Investment Decision and Portfolio Management

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    SUMMER INTERNERSHIP PROJECT REPORT

    AT

    SUMMER INTERNERSHIP PROJECT REPORT

    ON

    Investment decision and portfolio management

    SUBMITTED BY

    BHUPENDRA SINGH NATHAWAT

    POST GRADUATE DIPLOMA IN MANAGEMENT

    FROM: M.S.RAMAIAH INSTITUTE OF MANAGEMENT

    BANGALORE

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    C - SCHEME, JAIPUR

    INTERNSS DECLARATION

    I hereby declare that the Project Report conducted at ANAND RATHI FINACIAL SERVICE

    PVT LTD.

    Under the guidance of.

    Submitted in Partial fulfillment of the requirements for the certificate of

    Summer internship programme

    It is my original work and the same has not been submitted for the award of any

    other Degree/Diploma/Fellowship or other similar titles or prizes

    Place: JAIPUR

    Date:

    BHUPENDRA SINGH NATHAWAT

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    SUMMARY

    Indian Stock market has undergone tremendous changes over the years.Investment in Mutual Funds has become a major alternative amongInvestors. The project has been carried out to have an overview of MutualFund Industry and to understand investors perception about Mutual Fundsin the context of their trading preference, explore investors risk perception& find out their preference over Top Mutual funds.The methodology used was data collection using Schedule. Secondary datawas collected from Internet and Books. Primary Data was collected throughsurvey among existing clients along with the other investors. The procedureadopted to select sample was simple random sampling. The research design

    is analytical in nature. A questionnaire was prepared and distributed toInvestors. The investors profile is based on the results of a questionnairethat the Investors completed. The Sample consists of 100 investors fromvarious brokers premises. The target customers were Investors who aretrading in the stock market. The area of survey was restricted to peopleresiding in Varanasi.

    COMPANY PROFILE

    ORGANIZATION HISTORY

    Company Profile

    Milestones

    AR Core Strengths

    Management Team

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    About Anand Rathi

    AnandRathi shares and stock brokers ltd. (AR) is a leading full servicesecurities firm providing theentire gamut of financial services. The firm,founded in 1994 by Mr. Anand Rathi, today has a pan India presence as wellas an international presence through offices in Dubai and Bangkok. AR

    provides a breadth of financial and advisory services including wealthmanagement, investment banking, corporate advisory, brokerage &distribution of equities, commodities, mutual funds and insurance, structured

    products - all of which are supported by powerful research teams.

    The firm's philosophy is entirely client centric, with a clear focus onproviding long term value addition to clients, while maintaining the highest

    standards of excellence, ethics and professionalism. The entire firm activitiesare divided across distinct client groups: Individuals, Private Clients,Corporate and Institutions and was recently ranked by Asia Money 2006 pollamongst South Asia's top 5 wealth managers for the ultra-rich.

    In year 2007 Citigroup Venture Capital International joined the group as afinancial partner.

    Equity & Derivatives Brokerage

    AnandRathi shares and stock brokers ltd. provides end-to-end equitysolutions to institutional and individual investors. Consistent delivery ofhigh quality advice on individual stocks, sector trends and investmentstrategy has established us a competent and reliable research unit across thecountry.

    Clients can trade through us online on BSE and NSE for both equities andderivatives. They are supported by dedicated sales & trading teams in ourtrading desks across the country. Research and investment ideas can be

    accessed by clients either through their designated dealers, email, web orSMS

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    Milestones of Anand rathi

    1994: Started activities in consulting and Institutional equity sales with staffof 15

    1995: Set up a research desk and empanelled with major institutionalinvestors

    1997: Introduced investment banking businesses. Retail brokerage serviceslaunched

    1999: Leadmanaged first IPO and executed first M & A deal

    2001: Initiated Wealth Management Services

    2002: Retail business expansion recommences with ownership model

    2003: Wealth Management assets cross Rs 1500 crores. Insurance brokinglaunched Launch of Wealth Management services in Dubai. Retail Branchnetwork exceeds 50

    2004: Commodities brokerage and real estate services introduced, WealthManagement assets cross Rs 3000 crores, Institutional equities business re-

    launched and senior research team put in place, RetailBranch network expands across 100 locations within India.

    2005: Real Estate Private Equity Fund Launched, Retail Branch networkexpands across 200 locations within India.

    2006: AR Middle East, WOS acquires membership of Dubai Gold &Commodity Exchange (DGCX) , Ranked amongst South Asia's top 5 wealthmanagers for the ultra-rich by Asia Money 2006 poll, Ranked 6th in FY2006for All India Broker Performance in equity distribution in the High Net

    worth Individuals (HNI) Category, Ranked 9th in the Retail Category havingmore than 5% market share, Completes its presence in all States across thecountry with offices at 300+ locations within India

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    2007:Citigroup Venture Capital International picks up 19.9% equity stake ,Retail customer base crosses 100 thousand, Establishes presence in over 350locations

    AR Core Strengths

    Breadth of Services

    In line with its client-centric philosophy, the firm offers to its clients theentire spectrum of financial services ranging from brokerage services in

    equities and commodities, distribution of mutual funds, IPOs and insuranceproducts, real estate, investment banking, merger and acquisitions, corporatefinance and corporate advisory. Clients deal with a relationship managerwho leverages and brings together the product specialists from across thefirm to create an optimum solution to the client needs.

    Management Team

    AR brings together a highly professional core management team thatcomprises of individuals with extensive business as well as industryexperience.

    In-Depth Research

    Our research expertise is at the core of the value proposition that we offer toour clients. Research teams across the firm continuously track variousmarkets and products. The aim is however common - to go far deeper thanothers, to deliver incisive insights and ideas and be accountable for results.

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    Management Team

    The senior Management comprises a diverse talent pool that brings togetherrich experience from across industry as well as financial services.

    Mr. Anand Rathi - Group Chairman

    Chartered Accountant

    Past President, BSE

    Held several Senior Management positions with one of India's largestindustrial groups

    Mr. Pradeep Gupta - Vice Chairman

    Plus 17 years of experience in Financial Services

    Mr. Amit Rathi - Managing Director

    Chartered Accountant & MBA

    Plus 11 years of experience in Financial Services

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    ACQUISITION:

    ANZ Grind lays

    ACQUISITION:

    ANZ Grind lays: $ 1.34 bn from August 2000.

    Hong Kong Consumer Bank : $ 1.32 bn Thailand Nakornthan Bank: $ 320 million Indonesians Bank Per-Mata: $ 366 million from Oct. 2004. Korea First Bank: $ 3.3 bn from Apr. 2005.

    Standard Chartered PLC is listed on both the London Stock Exchange andthe Stock Exchange of Hong Kong and is in the top 25 FTSE-100companies, by market capitalization. Top 100 companies list, no other bank

    present except Bank of Americas position 69th and position of standardchartered bank is 74th.

    Offices of ANANDRATHI SHARES AND STOCK BROKERS LTD.

    are in 197 cities across 28 states & it has also branches in Dubai &

    Bangkok with more than 44000 employees. It has daily turnover in

    excess of Rs.4bn. It has 1, 00,000+ clients nationwide. It is also leading

    distributor of IPOs.

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    In India where ANANDRATHI SHARES AND STOCK BROKERS

    LTD. is present in 21 STATES:

    Andhra Pradesh TAMIL NADU

    Assam UTTARANCHAL

    Bihar UTTAR PRADESH

    Chhattisgarh WEST BENGAL

    Delhi

    Goa

    Gujarat

    Haryana

    Jammu & Kashmir

    Jharkhand

    Karnataka

    Kerala

    Madhya Pradesh

    Maharashtra

    Orissa

    Punjab

    Rajasthan

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    LIST OF PRODUCTS :

    Demat Accounts

    Mutual Funds

    Derivatives

    Commodities

    Bonds

    Trading Account

    Insurance

    Fixed deposits

    MISSION

    To be India's first Multinational providing complete financial servicessolution across the globe.

    VISION

    Providing integrated financial care driven by the relationship of trust andconfidence.

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    INVESTMENT DECISION AND PORTFOLIO

    MANAGEMENT

    INTRODUCTION

    Investment in share markets are influenced by the analysis & reasoningwhich help in

    predicting the market to some extent. Over the past years a number oftechnical & theories for analysis have evolved, these combined with moderntechnology guides the investor. The big players in the market, like ForeignInstitutional Investors, Mutual Funds, etc. have the expertise for variousanalytical tools & make use of them. The small investors are not in a

    position to benefit from the market the way Mutual Funds can do. Generallya small investors investments are based on market sentiments, insideinformation, through grapevine, tips & intuition. The small investors dependon brokers and brokerage house for his investments.

    Portfolio management or investment helps investors in effective andefficient management of their investment to achieve this goal. The rapid

    growth of capital markets in India has opened up new investment avenuesfor investors.The stock markets have become attractive investment optionsfor the common man.But the need is to be able to effectively and efficientlymanage investments in order to keep maximum returns with minimumrisk.Hence this study on PORTFOLIO MANAGEMENT & INVESTMENTDECISION to examine the role process and merits of effective investmentmanagement and decision.

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    PORTFOLIO MANAGEMENT

    PORTFOLIO:

    A portfolio is a collection of securities since it is really desirable to investthe entire funds of an individual or an institution or a single security, it isessential that every security be viewed in a portfolio context. Thus it seemslogical that the expected return of the portfolio. Portfolio analysis considersthe determine of future risk and return in holding various blends ofindividual securities

    Portfolio expected return is a weighted average of the expected return of theindividual securities but portfolio variance, in short contrast, can besomething reduced portfolio riskis because risk depends greatly on the co-variance among returns of individual securities. Portfolios, which arecombination of securities, may or may not take on the aggregatecharacteristics of their individual parts.

    Since portfolios expected return is a weighted average of the expected return

    of its securities, the contribution of each security the portfolios expectedreturns depends on its expected returns and its proportionate share of theinitial portfolios market value. It follows that an investor who simply wantsthe greatest possible expected return should hold one security; the one whichis considered to have a greatest expected return. Very few investors do this,and very few investment advisors would counsel such and extreme policyinstead, investors should diversify, meaning that their portfolio shouldinclude more than one security.

    http://mbafin.blogspot.com/2009/11/portfolio-management-and-investment.htmlhttp://mbafin.blogspot.com/2009/11/portfolio-management-and-investment.htmlhttp://mbafin.blogspot.com/2009/11/portfolio-management-and-investment.htmlhttp://mbafin.blogspot.com/2009/11/portfolio-management-and-investment.htmlhttp://mbafin.blogspot.com/2009/11/portfolio-management-and-investment.htmlhttp://mbafin.blogspot.com/2009/11/portfolio-management-and-investment.html
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    OBJECTIVES OF PORTFOLIO MANAGEMENT:

    The main objective of portfolio management is to maximize the returns fromthe investment and to minimize the risk involved in investment. Moreover,risk in price or inflation erodes the value of money and hence investmentmust provide a protection against inflation.

    Secondary objectives:

    The following are the other ancillary objectives: Regular return. Stable income. Appreciation of capital. More liquidity. Safety of investment. Tax benefits.

    Portfolio management services helps investors to make a wise choice

    between alternative investments with pit any post trading hassles thisservice renders optimum returns to the investors by proper selection ofcontinuous change of one plan to another plane with in the same scheme,any portfolio management must specify the objectives like maximumreturns, and risk capital appreciation, safety etc in their offer.

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    1.1 Types of investors

    There is wide diversity among investors, depending on their investmentstyles, mandates, horizons, and assets under management. Primarily,investors are either individuals, in that they invest for themselves orinstitutions, where they invest on behalf of others. Risk appetites and returnrequirements greatly vary across investor classes and are key determinants ofthe investing styles and strategies followed as also the constraints faced. Aquick look at the broad groups of investors in the market illustrates the point.

    1.1.1 Individuals

    While in terms of numbers, individuals comprise the single largest group inmost markets, the size of the portfolio of each investor is usually quite small.Individuals differ across their risk appetite and return requirements. Thoseaverse to risk in their portfolios would be inclined towards safe investmentslike Government securities and bank deposits, while others may be risktakers who would like to invest and / or speculate in the equity markets.Requirements of individuals also evolve according to their life-cycle

    positioning. For example, in India, an individualin the 25-35 years age groupmay plan for purchase of a house and vehicle, an individual belonging to the

    age group of 35-45 years may plan for childrens education andchildrenmarriage, an individual in his or her fifties would be planning for

    post-retirement life. The investment portfolio then changes depending on thecapital needed for these requirements.

    1.1.2 InstitutionsInstitutional investors comprise the largest active group in the financialmarkets. As mentioned earlier, institutions are representative organizations,i.e., they invest capital on behalf of others, like individuals or other

    institutions. Assets under management are generally large and managedprofessionally by fund managers. Examples of such organizations are mutualfunds, pension funds, insurance companies, hedge funds, endowment funds,

    banks, private equity and venture capital firms and other financialinstitutions.

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    The Indian financial markets are also witnessing active participation byinstitutions with foreign institutional investors, domestic mutual funds, anddomestic insurance companies comprising the three major groups, owningmore than a third of the shareholding in listed companies, with theGovernment and promoters another 50%. Over the years the share ofinstitutions has risen in share ownership of companies.

    1.1.2.1 Mutual funds

    Individuals are usually constrained either by resources or by limits to theirknowledge of the investment outlook of various financial assets (or both)and the difficulty of keeping abreast of changes taking place in a rapidlychanging economic environment. Given the small portfolio size to manage,it may not be optimal for an individual to spend his or her time analyzing

    various possible investment strategies and devise investment plans andstrategies accordingly.Instead, they could rely on professionals who possess the necessary expertiseto manage their funds within a broad, pre-specified plan. Mutual funds poolinvestors money and invest according to pre-specified, broad parameters.These funds are managed and operated by professionals whoseremunerations are linked to the performance of the funds. The profit orcapital gain from the funds, after paying the management fees andcommission is distributed among the individual investors in proportion to

    their holdings in the fund. Mutual funds vary greatly, depending on theirinvestment objectives, the set of asset classes they invest in, and the overallstrategy they adopt towards investments.

    1.1.2.2 Pension funds

    Pension funds are created (either by employers or employee unions) tomanage the retirement funds of the employees of companies or theGovernment. Funds are contributed by the employers and employees during

    the working life of the employees and the objective is to provide benefits tothe employees post their retirement. The management of pension funds maybe in-house or through some financial intermediary. Pension funds of largeorganizations are usually very large and form a substantial investor group forvarious financial instruments.

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    1.1.2.3 Endowment funds

    Endowment funds are generally non-profit organizations that manage fundsto generate a steady return to help them fulfill their investment objectives.

    Endowment funds are usually initiated by a non-refundable capitalcontribution. The contributor generally specifies the purpose (specific orgeneral) and appoints trustees to manage the funds. Such funds are usuallymanaged by charitable organizations, educational organization, non-Government organizations, etc. The investment policy of endowment fundsneeds to be approved by the trustees of the funds.

    1.1.2.4 Insurance companies (Life and Non-life)

    Insurance companies, both life and non-life, hold large portfolios frompremiums contributed by policyholders to policies that these companiesunderwrite. There are many different kinds of insurance polices and the

    premiums differ accordingly. For example, unlike term insurance, assuranceor endowment policies ensure a return of capital to the policyholder onmaturity, along with the death benefits. The premium for such poliices may

    be higher than term policies. The investment strategy of insurancecompanies depends on actuarial estimates of timing and amount of futureclaims. Insurance companies are generally conservative in their attitudetowards risks and their asset investments are geared towards meeting current

    cash flow needs as well as meeting perceived future liabilities.

    1.1.2.5 Banks

    Assets of banks consist mainly of loans to businesses and consumers andtheir liabilities comprise of various forms of deposits from consumers. Theirmain source of income is from what is called as the interest rate spread,which is the difference between the lending rate (rate at which banks earn)and the deposit rate (rate at which banks pay). Banks generally do not lend

    100% of their deposits. They are statutorily required to maintain a certainportion of the deposits as cash and another portion in the form of liquid andsafe assets (generally Government securities), which yield a lower rate ofreturn.

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    These requirements, known as the Cash Reserve Ratio (CRR ratio) andStatutory Liquidity Ratio (SLR ratio) in India, are stipulated by the ReserveBank of India and banks need to adhere to them.In addition to the broad categories mentioned above, investors in the marketsare also classified based on the objectives with which they trade. Under thisclassification, there are hedgers, speculators and arbitrageurs. Hedgers investto provide a cover for risks on a portfolio they already hold, speculators takeadditional risks to earn supernormal returns and arbitrageurs takesimultaneous positions (say in two equivalent assets or same asset in twodifferent markets etc.) to earn riskless profits arising out of the pricedifferential if they exist. Another category of investors include day-traderswho trade in order to profit from intra-day price changes. They generallytake a position at the beginning of the trading session and

    square off their position later during the day, ensuring that they do not carryany open position in the socalled cash markets, they also invest inderivatives, instruments that derive their value from the underlyingsecurities.

    1.2 Constraints

    Portfolio management is usually a constrained optimization exercise: Everyinvestor has some constraint (limits) within which she wants the portfolio to

    lie, typical examples being the risk profile, the time horizon, the choice ofsecurities, optimal use of tax rules etc. The professional portfolio advisor ormanager also needs to consider the constraint set of the investors whiledesigning the portfolio; besides having some constraints of his or her own,like liquidity, market risk, cash levels mandated across certain asset classesetc. We provide a quick outline of the various constraints and limitations thatare faced by the broad categories of investors mentioned above.

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    1.2.1 Liquidity

    In investment decisions, liquidity refers to the marketability of the asset, i.e.,

    the ability and ease of an asset to be converted into cash and vice versa. It isgenerally measured across two different parameters, viz., (i) market breadth,which measures the cost of transacting a given volume of the security, this isalso referred to as the impact cost; and (ii) market depth, which measures theunits that can be traded for a given price impact, simply put, the size of thetransaction needed to bring about a unit change in the price. Adequateliquidity is usually characterized by high levels of trading activity. Highdemand and supply of the security would generally result in low impactcosts of trading and reduce liquidity risk.

    1.2.2 Investment horizons

    The investment horizon refers to the length of time for which an investorexpects to remain invested in a particular security or portfolio, beforerealizing the returns. Knowing the investment horizon helps in securityselection in that it gives an idea about investors income needs and desiredrisk exposure. In general, investors with shorter investment horizons preferassets with low risk, like fixed-income securities, whereas for longerinvestment horizons investors look at riskier assets like equities. Risk-

    adjusted returns for equity are generally found to be higher for longerinvestment horizon, but lower in case of short investment horizons, largelydue to the high volatility in the equity markets. Further, certain securitiesrequire commitment to invest for a certain minimum investment period, forexample in India, the Post Office savings or Government small-savingschemes like the National Savings Certificate (NSC) have a minimummaturity of 3-6 years.Investment horizon also facilitates in making a decision between investing ina liquid or relatively illiquid investment. If an investor wants to invest for a

    longer period, liquidity costs may not be a significant factor, whereas if theinvestment horizon is a short period (say 1 month) then the impact cost(liquidity) becomes significant as it could form a meaningful component ofthe expected return.

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    1.2.3 Taxation

    The investment decision is also affected by the taxation laws of the land.Investors are always concerned with the net and not gross returns andtherefore tax-free investments or investments subject to lower tax rate maytrade at a premium as compared to investments with taxable returns. Thefollowing example will give a better understanding of the concept:

    Table 1.1:

    Asset Type Expected Return Net ReturnA 10% taxable bonds (30% tax) 10% 10%*(1-0.3) = 7%

    B 8% tax-free bonds 8% 8%Although asset A carries a higher coupon rate, the net return for the investorswould be higher for asset B and hence asset B would trade at a premium ascompared to asset A. In some cases taxation benefits on certain types ofincome are available on specific investments. Such taxation benefits shouldalso be considered before deciding the investment portfolio.

    1.3 Goals of Investors

    There are specific needs for all types of investors. For individual investors,retirement, childrens marriage / education, housing etc. are major eventtriggers that cause an increase in the demands for funds. An investmentdecision will depend on the investors plans for the above needs. Similarly,there are certain specific needs for institutional investors also. For example,for a pension fund the investment policy will depend on the average age ofthe plans participants.In addition to the few mentioned here, there are other constraints like thelevel of requisite knowledge (investors may not be aware of certain financialinstruments and their pricing), investment size (e.g., small investors may not

    be able to invest in Certificate of Deposits), regulatory provisions (countrymay impose restriction on investments in foreign countries) etc. which alsoserve to outline the investment choices faced by investors.

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    Factors affecting investment decisions in portfolio management

    Risk Tolerance

    Risk refers to the volatility of portfolios value. The amount of risk the

    investor is willing to take on is an extremely important factor. While some

    people do become more risk averse as they get older; a conservative investor

    remains risk averse over his life-cycle. An aggressive investor generally

    dares to take risk throughout his life. If an investor is risk averse and he

    takes too much risk, he usually panic when confronted with unexpected

    losses and abandon their investment plans mid-stream and suffers huge

    losses.

    Return Needs

    This refers to whether the investor needs to emphasize growth or income.

    Most younger investors who are accumulating savings will want returns that

    tend to emphasize growth and higher total returns, which primarily are

    provided by equity shares. Retirees who depend on theirinvestment

    portfolio for part of their annual income will want consistent annual payouts,such as those from bonds and dividend-paying stocks. Of course, many

    individuals may want a blending of the two some current income, but also

    some growth.

    Investment Time HorizonThe time horizon starts when the investment

    portfolio is implemented and ends when the investor will need to take the

    money out. The length of time you will be investing is important because it

    can directly affect your ability to reduce risk. Longer time horizons allow

    you to take on greaterrisks with a greatertotal return potential because

    some of that risk can be reduced by investing across different marketenvironments.

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    If the time horizon is short, the investor has greaterliquidity needs some

    attractive opportunities of earning higher return has to be sacrificed and the

    result is reduced in return. Time horizons tend to vary over the life-cycle.

    Younger investors who are only accumulating savings for retirement have

    long time horizons, and no real liquidity needs except for short-termemergencies. However, younger investors who are also saving for a specific

    event, such as the purchase of a house or a childs education, may have

    greater liquidity needs. Similarly, investors who are planning to retire, and

    those who are in retirement and living on their investment income, have

    greater liquidity needs.

    RATIOS USED IN INVESTMENT DECISIONS

    Before discussing valuation ratios, it's worthwhile to briefly review someconcepts that are integral to the interpretation and calculation of the mostcommonly used per share indicators.

    PER SHARE DATA

    Per-share data can involve any number of items in a company's financialposition. In corporate financial reporting - such as the annual

    report, Forms 10-Kand 10-Q (annual and quarterly reports, respectively,to the SEC) - most per-share data can be found in these statements,including earnings and dividends.

    Additional per-share items (which are often reported by investmentresearch services) also include sales (revenue), earnings growth and cashflow. To calculate sales, earnings and cash flow per share, a weightedaverage of the number of shares outstanding is used. Forbook value pershare, the fiscal yearend number of shares is used. Investors can rely oncompanies and investment research services to report earnings pershare on this basis.

    In the case of earnings per share, a distinction is made

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    between basic and dilutedincome per share. In the case of the latter,companies with outstanding warrants, stockoptions, and convertible

    preferred shares and bonds would report diluted earnings per share inaddition to their basic earnings per share.The concept behind this treatment is that if converted to common shares,all these convertible securities would increase a company's sharesoutstanding. While it is unlikely for any or all of these items to beexchanged for common stock in their entirety at the same time,conservative accounting conventions dictate that this potential dilution(an increase in a company's shares outstanding) be reported. Therefore,earnings per share come in two varieties - basic and diluted (also referredto as fully diluted).

    An investor should carefully consider the diluted share amount if it

    differs significantly from the basic share amount. A company's shareprice could suffer if a large number of the option holders of itsconvertible securities decide to switch to stock.

    For example, let's say that XYZ Corp. currently has one million sharesoutstanding, one million in convertible options outstanding (assumeseach option gives the right to buy one share), and the company's earnings

    per share are $3. If all the options were exercised (converted), therewould be two million shares outstanding. In this extreme example, XYZ'searnings per share would drop from $3 to $1.50 and its share place would

    plummet.

    While it is not very common, when companies sell off and/or shut downa component of their operations, their earnings per share (both basic anddiluted) will be reported with an additional qualification, which is

    presented as being based on continuing and discontinued operations.The absolute dollar amounts for earnings, sales, cash flow and book valueare worthwhile for investors to review on a year-to-year basis. However,in order for this data to be used in calculating investment

    valuations, these dollar amounts must be converted to a per-share basisand compared to a stock's current price.

    It is this comparison that gives rise to the common use of the expression"multiple" when referring to the relationship of a company's stock price

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    (per share) to its per-share metrics of earnings, sales, cash flow and bookvalue. These so-called valuation ratios provide investors with anestimation, albeit a simplistic one, of whether a stock price is too high,reasonable, or a bargain as an investment opportunity.

    Lastly, it is very important to once again to remind investors that while somefinancial ratios have general rules (or a broad application), in most instancesit is a prudent practice to look at a company's historical performance and use

    peer company/industry comparisons to put any given company's ratio inperspective. This is particularly true of investment valuation ratios.

    PRICE/EARNING RATIO

    Theprice/earnings ratio (P/E) is the best known of the investment valuationindicators. The P/E ratio has its imperfections, but it is nevertheless the mostwidely reported and used valuation by investment professionals and theinvesting public. The financial reporting of both companies and investmentresearch services use a basic earnings per share (EPS) figure divided into thecurrent stock price to calculate the P/E multiple (i.e. how many times a stockis trading (its price) per each dollar of EPS).

    It's not surprising that estimated EPS figures are often very optimistic duringbull markets, while reflecting pessimism during bear markets. Also, as amatter of historical record, it's no secret that the accuracy of stock analystearnings estimates should be looked at skeptically by investors.

    Nevertheless, analyst estimates and opinions based on forward-lookingprojections of a company's earnings do play a role in Wall Street's stock-pricing considerations.Historically, the average P/E ratio for the broad market has been around 15,although it can fluctuate significantly depending on economic and marketconditions. The ratio will also vary widely among different companies and

    industries.

    Formula:

    http://www.investopedia.com/terms/p/price-earningsratio.asphttp://www.investopedia.com/terms/e/eps.asphttp://www.investopedia.com/terms/p/price-earningsratio.asphttp://www.investopedia.com/terms/e/eps.asp
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    Components:

    The dollar amount in the numerator is the closing stock price for ZimmerHoldings as of December 31, 2005 as reported in the financial press or overthe Internet in online quotes. In the denominator, the EPS figure is calculated

    by dividing the company's reported net earnings (income statement) by theweighted average number of common shares outstanding (income statement)to obtain the $2.96 EPS figure. By simply dividing, the equation gives us theP/E ratio that indicates (as of Zimmer Holdings' 2005 fiscal yearend) itsstock (at $67.44) was trading at 22.8-times the company's basic net earningsof $2.96 per share. This means that investors would be paying $22.80 forevery dollar of Zimmer Holdings' earnings.

    Variations:The basic formula for calculating the P/E ratio is fairly standard. There isnever a problem with the numerator - an investor can obtain a currentclosing stock price from various sources, and they'll all generate the samedollar figure, which, of course, is a per-share number.

    However, there are a number of variations in the numbers used for the EPSfigure in the denominator. The most commonly used EPS dollar figuresinclude the following:

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    Basic earnings per share - based on the past 12 months as of themost recent reported quarterly net income. In investment researchmaterials, this period is often identified as trailing twelvemonths (TTM). As noted previously, diluted earnings per share couldalso be used, but this is not a common practice. The term "trailingP/E" is used to identify a P/E ratio calculated on this basis.

    Estimated basic earnings per share - based on a forward 12-monthprojection as of the most recent quarter. This EPS calculation is not a"hard number", but rather an estimate generated by investmentresearch analysts. The term, estimated P/E ratio, is used to identify aP/E ratio calculated on this basis.

    The Value Line Investment Survey's combination approach - Thiswell-known and respected independent stock research firm has

    popularized a P/E ratio that uses six months of actual trailing EPS and

    six months of forward, or estimated, EPS as its earnings per sharecomponent in this ratio.

    Cash Earnings Per Share - Some businesses will report cashearnings per share, which uses operating cash flow instead of netincome to calculate EPS.

    Other Earnings Per Share - Often referred to as "headline EPS","whisper numbers", and "pro forma", these other earnings per sharesmetrics are all based on assumptions due to special circumstances.While the intention here is to highlight the impact of some particularoperating aspect of a company that is not part of its conventionalfinancial reporting, investors should remember that the reliability ofthese forms of EPS is questionable.

    Commentary:

    A stock with a high P/E ratio suggests that investors are expecting higherearnings growth in the future compared to the overall market, as investorsare paying more for today's earnings in anticipation of future earningsgrowth. Hence, as a generalization, stocks with this characteristic areconsidered to be growth stocks.

    Conversely, a stock with a low P/E ratio suggests that investors have moremodest expectations for its future growth compared to the market as awhole.

    http://www.investopedia.com/terms/t/ttm.asphttp://www.investopedia.com/terms/t/ttm.asphttp://www.investopedia.com/terms/t/trailingpe.asphttp://www.investopedia.com/terms/t/trailingpe.asphttp://www.investopedia.com/terms/c/casheps.asphttp://www.investopedia.com/terms/c/casheps.asphttp://www.investopedia.com/terms/h/headlineearnings.asphttp://www.investopedia.com/terms/w/whispernumber.asphttp://www.investopedia.com/terms/p/proforma.asphttp://www.investopedia.com/terms/g/growthstock.asphttp://www.investopedia.com/terms/t/ttm.asphttp://www.investopedia.com/terms/t/ttm.asphttp://www.investopedia.com/terms/t/trailingpe.asphttp://www.investopedia.com/terms/t/trailingpe.asphttp://www.investopedia.com/terms/c/casheps.asphttp://www.investopedia.com/terms/c/casheps.asphttp://www.investopedia.com/terms/h/headlineearnings.asphttp://www.investopedia.com/terms/w/whispernumber.asphttp://www.investopedia.com/terms/p/proforma.asphttp://www.investopedia.com/terms/g/growthstock.asp
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    The growth investorviews high P/E ratio stocks as attractive buys and lowP/E stocks as flawed, unattractive prospects. Value investors are not inclinedto buy growth stocks at what they consider to be overpriced values,

    preferring instead to buy what they see as underappreciated and undervaluedstocks, at a bargain price, which, over time, will hopefully perform well.

    Note: Though this indicator gets a lot of investor attention, there is animportant problem that arises with this valuation indicator and investorsshould avoid basing an investment decision solely on this measure. Theratio's denominator (earnings per share) is based on accounting conventionsrelated to a determination of earnings that is susceptible to assumptions,interpretations and management manipulation. This means that the quality ofthe P/E ratio is only as good as the quality of the underlying earningsnumber.

    Whatever the limitations of the P/E ratio, the investment community makesextensive use of this valuation metric. It will appear in most stock quote

    presentations on an updated basis, i.e., the latest 12-months earnings (basedon the most recent reported quarter) divided by the current stock price.Investors considering a stock purchase should then compare this current P/Eratio against the stock's long-term (three to five years) historical record. Thisinformation is readily available in Value Line or S&P stock reports, as wellas from most financial websites, such as Yahoo!Financeand MarketWatch.

    It's also worthwhile to look at the current P/E ratio for the overall market(S&P 500), the company's industry segment, and two or three directcompetitor companies. This comparative exercise can help investorsevaluate the P/E of their prospective stock purchase as being in a high, lowor moderate price range.

    DIVIDED YIELD METHOD

    http://www.investopedia.com/terms/g/growthinvesting.asphttp://www.investopedia.com/terms/v/valueinvesting.asphttp://finance.yahoo.com/http://www.marketwatch.com/http://www.investopedia.com/terms/g/growthinvesting.asphttp://www.investopedia.com/terms/v/valueinvesting.asphttp://finance.yahoo.com/http://www.marketwatch.com/
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    A stock's dividend yield is expressed as an annual percentage and iscalculated as the company's annual cash dividend per share divided by thecurrent price of the stock. The dividend yield is found in the stock quotes ofdividend-paying companies. Investors should note that stock quotes recordthe per share dollar amount of a company's latest quarterly declareddividend. This quarterly dollar amount is annualized and compared to thecurrent stock price to generate the per annum dividend yield, whichrepresents an expected return.

    Income investors value a dividend-paying stock, while growth investorshave little interest in dividends, preferring to capture large capital gains.Whatever your investing style, it is a matter of historical record thatdividend-paying stocks have performed better than non-paying-dividend

    stocks over the long term.

    Formula:

    Components:

    http://www.investopedia.com/terms/d/dividendyield.asphttp://www.investopedia.com/terms/c/capitalgain.asphttp://www.investopedia.com/terms/d/dividendyield.asphttp://www.investopedia.com/terms/c/capitalgain.asp
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    BASIC PRINCIPLES OF PORTFOLIO MANAGEMENT:-

    There are two basic principles for effective portfolio management which aregiven below:-

    1. Effective investment planning for the investment in securities byconsidering the following factors-

    a. Fiscal,financial and monetary policies of the Govt.of India and theReserve Bank of India.

    b. Industrial and economic environment and its impact on industryProspect in terms of prospective technological changes, competition in themarket, capacity utilization with industry and demand prospects etc.

    II. Constant review of investment: Its require to review the investment insecurities and to continue the selling and purchasing of investment in more

    profitable manner. For this purpose they have to carry the followinganalysis:a. To assess the quality of the management of the companies in whichinvestment has been made or proposed to be made.

    b. To assess the financial and trend analysis of companies balance sheet andprofit&loss Accounts to identify the optimum capital structure and betterperformance for the purpose of withholding the investment from poorcompanies.c. To analysis the security market and its trend in continuous basis to arrive at a conclusion as towhether the securities already in possession should be disinvested and newsecurities be purchased. If so the timing for investment or dis-investment isalso revealed.

    ACTIVITIES IN PORTFOLIO MANAGEMENT:-

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    A. There are three major activities involved in an efficient portfoliomanagement which are as follows:-a. Identification of assets or securities, allocation of investment and alsoidentifying the classes of assets for the purpose of investment.b. They have to decide the major weights, proportion of different assets inthe portfolio by taking in to consideration the related risk factors.c. Finally they select the security within the asset classes as identify.The above activities are directed to achieve the sole purpose to maximizereturn and minimize risk in the investment even if there are unlimited risk inthe market.Let us have a look on the composite risk involve in the market duringoperation:-

    I. Interest rate risk: This arises due to variability in the interest rates fromtime to time. A changes in the interest rates establishes an inverserelationship in the price of the security i.e. price of securities trends to moveinversely with change in rate of interest. Long term securities shows greatervariability in compare to short term securities by this risk.

    II. Purchasing power risk: It is also known as inflation risk and theinflation affect the purchasing power adversely. Inflation rates vary overtime and changes unexpectedly causing erosion in the value of real returnand expected return. Thus purchasing power risk is more in inflationaryconditions especially in respect of bond and fixed income securities. It is notdesirable to invest in such securities during inflationary situations.Purchasing power risk is however less in flexible income securities likeequity shares or common stock where rise in dividend income off-setsincrease in the rate of inflation and provides advantage of capital gain.

    III. Business risk: Business risk arises from sale and purchase of securitiesaffected by business cycles, technological changes etc. Business cyclesaffect all types of securities viz. there is cheerful movement in boom due to

    bullish trend in stock price where as bearish trend in depression brings downfall in the prices of all types of securities. Therefore securities bearingflexible income affected more than the fixed rated securities duringdepression due to decline in their market price.

    IV. Financial Risk: This arises due to changes in the capital structure of the

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    company. It is also known as leveraged risk and expressed in the terms ofdebt-equity ratio. Excess of debt over equity in the capital structure of acompany indicates that the company is highly geared even if the per capitalearnings(EPS) of such company may be more. Because highly dependenceon borrowings exposes to the risk of winding up for its inability to honour itscommitments towards lenders and creditors. So the investors should beaware of this risk and portfolio manager should also be very careful.By taking in to accounts of all the above factors, investment decision in

    portfolio management are taken as followings:

    B. INVESTMENT DECISION:

    By a certain sum of funds, the investment decision are basically dependsupon the following factors:-

    I. Objectives of investment portfolio: This is a crucial point which aFinance Manager must consider. There can be many objectives of making aninvestment. The manager of a provident fund portfolio has to look forsecurity and may be satisfied with none too high a return, where as anaggressive investment company be willing to take high risk in order to havehigh capital appreciation.How the objectives can affect in investment decision can be seen from thefact that the Unit Trust of India has two major schemes : Its capital unitsare meant for those who wish to have a good capital appreciation and a

    moderate return, where as the ordinary unit are meant to provide a steadyreturn only. The investment manager under both the scheme will invest themoney of the Trust in different kinds of shares and securities. So it isobvious that the objectives must be clearly defined before an investmentdecision is taken.

    II. Selection of investment: Having defined the objectives of theinvestment, the next decision is to decide the kind of investment to beselected. The decision what to buy has to be seen in the context of thefollowing:-

    a. There is a wide variety of investments available in market i.e. Equityshares, preference share, debentures, convertible bond, Govt.securities and

    bond, capital units etc. Out of these what types of securities to be purchased .

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    b. What should be the proportion of investment in fixed interest dividendsecurities and variable dividend bearing securities. The fixed one ensure adefinite return and thus a lower risk but the return is usually not as higher asthat from the variable dividend bearing shares.

    c. If the investment is decided in shares or debentures, then the industriesshowed a potential in growth should be taken in first line. Industry-wise-analysis is important since various industries are not at the same level fromthe investment point of view. It is important to recognized that at a particular

    point of time, a particular industry may have a better growth potential thanother industries. For example, there was a time when jute industry was ingreat favour because of its growth potential and high profitability ,theindustry is no longer at this point of time as a growth oriented industry.

    d. Once industries with high growth potential have been identified, the nextstep is to select the particular companies, in whose shares or securitiesinvestments are to be made.To identify the industries, which have a high growth potential the followingtechniques/approaches may be taken in to consideration:-

    a.Statistical analysis of past performance: A statistical analysis of theimmediate past performance of the share price indices of various industriesand changes there in related to the general price index of shares of allindustries should be made. The Reserve Bank of India index numbers ofsecurity prices published every month in its bulletin may be taken torepresent the behaviour of share prices of various industries in the last fiewyears. The related changes in the price index of each industry as comparewith the changes in the average price index of the shares of all industrieswould show those industries which are having a higher growth potential inthe past fiew years. It may be noted that a Industry may not remaining agrowth Industry for all the time. So we have to make an assessment of thevarious Industries keeping in view the present potentiality also to finalizedthe list of Industries in which we will try to spread our investment.

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    b. Assessing the intrinsic value of an Industry/Company:-

    After identifying the Industry, we have to assess the various factors whichinfluence the value of a particular share. Those factors generally relate to thestrengths and weaknesses of the company under consideration,Characteristics of the industry within which the company fails and thenational and international economic scene. The major objective of theanalysis is to determine the relative quality and the quantity of the security.It is also to be seen that the security is good at current market prices. Thisapproach is known as intrinsic value approach.Industry analysis can help to assess the nature of demand of a particular

    product, Cost structure of the industry and other economic and Govt.constraints on the same. An appraisal of the particular industries prospect isessential and the basic profitability of any company is depends upon the

    economic prospect of the industry to which it belongs.

    2. Growth record: Three growth indicators may be looked in to i.e.Price earnings ratio, Percentage growth rate of earnings per annum andPercentage growth rate of net block of the company in the past few yearsshould be examined.

    3. Financial analysis: By the help of Financial analysis we can understandthe financial solvency and liquidity, the efficiency, the profitability and thefinancial and operating leverage of the company in which the fund are used.

    4. Pattern of existing stock holding: This analysis would show the stake ofVarious parties associate with the company. An interesting case in thisregard is that of the Punjab National Bank in which the L.I.C. and otherfinancial institutions had substantial holdings. When the bank wasnationalized, the residual company proposed a scheme whereby thoseshareholders, who wish to opt out, could received a certain amount ascompensation in cash. It was only at the instant and bargaining strength ofinstitutional investors that the compensation offered to the shareholders, who

    wish to opt out of the company, was raised considerably.

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    5. Marketability of the shares: Mere listing of a share on the stockexchange does not automatically mean that the share can be sold and

    purchase. There may be inactive shares with no transaction for long period.So we have to examined the speculative interest of such scrip, extent of

    public holding and the particular stock exchange where it is traded.Fundamental analysis thus is basically an examination of the economics andfinancial aspects of a company with the aim of estimating future earningsand dividend prospect. So after having analyzed of all the relevantinformation we have to decide whether we should buy or sell the securities.

    II. Timing of Purchases:-

    The timing of dealings in the securities, specially shares is of crucial

    importance, because after correctly identifying the companies one may losemoney if the timing is bad due to wide fluctuation in the price of shares ofthat companies.The decision regarding timing of purchases is particularly difficult becauseof certain psychological factors. It is obvious that if a person wishes tomake any gains, he should buy cheap and sell dear, i.e. buy when the shareare selling at a low price and sell when they are at a higher price. But in

    practical it is a difficult task. When the prices are rising in the market i.e.there is bull phase, everybody joins in buying without any delay becauseevery day the prices touch a new high. Later when the bear face starts, pricestumble down everyday and everybody starts counting the losses. Theordinary investor regretted such situation by thinking why he did not sell hisshares in previous day and ultimately sell at a lower price. This kind ofinvestment decision is entirely devoid of any sense of timing.

    There are various theories and technique to deal with the portfoliomanagement, some of their concept are discuss shortly hereunder:-

    Dow Jones theory: According to this theory of Charles H. Dow , purchase

    should be made when bull trend started i.e. when price of the share are onthe rise and sells them when they are on the fall i.e. at the time when bearishtrend started.

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    Randam walk theory: Basically stock prices can never be predictedbecause they are not a result of any underlying factors but are merestatistical ups and downs. This hypothesis is known as Randam walkhypothesis. In the Laymans language it may be said that prices on the stockexchange behave exactly the way a drunk would behave while walking in a

    blind lane, i.e. up and down, with an unsteady way going in any direction helikes, bending on the side once and on the other side the second time.

    Capital Assets Pricing Model(CAPM): CAPM provides a conceptualframework for evaluating any investment decision. It is used to estimate theexpected return of any portfolio with the following formula:

    E(Rp) = Rf+Bp(E(Rm)-Rf)Where,

    E(Rp) = Expected return of the portfolioRf = Risk free rate of returnBp = Beta portfolio i.e. market sensitivity indexE(Rm)= Expected return on market portfolio(E(Rm)-Rf)= Market risk premium

    The above model of portfolio management can be used effectively to:-*Estimate the required rate of return to investors on companys commonstock.**Evalute risky investment projects involving real Assets.***Explain why the use of borrowed fund increases the risk and increasesthe rate of return.****Reduce the risk of the firm by diversifying its project portfolio.Moving Average: It refers to the mean of the closing price which changesconstantly and moves ahead in time, there by encompasses the most recentdays and deletes the old one.

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    CONCLUSION

    From the above discussion it is clear that portfolio functioning is based on

    market risk, so one can get the help from the professional portfolio manageror the Merchant banker if required before investment. Because applicabilityof practical knowledge through technical analysis can help an investor toreduce risk. In other words Security prices are determined by moneymanager and home managers, students and strikers, doctors and dogcatchers, lawyers and landscapers, the wealthy and the wanting. This breadthof market participants guarantees an element of unpredictability andexcitement. If we were all totally logical and could separate our emotionsfrom our investment decisions then, the determination of price based onfuture earnings would work magnificently. And since we would all have the

    same completely logical expectations, price would only change whenquarterly reports or relevant news was released.I believe the future is only the past again, entered through another gate Sir Arthur wing Pinero. 1893.

    If price are based on investors expectations, then knowing what a securityshould sell for become less important than knowing what other investorsexpect it to sell for. There are two times of a mans life when he should notspeculate; when he cant afford it and when he can Mark Twin,1897.

    A Casino make money on a roulette wheel , not by knowing what numberwill come up next, but by slightly improving their odds with the addition ofa 0 and 00. Yet many investors buy securities without attempting tocontrol the odds. If we believe that this dealings is not a Gambling wehave to start up it with intelligent way. Through it is basically a futureestimation or expectation , one should know the standard norms and relatedrules for lowering the risk.