF CONTRACTS

TRADED VALUE (RS. CR.)

% OF CONTRACTS TO TOTAL CONTRACTS

1 NIFTY JAN 2008 3687166 147980 16

2 NIFTY FEB 2008 957758 39209 7

3 REL JAN 2008 498713 19969 4

4 RCOM JAN 2008 268377 8268 2

5 TATA STEEL JAN 2008

18221 5888 1

OTHERS 8,486,867 320095 60

TOTAL 14,081,102 541,409 100

62

6. FINDINGS IN DERIVATIVES:

From the above comparison we can see that people are trading more in the future than the options. The gap between futures and options has increased and keeps on increasing.

The reason behind this is the more liquidity in case of futures than options. People in futures have equal right and obligation to perform which makes the trading

more in volume and value. While in options, one party that means buyer is stronger and the other that the seller is weaker. That’s why volume of trading is less.

Between cash market and derivative market we can see that the volume is much more in derivatives as comparison to cash market. This is because of the leverage in derivatives segment. Though it is introduced much later, but the growth is much faster than cash market.

The total trade value has increased tremendously in last 1 year. This shows that more number of people is trading in stock market.

With the increase in turnover, the number of contracts also increased in the last year. Trading in Stock futures (in 2007-08-203587952) is very high as compare to Index

futures (in 2007-08-156598579).

FINDINGS IN CASE OF PORTFOLIO CONSTRUCTION:

Research your investment options before you construct your portfolio. Allocate your assets to obtain the desired portfolio characteristics to suit your distinct

investor profile. Select individual securities and build a portfolio for each of the asset class under

consideration. Diversify your portfolio to lower investment risk. Understand the case study given to comprehend asset allocation. Track your portfolio by following the performance of your selections. Observe a few Do’s and Don’ts of Investing.

63

7. CONCLUSION:

Although the financial derivatives market is growing much faster speed, but there are also many investors, don’t have any idea regarding this segment.

These are the factors affecting the growth of derivatives.

1: Increased volatility in asset prices in financial markets.

2: Increased integration of national financial markets with the international markets.

3: Marked improvement in communication facilities and sharp decline in their costs.

4: Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies.

In this vast area of derivatives, a considerable amount of work is yet to be done to inculcate more interest of investors in derivatives. The regulation and settlement procedure of derivatives not be simplified. That means it can’t be said that even today the derivatives market has reached the stage of perfection. An increase number of innovations are entering into the financial derivatives market but the imperfection in the market is still increasing. Such barriers demand for increasing role of regulations in the financial market, which can bring success that is yet awaited.

In derivative segment, I have explained the straddle strategy how it can minimize the risk of the investor.

Here, I have made portfolio for stocks, mutual funds and portfolio on asset allocation. For stocks and mutual funds I have also constructed conservative (the low risk taker investor), semi-aggressive (medium risk taker investors) and aggressive (the high risk taker investors). I have considered the return objective of the investor and the risk taking capacity of him before constructing the portfolio.

64

8. REFERENCES:

Books and Journals:

Business World (Both Web and Print edition)

Business Week (Web edition)

Capital market print edition

Newspapers viz. Business Standard, Business Line, Economic Times etc.

fundamentals of futures and options markets by “JOHN C.HULL”

derivatives in India “Ajay shah & Sushan Thomas”

fundamentals of futures and options markets by “Ravi Shankar”

Websites:

1. www.reliancemoney.com

2. www.investopedia.com

3. www.nse-india.com

4. www.bseindia.com

5. www.derivativesindia.com

6. www.finance-research.net

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analysis of indian derivative market and portfolio construction

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