A Project On

PORTFOLIO MANAGEMENT

Submitted By

SHITAL .S. PATIL

T.Y.B.F.M Semester V

2010-2011

Submitted To

University of Mumbai

Smt. Chandibai Himathmal Mansukhani College

Ulhasnagar 421003

Smt. Chandibai Himathmal Mansukhani College

Ulhasnagar 421003

CERTIFICATE

Mr. /Mrs. SHITAL S. PATIL of B.F.M

Semester V has undertaken & completed the project work titled PORTFOLIO MANAGEMENT during the academic year 2010-11 under the guidance of MS. POOJA NAGPAL submitted on to this college in fulfillment of the curriculum of Bachelor of Financial Markets. University of Mumbai.

DECLARATION

Smt. Chandibai Himathmal Mansukhani College

Ulhasnagar 421003

I SHITAL .S. PATIL of Smt. Chandibai Himathmal Mansukhani College, T.Y.B.F.M Semester V hereby declare that I have completed the project on PORTFOLIO MANAGEMENT IN academic year 2010-11

The information submitted is true and original to the best of my knowledge

ACKNOWLEDGEMENT

I hereby acknowledge all those who directly or indirectly helped me to draft the project repot. It would not have been possible for me to complete the task without their help and guidance.

First of all I would like to thank the principal Bhavna Motwani and the coordinator Dr. Manju Pathak who gave me the opportunity to do this project work. They also conveyed the important instruction from the university from time to time. Secondly, I am very much obliged of Prof. Pooja Nagpal for giving guidance for completing the project

Last but not the least; I am thankful to the University of Mumbai for offering the project the syllabus. I must mention my hearty gratitude towards my family, others faculties and friends who supported me to go ahead with the project.

INTRODUCTION TO THE STUDY

Aim of doing the project:

The aim o doing the project is to have practical knowledge of the subject and know the actual or application of theories in the book, which were learned in the class rooms.

This is to be done by meeting the experts in the field, talking to them, interviewing them.

Objective of doing the project:

The objective of doing this project is to relate the bookish theories with the actual Portfolio management.

To know the importance of portfolio management. To understand how process of portfolio management are implemented. To understand the working of portfolio management. To take major decision in portfolio management. To understand the investors need for portfolio management.

Limitation of doing the project:

Limitation of time The portfolio management is a huge concept to work on.

Methodology of data collection:

Reference books Internet

CONTENT

SR. NO. PARTICULARS PAGE NO.01. INTRODUCTION02. DEFINATION03. NEED OF PORTFOLIO AND PORTFOLIO MANAGEMENT04. GOALS OF PORTFOLIO MANAGEMENT05. OBJECTIVE OF PORTFOLIO MANAGEMEBT

BASIC OBJECTVE SUBSIDRY OBJECTIVE

06. SCOPE OF PORTFOLIO MANAGEMENTSTEPSOF PORTFOLIO MANAGEMENT

SEPECIFICATION OF INVESMENTS OBJECTIVES AND CONSTRAINTS

SELECTION OF ASSET MIX FORMULATION OF PORTFOLIO STRATEGY SELESTION OF SECURITY PORTFOLIO EXECUTION PORTFOLIO REVISION PORTFOLIO EVALUTION

07. ASPECTS OF PORTFOLIO MANAGEMENT08. TYPES OF RISK IN PORTFOLIO MANAEMENT

SYSTEMATIC RISK UNSYSTEMATIC RISK

09. SEBI GUIDELINES TO PORTFOLIO MANAGEMENT10 PORTFOLIO MANAGEMENT SERVICES11 BENEFITS AND SERVICE AND STRATIGES OFFERED THROUGH

PMS12 PORTFOLIO MANAGER13 GENERAL RESPONSIBLITIES OF PORTFOLIO MANAGER14 PAYMENT CRITERIA

FIXED-LINKED MANAGEMENT FEE PERFORMANCED-LINKED MANAGEMENT FEE

15 CODE OF CONDUCT OF PORTFOLIO MANAGER16 OBJECTIVES OF INVESTOR FOR SELECTING PMS17 INVESTOS ALERTS

DO’S DON’T’S

18 DIFFERENCE BETWEEN PORTFOLIO MANAGER & MTUAL FUNDS

19 BENEFIT OF CHOOSING PORTFOLIO MANAGEMENT SERVICE INSTEAD OF MUTUAL FUNDS

20 CONCLUSION21 BIBLOGRAPHY

INTRODUCTION

INTRODUCTION

As per definition of SEBI Portfolio means “a collection of securities owned by an investor”. It represents the total holdings of securities belonging to any person". It comprises of different types of assets and securities

In finance, a portfolio is an appropriate mix or collection of investments held by an institution or an individual.

Holding a portfolio is a part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value.

In building up an investment portfolio a financial institution will typically conduct its own investment analysis, whilst a private individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services.

Portfolio Management

Portfolio management refers to the management or administration of a portfolio of securities to protect and enhance the value of the underlying investment. It is the management of various securities (shares, bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. It helps to reduce risk without sacrificing returns. It involves a proper investment decision with regards to what to buy and sell. It involves proper money management. It is also known as Investment Management

Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions. Selection involves deciding what assets to purchase, how many to purchase, when to purchase them, and what assets to divest. These decisions always involve some sort of performance measurement, most typically expected return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return). Typically the expected return from portfolios of different asset bundles is compared.

The unique goals and circumstances of the investor must also be considered. Some investors are more risk averse than others.

Mutual funds have developed particular techniques to optimize their portfolio holdings.

The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance .

Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk.

Portfolio management involves maintaining a proper combination of securities which comprise the investor’s portfolio in a manner that they give maximum return with minimum risk. This requires framing of proper investment policy. Investment policy means formation of guidelines for allocation of available funds among the various types of securities including variation in such proportion under changing environment. This requires proper mix between different securities in a manner that it can maximize the return with minimum risk to the investor. Broadly speaking investors are those individuals who save money and invest in the market in order to get return over it. They are not much educated, expert and they do not have time to carry out detailed study. They have their business life, family life as well as social life and the time left out is very much limited to study for investment purpose. On the other hand institutional investors are companies, mutual funds, banks and insurance company who have surplus fund which needs to be invested profitably. These investors have time and resources to carry out detailed research for the purpose of investing.

DEFINATION

DEFINATION

PORTFOLIO:

As per definition of SEBI Portfolio means “a collection of securities owned by an investor”. It represents the total holdings of securities belonging to any person".

PORTFOLIO MANAGEMENT:

“The process of managing the assets of a mutual fund, including choosing

and monitoring appropriate investments and allocating funds accordingly.”

NEED OF PORTFOLIO AND PORTFOLIO MANAGEMENT

Need of Portfolio and Portfolio Management

The portfolio is needed for the selections of optimal, portfolio by rational risk averse investors i.e. by investors who attempt to maximize their expected return consistent with individually acceptable portfolio risk. The portfolio is essential for portfolio construction. The portfolio construction refers to the allocation of funds among a variety of financial assets open for investments. Portfolio concerns itself with the principles governing such allocation. The objective of the portfolio theory is to elaborate the principles in which the risk can be minimized, subject to the desired level of return on the portfolio or maximize the return, subject to the constraints of a tolerable level of risk.

The need for portfolio management arises due to the objectives of the investors. The emphasis of portfolio management varies from investors to investor. Some want income, some capital gains and some combination of both. However, the portfolio analysis enables the investors to identify the potential securities, which will maximize the following objectives:

Securities of principal, stability of income, capital growth, marketability, liquidity and diversification.

Thus the basic need of portfolio is to maximize yield and minimize yield and minimize the risk. The other ancillary needs are as follows:

1. Providing regular or stable income.2. Creating safety of investments and capital appreciation.3. Providing marketability and liquidity.4. Minimizing the tax liability

GOALS OF PORTFOLIO MANAGEMENT

GOALS OF PORTFOLIO MANAGEMENT

1. Value Maximization

Allocate resources to maximize the value of the portfolio via a number of key objectives such as profitability, ROI, and acceptable risk. A variety of methods are used to achieve this maximization goal, ranging from financial methods to scoring models.

2. Balance

Achieve a desired balance of projects via a number of parameters: risk versus return; short-term versus long-term; and across various markets, business arenas and technologies. Typical methods used to reveal balance include bubble diagrams, histograms and pie charts.

3. Business Strategy Alignment

Ensure that the portfolio of projects reflects the company’s product innovation strategy and that the breakdown of spending aligns with the company’s strategic priorities. The three main approaches are: top-down (strategic buckets); bottom-up (effective gate keeping and decision criteria) and top-down and bottom-up (strategic check).

4. Pipeline Balance

Obtain the right number of projects to achieve the best balance between the pipeline resource demands and the resources available. The goal is to avoid pipeline gridlock (too many projects with too few resources) at any given time. A typical approach is to use a rank ordered priority list or a resource supply and demand assessment.

5. Sufficiency

Ensure the revenue (or profit) goals set out in the product innovation strategy are achievable given the projects currently underway. Typically this is conducted via a financial analysis of the pipeline’s potential future value.

OBJECTIVES OF PORTFOLIO MANAGEMENT

OBJECTIVES OF PORTFOLIO MANAGEMENT

The objective of portfolio management is to maximize the return and minimize the risk. These objectives are categorized into:1. Basic Objectives.2. Subsidiary Objectives.

1. Basic Objectives

The basic objectives of a portfolio management are further divided into two kinds viz.

(a) Maximize yield

(b) Minimize risk.

The aim of the portfolio management is to enhance the return for the level of risk to the portfolio owner. A desired return for a given risk level is being started. The level of risk of a portfolio depends upon many factors.

The investor, who invests the savings in the financial asset, requires a regular return and capital appreciation.

2. Subsidiary Objectives

The subsidiary objectives of a portfolio management are expecting a reasonable income, appreciation of capital at the time of disposal, safety of the investment and liquidity etc. The objective of investor is to get a reasonable return on his investment without any risk. Any investor desires regularity of income at a consistent rate. However, it may not always be possible to get such income. Every investor has to dispose his holding after a stipulated period of time for a capital appreciation. Capital appreciation of a financial asset is highly influenced by a strong brand image, market leadership, guaranteed sales, financial strength, large pool of reverses, retained earnings and accumulated profits of the company. The idea of growth stocks is the right issue in the right industry, bought at the right time. A portfolio management desires the safety of the investment. The portfolio objective is to take the precautionary measures about the safety of the principal even by diversification process. The safety of the investment calls for careful review of economic and industry trends. Liquidity of the investment is most important, which may not be neglected by any investor/portfolio manager.

An investment is to be liquid, it must has “termination and marketable” facility any time.

SCOPE OF PORTFOLIO MANAGEMENT

SCOPE OF PORTFOLIO MANAGEMENT

Portfolio management is a continuous process. It is a dynamic activity. The following are the basic operations of a portfolio management:

1. Monitoring the performance of portfolio by incorporating the latest market conditions.

2. Identification of the investor’s objective, constraints and preferences.

3. Making an evaluation of portfolio income (comparison with targets and achievements).

4. Making revision in the portfolio.

5. Implementation of strategies in tune with the investment objectives.

Steps of Portfolio Management

PROCESS /STEPS OF PORTFOLIO MANAGEMENT

Selection of Asset Mixes

Formulation of Portfolio Strategy

Selection of Securities

Portfolio Execution

Portfolio Revision

Specification of Investment objective and Constraints

Selection of Asset Mix

PROCESS/STEPS OF PORTFOLIO MANAGEMENT

Formulation of Portfolio Strategy

Selection of Securities

Portfolio Execution

Portfolio Revision

Portfolio Evaluation

1. SPECIFICATION OF INVESTMENT OBJECTIVES AND CONSTRAINTS:

The first step in the portfolio management process is to specify the investment policy that consists of investment objectives, constraints and preferences of investor. The investment policy can be explained as follows:

Specification of investment objectives can be done in following two ways:

Maximize the expected rate of return, subject to the risk exposure being held within a certain limit (the risk tolerance level).

Minimize the risk exposure, without sacrificing a certain expected rate of return (the target rate of return).

An investor should start by defining how much risk he can bear or how much he can afford to lose, rather than specifying how much money he wants to make. The risk he wants to bear depends on two factors:a) Financial situation b) Temperament

To assess financial situation one must take into consideration position of the wealth, major expenses, earning capacity, etc and a careful and realistic appraisal of the assets, expenses and earnings forms a base to define the risk tolerance.

After appraisal of the financial situation assess the temperamental tolerance of risk. Risk tolerance level is set either by one’s financial situation or financial temperament whichever is lower, so it is necessary to understand financial temperament objectively. One must realize that risk tolerance cannot be defined too rigorously or precisely. For practical purposes it is enough to define it as low, medium or high. This will serve as a valuable guide in taking an investment decision. It will provide a useful perspective and will prevent from being a victim of the waves and manias that tend to sweep the market from time to time.

Constraints and Preferences:

Liquidity: Liquidity refers to the speed with which an asset can be sold, without suffering any loss to its actual market price. For example, money market instruments are the most liquid assets, whereas antiques are among the least liquid.

Investment horizon: The investment horizon is the time when the investment or part of it is planned to liquidate to meet a specific need. For example, the investment horizon for ten years to fund the child’s college education. The investment horizon has an important bearing on the choice of assets.

Taxes: The post – tax return from an investment matters a lot. Tax considerations therefore have an important bearing on investment decisions. So, it is very important to review the tax shelters available and to incorporate the same in the investment decisions.

Regulations: While individual investors are generally not constrained much by laws and regulations, institutional investors have to conform to various regulations. For example, mutual funds in India are not allowed to hold more than 10 percent of equity shares of a public limited company.

Unique circumstances:

Almost every investor faces unique circumstances. For example, an endowment fund may be prevented from investing in the securities of companies making alcoholic and tobacco products.

2. SELECTION OF ASSET MIXES:

Based on the objectives and constraints, selection of assets is done. Selection of assets refers to the amount of portfolio to be invested in each of the following asset categories:

Cash:

The first major economic asset that an individual plan to invest in is his or her own house. Their savings are likely to be in the form of bank deposits and money market mutual fund schemes. Referred to broadly as ‘cash’, these instruments have appeal, as they are safe and liquid.

Bonds: Bonds or debentures represent long-term debt instruments. They are generally of private sector companies, public sector bonds, gilt-edged securities, RBI saving bonds, national saving certificates, Kisan Vikas Patras, bank deposits, public provident fund, post office savings, etc.

Stocks: Stocks include equity shares and units/shares of equity schemes of mutual funds. It includes income shares, growth shares, blue chip shares, etc.

Real estate: The most important asset for individual investors is generally a residential house. In addition to this, the more affluent investors are likely to be interested in other types of real estate, like commercial property, agricultural land, semi-urban land, etc.

Precious objects and others:

Precious objects are items that are generally small in size but highly valuable in monetary terms. It includes gold and silver, precious stones, art objects, etc. Other assets includes like that of financial derivatives, insurance, etc.

3. FORMULATION OF PORTFOLIO STRATEGY :

After selection of asset mix, formulation of appropriate portfolio strategy is required. There are two types of portfolio strategies, active portfolio strategy and passive portfolio strategy.

ACTIVE PORTFOLIO STRATEGY:

Most investment professionals follow an active portfolio strategy and aggressive investors who strive to earn superior returns after adjustment for risk. The four principal vectors of an active strategy are:1. Market Timing2. Sector Rotation3. Security Selection4. Use of a specialized concept

1. Market timing:

Market timing is based on an explicit or implicit forecast of general market movements. The advocates of market timing employ a variety of tools like business cycle analysis, advance-decline analysis, moving average analysis, and econometric models. The forecast of the general market movement derived with the help of one or more of these tools are tempered by

the subjective judgment of the investor. Often, of course, the investor may go largely by his market sense.

2. Sector Rotation:

The concept of sector rotation can be applied to stocks as well as bonds. It is however, used more commonly with respect to stock component of portfolio where it essentially involves shifting the weightings for various industrial sectors based on their assessed outlook. For example if it is assumed that cement and pharmaceutical sectors would do well compared to other sectors in the forthcoming period, one may overweight these sectors, relative to their position in market portfolio. With respect to bonds, sector rotation implies a shift in the composition of the bond portfolio in terms of quality, coupon rate, term to maturity and so on. For example, if there is a rise in the interest rates, there may be shift in long term bonds to medium term or even short-term bonds. But we should remember that a long-term bond is more sensitive to interest rate variation compared to a short-term bond.

3. Security Selection:

Security selection involves a search for under priced securities. If an investor resort to active stock selection, he may employ fundamental and or technical analysis to identify stocks that seems to promise superior returns and overweight the stock component of his portfolio on them. Likewise, stocks that are perceived to be unattractive will be under weighted relative to their position in the market portfolio. As far as bonds are concerned, security selection calls for choosing bonds that offer the highest yield to maturity at a given level of risk.

4. Use of a specialized Investment Concept:

A fourth possible approach to achieve superior returns is to employ a specialized concept or philosophy, particularly with respect to investment in stocks. As Charles D. Ellis words says, a possible way to enhance returns “is to develop a profound and valid insight into the forces that drive a particular group of companies or industries and systematically exploit that investment insight or concept

PASSIVE PORTFOLIO STRATEGY:

The passive strategy rests on the tenet that the capital market is fairly efficient with respect to the available information. The passive strategy is implemented according to the following two guidelines: 1. Create a well-diversified portfolio at a predetermined level of risk.2. Hold the portfolio relatively unchanged over time, unless it becomes inadequately diversified or inconsistent with the investor’s risk-return preferences.

4. SELECTION OF SECURITIES:

The following factors should be taken into consideration while selecting the fixed income avenues:

SELECTION OF BONDS (fixed income avenues)

Yield to maturity: The yield to maturity for a fixed income avenue represents the rate of return earned by the investors if he invests in the fixed income avenue and holds it till its maturity.

Risk of default:

To assess the risk of default on a bond, one may look at the credit rating of the bond. If no credit rating is available, examine relevant financial ratios (like debt-to-equity ratio, times interest earned ratio, and earning power) of the firm and assess the general prospects of the industry to which the firm belongs

Tax Shield:

In yesteryears, several fixed income avenues offered tax shield, now very few do so.

Liquidity:

If the fixed income avenue can be converted wholly or substantially into cash at a fairly short notice, it possesses liquidity of a high order.

SELECTION OF STOCK (Equity shares)Three board approaches are employed for the selection of equity shares:

Technical analysis looks at price behavior and volume data to determine whether the share will move up or down or remain trend less.

Fundamental analysis focuses on fundamental factors like the earnings level, growth prospects, and risk exposure to establish the intrinsic value of a share. The recommendation to buy, hold, or sell is based on a comparison of the intrinsic value and the prevailing market price.

Random selection approach is based on the premise that the market is efficient and securities are properly priced.

5. PORTFOLIO EXECUTION:

The next step is to implement the portfolio plan by buying or selling specified securities in given amounts. This is the phase of portfolio execution which is often glossed over in portfolio management literature. However, it is an important practical step that has a significant bearing on the investment results. In the execution stage, three decision need to be made, if the percentage holdings of various asset classes are currently different from the desired holdings.

6. PORTFOLIO REVISION:

In the entire process of portfolio management, portfolio revision is as important stage as portfolio selection. Portfolio revision involves changing the existing mix of securities. This may be effected either by changing the securities currently included in the portfolio or by altering the proportion of funds invested in the securities. New securities may be added to the portfolio or some existing securities may be removed from the portfolio. Thus it leads to purchase and sale of securities. The objective of portfolio revision is similar to the objective of selection i.e. maximizing the return for a given level of risk or minimizing the risk for a given level of return.The need for portfolio revision has aroused due to changes in the financial markets since creation of portfolio. It has aroused because of many factors like availability of additional funds for investment, change in the risk attitude, change investment goals, the need to liquidate a part of the portfolio to provide funds for some alternative uses. The portfolio needs to be revised to accommodate the changes in the investor’s position.

Portfolio Revision basically involves two stages:

Portfolio Rebalancing:

Portfolio Rebalancing involves reviewing and revising the portfolio composition (i.e. the stock- bond mix). There are three basic policies with respect to portfolio rebalancing: buy and hold policy, constant mix policy, and the portfolio insurance policy.

Under a buy and hold policy, the initial portfolio is left undisturbed. It is essentially a ‘buy and hold’ policy. Irrespective of what happens to the relative values, no rebalancing is done. For example, if the initial portfolio has a stock-bond mix of 50:50 and after six months it happens to be say 70:50 because the stock component has appreciated and the bond component has stagnated, than in such cases no changes are made.The constant mix policy calls for maintaining the proportions of stocks and bonds in line with their target value. For example, if the desired mix of stocks and bonds is say 50:50, the constant mix calls for rebalancing the portfolio when relative value of its components change, so that the target proportions are maintained.The portfolio insurance policy calls for increasing the exposure to stocks when the portfolio appreciates in value and decreasing the exposure to stocks when the portfolio depreciates in value. The basic idea is to ensure that the portfolio value does not fall below a floor level.

Portfolio Upgrading:

While portfolio rebalancing involves shifting from stocks to bonds or vice versa, portfolio-upgrading calls for re-assessing the risk return characteristics of various securities (stocks as well as bonds), selling over-priced securities, and buying under-priced securities. It may also entail other changes the investor may consider necessary to enhance the performance of the portfolio.

7. PORTFOLIO EVALUATION:

Portfolio evaluation is the last step in the process of portfolio management. It is the process that is concerned with assessing the performance of the portfolio over a selected period of time in terms of return and risk. Through portfolio evaluation the investor tries to find out how well the portfolio has performed. The portfolio of securities held by an investor is the result of his investment decisions. Portfolio evaluation is really a study of the impact of such decisions. This involves quantitative measurement of actual return realized and the risk born by the portfolio over the period of investment. It provides a mechanism for identifying the weakness in the investment process and for improving these deficient areas.

The evaluation provides the necessary feedback for designing a better portfolio next time.

ASPECTS OF PORTFOLIO MANAGEMENT

ASPECTS OF PORTFOLIO MANAGEMENT

Basically, portfolio management involves:

1. A proper investment decision-making of what to buy and sell

2. Proper money management in terms of investment in a basket of assets to satisfy the asset preferences of the investors.

3. Reduce the risk and increase the returns.

4. Balancing fixed interest securities against equities.

5. Balancing high dividend payment companies against high earning growth companies as required.

6. Finding the income or growth portfolio as required.

7. Balancing transaction costs against capital gains from rapid switching.

8. Balancing income tax payable against capital gains tax.

9. Retaining some liquidity to seize upon bargains.

TYPES OF RISK IN PORTFOLIO MANGEMENT

Types of Risk in Portfolio Management

Each and every investor has to face risk while investing. What is Risk? Risk is the uncertainty of income/capital appreciation or loss of both. Risk is classified into: Systematic risk or Market related risk and Unsystematic risk or Company related risk.

SYSTEMATIC RISK

1. Market Risk 1. Business Risk2. Interest Rate Risk 2. Internal Risk 3. Inflation Rate Risk 3. Financial Risk

SYSTEMATIC RISK

Systematic risk refers to that portion of variation in return caused by factors that affect the price of all securities. It cannot be avoided. It relates to economic trends with effect to the whole market. This is further divided into the following:

1. Market risks: A variation in price sparked off due to real, social political and economical events is referred as market risks.

2. Interest rate risks: Uncertainties of future market values and the size of future incomes, caused by fluctuations in the general level of interest is referred to as interest rate risk. Here price of securities tend to move inversely with the change in rate of interest.

3. Inflation risks: Uncertainties in purchasing power is said to be inflation risk.

TYPES OF RISK IN PORTFOLIO MANAGEMENT

SYSTEMATIC RISK UNSYSTEMATIC RISK

UNSYSTEMATIC RISK

Unsystematic risk refers to that portion of risk that is caused due to factors related to a firm or industry. This is further divided into:

1. Business risk: Business risk arises due to changes in operating conditions caused by conditions that thrust upon the firm which are beyond its control such as business cycles, government controls, etc.

2. Internal risk: Internal risk is associated with the efficiency with which a firm conducts its operations within the broader environment imposed upon it.

3. Financial risk: Financial risk is associated with the capital structure of a firm. A firm with no debt financing has no financial risk.

SEBI GUIDE LINES TO PORTFOLIO MANAGEMENT

SEBI Guidelines to Portfolio Management

SEBI has issued detailed guidelines for portfolio management services. The guidelines have been made to protect the interest of investors.

The salient features of these guidelines are:

The nature of portfolio management service shall be investment consultant.

The portfolio manager shall not guarantee any return to his client. Client’s funds will be kept in a separate bank account.

The portfolio manager shall act as trustee of client’s funds.

The portfolio manager can invest in money or capital market.

Purchase and sale of securities will be at a prevailing market price.

PORTFOLIO MANAGEMENT SERVICES

PORTFOLIO MANAGEMENT SERVICES

A Portfolio in Securities Market refers to basket of securities that a person has invested into. Sometimes this includes Debt Instruments, Mutual Funds and even Bank Balance in addition to regular equities.

The person designated to manage the portfolio is called Portfolio Manager. The Portfolio Manager advises, manages and administers the securities and funds on behalf of the entrusting client.

The service is offered by a Portfolio Manager under a specific license from Securities and Exchange Board of India.

As per definition of SEBI Portfolio means “a collection of securities owned by an investor”. It represents the total holdings of securities belonging to any person". It comprises of different types of assets and securities. Portfolio management refers to the management or administration of a portfolio of securities to protect and enhance the value of the underlying investment. It is the management of various securities (shares, bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. It helps to reduce risk without sacrificing returns. It involves a proper investment decision with regards to what to buy and sell. It involves proper money management. It is also known as Investment Management.

Portfolio Management Services, called, as PMS are the advisory services provided by corporate financial intermediaries. It enables investors to promote and protect their investments that help them to generate higher returns. It devotes sufficient time in reshuffling the investments on hand in line with the changing dynamics. It provides the skill and expertise to steer through these complex, volatile and dynamic times. It is a choice of selecting and revising spectrum of securities to it with the characteristics of an investor. It prevents holding of stocks of depreciating-value. It acts as a financial intermediary and is subject to regulatory control of SEBI.

Under PMS, the Client and the Portfolio Manager chart out specific needs of the client and the Portfolio Manager manages the Portfolio in accordance with those needs. Sometimes the Portfolio Manager may also have separate ready schemes for the client to choose from. As a result of this customization, client, with his specific needs, benefits. The service level in the form of reporting transactions, holdings statements etc., also are comparable or even better than that of a mutual fund.

Benefits of pms

Benefits of PMS

1. Personalized Advice : A client gets investment advice and strategies from expert Fund Managers. An Investment Relationship Manager will ensure that you receive all the services related to your investment needs. The personalized services also translates into zero paper work and all your financial statements will be e-mailed

2. Professional Management : An experienced team of portfolio managers ensure your portfolio is tracked, monitored and optimized at all times.

3. Continuous Monitoring: The clients are informed about your investment decisions. A dedicated website and a customer services desk allow you to keep a tab on portfolio’s performance.

4. Timing: Portfolio managers preserve client’s money on time. Portfolio management services (PMS) help in allocating right amount money in right type of saving plan at right time. This means portfolio managers analyzes the market and provides his expert advice to the client regarding the amount he should take out at the time of big risk in stock market.

5. Professional Management: PMS provides benefits of professional money management with the flexibility, control and potential tax advantages of owing individual stocks or other securities. The portfolio managers take care of all the administrative aspects of client’s portfolio with a monthly or semiannual reporting on overall status of the portfolio and performance.

6. Flexibility: Portfolio manager’s plan saving of his client according to their need and preferences. But sometimes, portfolio managers can invest client’s money according to his preference because they know the market very well than his client. It is his client’s duty to provide him a level of flexibility so that he can manage the investment with full efficiency and effectiveness.

 

SERVICES AND STRATEGIES OFFERED THROUGH PMS

Services and Strategies Offered Through PMS

1. Portfolio management services (PMS) handles all types of administrative work like opening a new bank account or dealing with any financial settlement or depository transaction.

2. PMS also help in managing the tax of his client based on detailed statement of the transaction found on the client’s portfolio.

3. PMS also provide a Portfolio manager to the client who acts as personal relationship manager though whom the client can interact with the fund manager at any time depending on his own preferences such as:

i. To discuss any concern saving or money, the client can interact with portfolio manager on the monthly basis.

ii. The client can discuss on any major changes he want in his asset allocation and investment strategies.

1.

Portfolio manager

Portfolio Manager

Portfolio Manager is a professional who manages the portfolio of an investor with the objective of profitability, growth and risk minimization. According to SEBI, Any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client the management or administration of a portfolio of securities or the funds of the client, as the case may be is a portfolio manager. He is expected to manage the investor’s assets prudently and choose particular investment avenues appropriate for particular times aiming at maximization of profit. He tracks and monitors all your investments, cash flow and assets, through live price updates. The manager has to balance the parameters which defines a good investment i.e. security, liquidity and return. The goal is to obtain the highest return for the client of the managed portfolio.

There are two types of portfolio manager known as Discretionary Portfolio Manager and Non Discretionary Portfolio Manager. Discretionary portfolio manager is the one who individually and independently manages the funds of each client in accordance with the needs of the client and non-discretionary portfolio manager is the one who manages the funds in accordance with the directions of the client.

Who can be a Portfolio Manager?

Only those who are registered and pay the required licence fee to SEBI are eligible to operate as Managers. An applicant for this purpose should have necessary infrastructure with professionally qualified person and with a minimum of two person with experience in this business and minimum net worth of Rs.5 lack. The certificate once granted is valid for three years. Fees payable for registration are Rs2.5 lack for two years and Rs.1 lack for the third year. From the fourth year onwards, renewal fees per annum are Rs.75000. These are subject to change by SEBI.

The SEBI has imposed number of obligation and code of conduct on portfolio manager. The portfolio manager should have a high standard of integrity, honesty and should not have been convicted of any economic offence or moral turpitude. He should not resort of rigging up of prices, insider trading or creating false market etc. Their books of account are subjected to inspection and audited by SEBI. The observance of code of conduct and guidelines given by SEBI are subject to inspection and penalties for violation are imposed. The Manager has to submit periodical returns and documents as may be required by the SEBI from time-to-time.

GENERAL RESPONSIBILITIES OF A PORTFOLIO MANAGER

General Responsibilities of Portfolio Manager

Following are some of the responsibilities of a Portfolio Manager:

1. The portfolio manager shall act in a fiduciary capacity with regard to the client's funds.

2. The portfolio manager shall transact the securities within the limitations placed by the client.

3. The portfolio manager shall not derive any direct or indirect benefit out of the client's funds or securities.

4. The portfolio manager shall not borrow funds or securities on behalf of the client.

5. portfolio manager shall ensure proper and timely handling of complaints from his clients and take appropriate action immediately

6. The portfolio manager shall not lend securities held on behalf of clients to a third person except as provided under these regulations.

Payment Criteria

Of PMS

Payment Criteria of PMS

There are two types of payment criteria offered by Portfolio Manages to their clients such as:

1. Fixed- linked management fee.2. Performance-linked management fee.

Fixed-linked management fee:

In fixed-linked management fee the clients usually pays between 2-2.5% of the portfolio value calculated on weighted average method.

Performance-linked management fee:

In performance- linked management fees the client pays a flat ranging between 0.5-1.5percent based on the performance of the portfolio manager. The profits are calculated on the basis of “high watermarking” concept. This means that the fee is paid only on the basis of positive return on investment.

In addition to these criteria the portfolio manager also gets around 15-20% earned by the client. The portfolio manager can also claim some separate charges gained from brokerage, custodial service and tax payments.

CODE OF CONDUCT OF A PORTFOLIO MANAGER

Code of Conduct of Portfolio Manager

Every portfolio manager in India as per the regulation 13 of SEBI shall follow the following Code of Conduct:

1. A portfolio manager shall maintain a high standard of integrity fairness.

2. The client’s funds should be deployed as soon as he receives.

3. A portfolio manager shall render all times high standards and unbiased service.

4. A portfolio manager shall not make any statement that is likely to be harmful to the integration of other portfolio manager.

5. A portfolio manager shall not make any exaggerated statement.

6. A portfolio manager shall not disclose to any client or press any confidential information about his client, which has come to his knowledge.

7. A portfolio manager shall always provide true and adequate information.

8. A portfolio manager should render the best pose advice to the client.

OBJECTIVES OF INVESTORS FOR SELECTING PMS

Objectives of Investors for Selecting of PMS

Following are the objectives:

1. Keep the security, safety of principles intact both in terms of money as well as its purchasing power.

2. Stability of the flow of income so as to facilities planning more accurately and systematically the reinvestment or consumption of income.

3. To attain capital growth by re-investing in growth securities or through purchase of growth securities.

4. Marketability of the security which is essential for providing flexibility to the investment portfolio.

5. Liquidity i.e. nearness to the money which is desirable to the investors so as to take advantages of attractive opportunities upcoming in the market.

6. Diversification: The basic objective of building a portfolio is to reduce the risk of loss of capital and income by investing in various types of securities and over a wide range of industries.

7. Favorable tax status: the effectively yield a investors gets from his investments depends on tax to which it is subject.

8. Capital growth which can be attained by reinvesting in growth securities or through purchased of growth securities.

INVESTORS ALERTS

Investors Alerts

Do’s:

Only intermediaries having specific SEBI registration for rendering Portfolio management services can offer portfolio management services

Investors should make sure that they are dealing with SEBI authorized portfolio manager.

Investors must obtain a disclosure document from the portfolio manager broadly covering manner and quantum of fee payable by the clients, portfolio risks, performance of the portfolio manager etc.

Investors must check whether the portfolio manager has a necessary infrastructure to effectively service their requirements.

Investors must enter into an agreement with the portfolio manager.

Investors should make sure that they receive a periodical report on their portfolio as per the agreed terms.

Investors must make sure that portfolio manager has got the respective portfolio account by an independent charted accountant every year and that the certificate given by the charted accountant is given to an investor by the portfolio manager.

In case of complaints, the investors must approach the authorities for redressal in a timely manner.

Don’ts:

Investors should not deal with unregistered portfolio managers.

They should not hesitate to approach the authorities for redressed of the grievances.

They should not invest unless they have understood the details of the scheme including risks involved.

Should not invest without verifying the background and performance of the portfolio manager.

The promise of guaranteed returns should not influence the investors.

DIFFERENCE BETWEEN PORTFOLIO MANAGEMENT

SERVICES AND MUTUAL FUNDS

Difference between portfolio management Services and mutual funds

While the concept of Portfolio Management Services and Mutual Funds remains the same of collecting money from investors, pooling them and investing the funds in various securities. There are some differences between them described as follows:

1. In the case of portfolio management, the target investors are high net-worth investors, while in the case of mutual funds the target investors include the retail investors.

2. In case of portfolio management, the investments of each investor are managed separately, while in the case of MFs the funds collected under a scheme are pooled and the returns are distributed in the same proportion, in which the investors/ unit holders make the investments.

3. The investments in portfolio management are managed taking the risk profile of individuals into account. In mutual fund, the risk is pooled depending on the objective of a scheme.

4. In case of portfolio management, the investors are offered the advantage of personalized service to try to meet each individual client’s investment objectives separately while in case of mutual funds investors are not offered any such advantage of personalized services.

BENEFITS OF CHOOSING PORFTFOLIO MANAGEMENT

SERVICE INSTEAD OF MUTUAL FUNDS

Benefits of Choosing Portfolio Management service Instead of Mutual Funds

While selecting a portfolio management service over mutual fund services it is found that the portfolio manager offer some very service which are better than standardized product services offered by the mutual fund manager. Such as:

1. Asset Allocation : Asset allocation plan offered by portfolio management service (PMS) helps in allocating savings of the client in terms of stock bonds or equity funds. The plan is tailor made and is designed after a detailed analysis of client’s investment goals, saving pattern and risk taking goal.

2. Timing: Portfolio manager preserves client’s money on time. Portfolio management services helps in allocating right amount of money in right type of saving plan at right time. This means the portfolio manager provides their expert advice when his client should invest his money in equity or bonds or when he should take his money out of particular saving plan. Portfolio manager analyzes market and provides his expert advice to the client regarding the amount of cash he should take out at the time of big risk in stock market.

3. Flexibility: Portfolio manager plan saving of his client according to their need and preferences. But sometime portfolio manager can invest the client’s money according to his own preferences because they know the market very well than his client. It is his client’s duty to provide him a level of flexibility so that he can manage the investment with full efficiency and effectiveness.

4. Rules and Regulation: In comparison to mutual funds, portfolio managers do not need to follow any rigid rules of investing a particular amount of money in a particular mode of investment. Mutual fund managers need to work according to the regulations set up by financial authorities of their country. Like in India, they have to follow rules set up by SEBI

CONCLUSION

Conclusion

After the overall all study about each and every aspect of this topic it shows that portfolio management is a dynamic and flexible concept which involves regular and systematic analysis, proper management, judgment, and actions and also that the service which was not so popular earlier as other services has become a booming sector as on today and is yet to gain more importance and popularity in future as people are slowly and steadily coming to know about this concept and its importance.

It also helps both an individual the investor and FII to manage their portfolio by expert portfolio managers. It protects the investor’s portfolio of funds very crucially.

Portfolio management service is very important and effective investment tool as on today for managing investible funds with a surety to secure it. As and how development is done every sector will gain its place in this world of investment.

BIBLIOGRAPHY

Bibliography

Reference books:

Prasanna Chandra – Security Analysis and Portfolio Management.

V.A. Adadani- Security Analysis and Portfolio Management.

V. Gangadhar- Security Analysis and Portfolio Management.

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