it is concluded all the things about the portfolio managment.

1. Sri Sharada Institute Of Indian Management - Research
(A unit of Sri Sringeri Sharada Peetham, Sringeri)
Approved by AICTE
Plot No. 7, Phase-II, Institutional Area, Behind the Grand Hotel, Vasant Kunj,
New Delhi – 110070
Tel.: 2612409090 / 91; Fax: 26124092
E-mail: administration@srisiim.org; Website: www.srisiim.org
DEVELOPMENT DAY PROJECT REPORT
“Market Scenario of ITES Sector in India”
A report submitted in partial fulfillment of the requirements of the two-year
full time Post Graduate Diploma in Management.
Submitted by:
Name: SUMAN PARTHRIA
NEERAJ HOTWANI
Roll No: 20090213
20090134
Batch: 2009 – 2011

2. Acknowledgement
Preservation, Inspiration and motivation have always played a key role in the success of any
venture. In the present world of competition and success, training is like a bridge between
theoretical and practical working; willingly we prepared this particular Project.
First of all we would like to thank the supreme power, the almighty God, who is the one who has
always guided us to work on the right path of my life.
This project would not have seen the light of the day without the support of our faculty mentor
Mr.SANDEEP S. PARMAR he has been of great help in guiding us through the various stages
of our project.
Constructive criticism and feedback would be highly appreciated.
ARNAB BANERJEE ARJIT JAIN
20090162 20090161
Sri SIIM, Vasant kunj, Sri SIIM, Vasant
kunj,
New Delhi New Delhi
Executive Summary

3. Investing is both Arts and Science. Every Individual has their own specific financial need and
expectation based on their risk taking capabilities, whereas some needs and expectation are
universal. Therefore, we find that the scenario of the Stock Market is changing day by day hors
by hours and minute by minute. The evaluation of financial planning has been increased through
decades, which can be best seen in customers. Now a day’s investments have become very
important part of income saving.
In order to keep the investor safe from market fluctuation and make them profitable, Portfolio
Management Services (PMS) is fast gaining Investment Option for the High Net worth
Individual (HNI). There is growing competition between brokerage firms in post reform India.
For investor it is always difficult to decide which brokerage firm to choose.
The research design is analytical in nature. A questionnaire was prepared and distributed to
Investors. The investor’s profile is based on the results of a questionnaire that the Investors
completed. The sample consists of 100 investors from various broker’s premises. The target
customers were Investors who are trading in the stock market.
In order to identify the effectiveness of Prabhudas Lilladher PMS services this Research is
carried throughout the area of Delhi. At the time of investing money everyone looks for the Risk
factor involved in the Investment option. This report is prepared on the basis of Research work
done through the different Research Methodology the data is collected from both the Primary
sources & secondary sources. .
Glossary of Acronyms

4. Acronym Full Form
NSE National Stock Exchange
BSE Bombay Stock Exchange
S&P Standard and Poor
CNX Crisil NSE Indices
ISO Indian standards organization
BOLT BSE Online trading system
NYSE New York stock exchange
FTSE Financial Times Stock Exchange
PAT Profit After Tax
NPM Net Profit Margin
EPS Earnings per Share
RoNW Return On Net Worth
QoQ Quarter over Quarter
YoY Year over Year
P/E Price Earnings ratio
H/L High/Low
RoI Return on Investment
AMC Annual Maintenance Charge
MNC Multinational Corporation
Introduction to Study

5. The field of investment traditionally divided into security analysis and portfolio management.
The heart of security analysis is valuation of financial assets. Value in turn is the function of risk
and return. These two concepts are in the study of investment. Investment can be defined the
commitment of funds to one or more assets that will be held over for some future time period.
In today’s fast growing world many opportunities are available, so in order to move with
changes and grab the best opportunities in the field of investments a professional fund manager
is necessary.
Therefore, in the present scenario the Portfolio Management Services (PMS) is fast gaining
importance as an investment alternative for the High Net worth Investors.
Portfolio Management Services (PMS) is an investment portfolio in stocks, fixed income, debt,
cash, structured products and other individual securities, managed by a professional money
manager that can potentially be tailored to meet specific investment objectives.
When you invest in PMS, you own individual securities unlike a mutual fund investor, who owns
units of the entire fund. You have the freedom and flexibility to tailor your portfolio to address
personal preferences and financial goals. Although portfolio managers may oversee hundreds of
portfolio, you account may be unique.
Investment management solution in PMS can be provided in the following ways:
1. Discretionary
2. Non Discretionary
3. Advisory
Discretionary: Under these services, the choice as well as the timings of the investment decisions
rest solely with the Portfolio Manager.
Non Discretionary: Under these services, the portfolio manager only suggests the investment
ideas. The choice as well as the timings of the investment decisions rest solely with the Investor.
However the execution of trade is done by the portfolio manager.
Advisory: Under these services, the portfolio managers only suggest the Investment ideas.
The choice as well as the execution of the investment decisions rest solely with the Investors.
Rule 2, clause (d) of the SEBI (portfolio manager) Rules, 1993 defines the term “Portfolio” as “
total holding of securities belonging to any person”.
As a matter of fact, portfolio is combination of assets the outcomes of which cannot be defined
with certainty new assets could be physical assets, real estates, land, building, gold etc. or
financial assets like stocks, equity, debenture, deposits etc.
Portfolio management refers to managing efficiently the investment in the securities held by
professional for others.
Merchant banker and the portfolio management with a view to ensure maximum returns by such
investment with minimum risk of loss of return on the money invested in securities held by them
for their clients. The aim Portfolio management is to achieve the maximum return from a
portfolio, which has been delegated to be managed by manager or financial institution.
There are lots of organizations in the market on the lookout for people like you who need their
portfolios managed for them. They have trained and skilled talent will work on your money to
make it do more for you.
Therefore, if any investors still insist on managing their own portfolio, then ensure you build
discipline in to their investment. Work out their strategy and stand by it.
MYTHS ABOUT PMS

6. There are two most common myths found about Portfolio Management Services (PMS) which
we found among most of the Investors. They are as follows.
Myth No. 1: “PMS and Mutual Fund are similar as the investment option”
As in the Finance basket both the PMS and Mutual Fund are used for minimizing risk and
maximize the profit of the Investors. The objectives are similar as in both the product but they
are different from each other in certain aspects. They are as follows:-
Management Side:
In PMS, it’s ongoing personalized access to professional money management services. Whereas,
in Mutual fund gives personalize access to money.
Customization:
In PMS, Portfolio can be tailored to address each investor’s each investor’s specific needs.
Whereas in Mutual Fund Portfolio structured to meet the fund’s stated investment objectives.
Ownership:
In PMS, Investors directly own the individual securities in their portfolio, allowing for tax
management flexibility, whereas in Mutual Fund Shareholders own shares of the fund and cannot
influence buy and sell decisions or control their exposure to incurring tax liabilities.
Liquidity:
In PMS, managers may hold cash; they are not required to hold cash to meet redemptions,
whereas, Mutual funds generally hold some cash to meet redemptions.
Minimums:
PMS generally gives higher minimum investments than mutual funds. Generally, minimum
ranges from: Rs. 1crore + for Equity Options Rs. 5crore + for Fixed Income Options Rs. 20 lacs
+ for structured Products, whereas in Mutual Fund Provide ongoing, personalized access to
professional money management services.
Flexibility:
PMS is generally more flexible than mutual funds. The Portfolio Manger may move to 100%
cash if it required. The Portfolio Manager may take his own time in building up the portfolio.
The Portfolio Manger can also manage a portfolio with disproportionate allocation to select
compelling opportunities whereas, in Mutual Fund comparatively less flexible.
Myth No. 2: “PMS is more Risk free than other Financial Instrument”
In Financial Market Risk factor is common in all the financial products, but yes it is true that
Risk Factor vary from each other due to its nature. All investments involve a certain amount of
risk, including the possible erosion of the principal amount invested, which varies depending n
the security selected. For example, investments in small and mid-sized companies tend to
involve more risk than investments in larger companies.
Introduction to Stock Market

7. A stock market or equity market is a public market (a loose network of economic transactions
not a physical facility or discrete entity) for the trading of company stock and derivatives at an
agreed price; these are securities listed on a stock exchange as well as those only traded
privately.
The size of the world stock market was estimated at about $36.6 trillion US at the beginning of
October 2008. The total world derivatives market has been estimated at about $791 trillion face
or nominal value, 11 times the size of the entire world economy. The value of the derivatives
market, because it is stated in terms of notional values, cannot be directly compared to a stock or
a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority
of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a
comparable derivative 'bet' on the event not occurring.).
Participants in the stock market range from small individual stock investors to large hedge fund
traders, who can be based anywhere. Their orders usually end up with a professional at a stock
exchange, who executes the order.
Types of Shares:
There are several types of shares, including common stock, preferred stock, treasury
stock, and dual class shares. Preferred stock, sometimes called preference shares, have
priority over common stock in the distribution of dividends and assets, and sometime
have enhanced voting rights such as the ability to veto mergers or acquisitions or the right
of first refusal when new shares are issued (i.e. the holder of the preferred stock can buy
as much as they want before the stock is offered to others). A dual class equity structure
has several classes of shares (for example Class A, Class B and Class C) each with its
own advantages and disadvantages. Treasury stock are shares that have been bought back
from the public.
Primary Market:
In financial markets, an Initial Public Offering (IPO) is the first sale of a company’s common
Shares to public investors. The company will usually issue only primary shares, but may also
sell secondary shares. Typically, a company will hire an investment banker to underwrite the
offering and a corporate lawyer to assist in the drafting of the prospectus.
The sale of stock is regulated by authorities of financial supervision and where relevant by a
Stock exchange. It is usually a requirement that disclosure of the financial situation and

8. Prospective investors the Federal Securities and Exchange Commission (SEC) regulates the
securities markets of the United States and, by extension, the legal procedures governing IPOs.
The law governing IPOs in the United States includes primarily the Securities Act of 1933, the
regulations issued by the SEC, and the various state “Blue Sky Laws”.
Secondary Market:
The secondary market (also called “aftermarket”) is the financial market for trading of
Securities that have already been issued in its initial private or public offering. Stock
Exchanges are example of secondary markets. Alternatively, secondary market can refer to
the market for any kind of used goods.
Function and purpose
The stock market is one of the most important sources for companies to raise money. This allows
businesses to be publicly traded, or raise additional capital for expansion by selling shares of
ownership of the company in a public market. The liquidity that an exchange provides affords
investors the ability to quickly and easily sell securities. This is an attractive feature of investing
in stocks, compared to other less liquid investments such as real estate.
History has shown that the price of shares and other assets is an important part of the dynamics
of economic activity, and can influence or be an indicator of social mood. An economy where
the stock market is on the rise is considered to be an up-and-coming economy. In fact, the stock
market is often considered the primary indicator of a country's economic strength and
development. Rising share prices, for instance, tend to be associated with increased business
investment and vice versa. Share prices also affect the wealth of households and their
consumption. Therefore, central banks tend to keep an eye on the control and behavior of the
stock market and, in general, on the smooth operation of financial system functions.
Relation of the stock market to the modern financial system
Statistics show that in recent decades shares have made up an increasingly large proportion of
households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and
other very liquid assets with little risk made up almost 60 percent of households' financial
wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment in
financial portfolios has gone directly to shares but a good deal now takes the form of various

9. kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds,
hedge funds, insurance investment of premiums, etc.
The trend towards forms of saving with a higher risk has been accentuated by new rules for most
funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to
be found in other industrialized countries. In all developed economic systems, such as the
European Union, the United States, Japan and other developed nations, the trend has been the
same: saving has moved away from traditional (government insured) bank deposits to more risky
securities of one sort or another.
Stock market Index
The movements of the prices in a market or section of a market are captured in price indices
called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euro next
indices. Such indices are usually market capitalization weighted, with the weights reflecting the
contribution of the stock to the index. The constituents of the index are reviewed frequently to
include/exclude stocks in order to reflect the changing business environment.
In India the index used for capturing the price movement of market is S&P CNX Nifty. Standard
& Poor's (S&P) is a division of McGraw-Hill that publishes financial research and analysis on
stocks and bonds. It is well known for the stock market indexes, the US-based S&P 500, the
Australian S&P/ASX 200, the Canadian S&P/TSX, the Italian S&P/MIB and India's S&P CNX
Nifty.
Market trend
A market trend is a putative tendency of a financial market to move in a particular direction over
time. These trends are classified as secular trends for long time frames, primary trends for
medium time frames, and secondary trends lasting short times. Traders identify market trends
using technical analysis, a framework which characterizes market trends as a predictable price
response of the market at levels of price support and price resistance, varying over time.
The terms bull market and bear market describe upward and downward market trends,
respectively, and can be used to describe either the market as a whole or specific sectors and
securities
Bull market
A bull market is associated with increasing investor confidence, and increased investing in
anticipation of future price increases (capital gains). A bullish trend in the stock market often

10. begins before the general economy shows clear signs of recovery. It is a win-win situation for the
investors.
Examples
India's Bombay Stock Exchange Index, SENSEX, was in a bull market trend for almost five
years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points.
Another notable bull market was in the 1990s and most of the 1980s when the U.S. and many
other stock markets rose; this time period included the dot-com bubble.
Bear market
A bear market is a general decline in the stock market over a period of time. It is a transition
from high investor optimism to widespread investor fear and pessimism.
"While there’s no agreed-upon definition of a bear market, one generally accepted measure is a
price decline of 20% or more over at least a two-month period."
Examples
A bear market followed the Wall Street Crash of 1929 and erased 89% (from 386 to 40) of the
Dow Jones Industrial Average's market capitalization by July 1932, marking the start of the
Great Depression. After regaining nearly 50% of its losses, a longer bear market from 1937 to
1942 occurred in which the market was again cut in half. Another long-term bear market
occurred from about 1973 to 1982, encompassing the 1970s energy crisis and the high
unemployment of the early 1980s. Yet another bear market occurred between March 2000 and
October 2002. The most recent example occurred between October 2007 and March 2009.
Depository:
A depository holds shares and other securities of investors in electronic form. Through
Depository Participants (DPs), it also provides services related to transaction in securities. Its
structure and functioning are similar to the bank. Presently in India, there are two depository viz.
National Securities Depository limited (NSDL) and Central Depository Services (I) Limited
(CDSL). Both of them are registered with SEBI.
DP is a member of a Depository who offers its services to hold securities of Investors (Beneficial
Owners) in dematerialized form. DP is like a bank branch. It is an agent of the depository. DP
works as an interface between Depository and Investors. DPs are required to be registered with
SEBI. If an investor wants to avail the services offered by Depository, he has to open a Demat
account with DP similar to opening of a bank account with a branch of the bank.

11. Depository is responsible for keeping stocks of investors in electronics form. There are two
depositories in India, NSDL (National Securities Depository Ltd) and CDSL (Central Depository
Services Ltd).
CDSL was promoted by Bombay Stock Exchange Limited(BSE) jointly with leading banks such
as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank,
Union Bank of India and Centurion Bank.
CDSL was setup with the objective of providing convenient, dependable and secure depository
services at affordable cost to all market participants. Some of the important milestones of CDSL
system are:
CDSL received the certificate of commencement of business from SEBI in February, Shri
Yashwant Sinha flagged off the operations of CDSL on July 15, 1999. Settlement of trades in the
demat mode through BoI Shareholding Limited, the clearing house of BSE, started in July 1999.
All leading stock exchanges like the national Stock Exchange, Calcutta Stock Exchange, Delhi
Stock Exchange, The Stock Exchange, Ahmedabad, etc have established connectivity with
CDSL.
As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities, bonds,
debentures, commercial papers), units of mutual funds, certificate of deposits etc. into the CDSL
system.
NSDL:
Although India had a vibrant capital market which is more than century old, the paper-based
settlement of trades caused substantial problems like bad delivery and delayed transfer of title till
recently. The enactment of Depositories Act in August 1996, paved thee way for establishment
of National Securities Depository Limited (NSDL), the first depository in India. This depository
promoted by institutions of National stature responsible for economic development of the
country has since established a National infrastructure of International standards that handles
most of the securities held and settled in dematerialised form in the Indian capital market. Using
innovative and flexible technology systems, NSDL works to support the investors and brokers in
the capital market of the country. NSDL aims at ensuring the safety and soundness of Indian
marketplaces by developing settlement solutions that increase efficiency, minimize risk and
reduce costs. At NSDL, we play a quiet but central role in developing products and services that
will continue to nurture the growing needs of the financial services industry.
In the depository system, securities are held in depository account, which is more or less similar
to holding funds in bank accounts. Transfer of ownership of securities is done through simple
account transfers. This method does away with all the risks and hassles normally associated with
paperwork. Consequently, the cost of transacting in a depository environment is considerably
lower as compared to transacting in certificates Promoters/ Shareholders NSDL is promoted by
Industrial Development Bank of India (IDBI) – the largest development bank of India, Unit Trust
of India (UTI) – the largest mutual fund in India and national Stock Exchange of India Limited
(NSE) – the largest stock exchange in India. Some of the prominent banks in the country have
taken a stake in NSDL.
● NSDL facts & Figures: as on December 31, 2008:

12. • Number of certificates eliminated (Approx): 550 crore
• Number of companies in which more than 75% shares are dematted : 2282
• Average number of accounts opened per day since November 1996 : 3636
• Presence of demat account holders in the country : 78% of all pin codes in the country
Central Securities Depository :
A Central Securities Depository (CSD) is an organization holding securities either in certificated
or uncertificated (dematerialized) form, to enable book entry transfer of securities. In some cases
these organizations also carry out centralized comparison, and transaction processing such as
clearing and settlement of securities. These physical securities may be immobilized by the
depository, or securities may be dematerialized (so that they exist only as electronic records).
International Central Securities Depository (ICSD) is a central securities depository that settles
trades in international securities and in various domestic securities, usually through direct or
indirect (through local agents) links to local CSDs. ClearStream International (earlier Cedel),
Euro clear and SIX SIS are considered ICSDs. While some view The Depository Trust Company
(DTC) as a National CSD rather than an ICSD, in fact DTC – the largest depository in the world
– hold over $2 trillion in non-US securities and in American Depository Receipts from over 100
nations.
Functions:
 Safekeeping Securities may be in dematerialized form, book-entry only from (with one or
more “global” certificate), or in physical form immobilized within the CSD.
 Deposit and Withdrawal supporting deposits and withdrawals involves the relationship
between the transfer agent and/or issuers and the CSD. It also covers the CSD’s role with
in the underwriting process or listing of new issues in a market.
 Dividend, interest, and principal processing, as well as corporate actions including proxy
voting paying and transfer agent, as well as issuers are involved in these processes, as
welll as issuers are involved in these processes, depending on the level of services
provided by the CSD and its relationship with these entities.
 Other services CSDs offer additional services aside from those considered core services.
These services include Securities Lending and Borrowing, matching, and Repo
Settlement
 Pledge – Central depositories provide pledging of share and securities. Every country
require to provide legal framework to protect the interest of the pledgor and pledgee
 However, there are risks and responsibilities regarding these services that must be taken
into consideration in analyzing and evaluating each market on a case-by-case basis.

13. Derivatives:
A financial instrument whose value is derived from the values of other, more basic underlying
assets.
Underlying assets may be stock, indices, currency, bullion commodities etc. For example, value
September 1 month future contract for Nifty will depend on the current value of Nifty.
Basic types of Derivative:
1. Forward Contracts
2. Future Contracts
3. Options
Forward Contracts:
 It is an agreement to buy or sell an asset (like stock, indices, currency etc) at a certain
future time for a certain price.
 The contract is usually between two parties without having any involvement of exchange
 Settled at maturity, when the holder of the short position (seller) delivers the asset to the
holder of the long position (Buyer) in return for a cash amount agree upon.
 Risk of counter party default
 Generally popular in foreign currency where different Banks and corporation enter into
forward contracts for different currencies
Future Contacts:
 Like a forward contract, a future contract is an agreement between two parties to buy or
sell an asset at a certain time in the future for a certain price.
 Counter party is an exchange and future contracts are traded on exchange.
 To make trading possible, the exchange specifies certain standardized feature of thee
contract, like minimum size of contract, delivery time (usually in terms of month),
margin requirement etc.
 Daily mark to market accounting is done by the exchange
 On maturity, it is not required to give actual delivery of an asset but contract is settled bas
on spot price of an asset
Options:
 Options name suggest is right but not an obligation of option holder

14.  Basic two types of Option:
1. Call Option
2. Put Option
A call option gives the holder right to buy a certain date for a certain price.
A put option gives holder right to sell the stock by a certain date for a certain price.
The price in the contract is called strike price; the date in contract is known as the expiration
date, exercise date, or maturity.
 The price paid for buying an option is known as option price or option premium.
 American option can be exercised at any time up to the expiration date while European
option can be exercised only on the expiration date itself.
 Most of the option that is traded on the exchange is American
Equity market reforms since 1992
As part of a broad set of reforms, the Securities and Exchange Board of India (SEBI) was given
the legal powers in 1992 to regulate and reform the capital market, including new issues. The
equity market reforms since then can be divided into two broad categories:
One that increases the level of competition in the market and the other that deals with problems
of information and transaction cost. The most important initiative to enhance competitions was
the free pricing of IPO and formulation of guidelines concerning new issues. The new regulatory
framework sought to strengthen investor protection by ensuring disclosure and transparency
rather than through direct control. Secondly, the national Stock Exchange (NSE) was set up,
which competed with the Bombay Stock Exchange (BSE).The NSE introduced an automated
screen-based trading system, known as the National Exchange for Automated Trading (NEAT)
system, which allowed members from across the country to trade simultaneously with enormous
ease and efficiency. Faced with stiff competition, the BSE adopted similar technology.
Competition was also enhanced through an increased number of participants- foreign
institutional investors (FIIs) were permitted to trade and private sector mutual funds came on the
scene. To deal with market imperfection such as information asymmetry and high transaction
costs, a number of measures were taken. AT the trading level, transparency was facilitated by the
new technology (NEAT system), which operated on a strict price/time priority. At the investor
level, transparency was augmented by the regulation that required listed companies to increase
the frequency of their account announcements. To ensure transferability of securities with speed,
accuracy and security, the Depositories Act was passed in 1996, which provided for the
establishment of securities depositories and allowed securities to be dematerialized. Following
the legislation, National Securities Depository Limited- India’s first depository- was launched.
Other measures to reduce transaction costs included:
(a) A movement toward electronic trading and settlement, and
(b) Streamlining of procedures with respect to clearance of new issues.
Stock exchange

15. The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual
organization specialized in the business of bringing buyers and sellers of the organizations to a
listing of stocks and securities together.
Stock Exchanges are an organized marketplace where members of the organization gather to
trade company stocks and other securities. The members may act either as agents for their
customers, or as principals for their own accounts. Stock exchanges also facilitate for the issue
and redemption of securities and other financial instruments including the payment of income
and dividends.
Portfolio Management Services:
Portfolio (finance) means a collection of investments held by an institution or a private
individual. Holding a portfolio is often 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. There are also portfolios which are aimed at taking high risks – these are called
concentrated portfolios.
Investment management is the professional 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. Investors may be institutions (Insurance companies, pension funds, corporations etc)
or private investors (both directly via investment contracts and more commonly via collective
investment schemes e.g. mutual funds).
The term asset management is often used to refer to the investment management of collective
investments, while the more generic fund management may refer to all forms of institutional
investment as well as investment management for private investors. Investment managers who
specialize in advisory or discretionary management on behalf of (normally wealthy) private
investors may often to their services as wealth management or portfolio management often
within the context of so-called “private banking”.
The provision of ‘investment management services’ includes element of financial analysis, asset
selection, stock selection, plan implementation and ongoing monitoring of investments. Outside
of the financial industry, the term “investment management” is often applied to investments
other than financial instruments. Investments are often meant to include projects, brands, patents
and many things other than stocks and bonds. Even in this case, the term implies that rigorous
financial and economic analysis methods are used.
Need of PMS:
As in the current scenario the effectiveness of PMS is required. As the PMS gives investors
periodically review their asset allocation across different assets as the portfolio can get skewed
over a period of time. This can be largely due to appreciation / depreciation in the value of the
investments.
As the financial goals are diverse, the investment choices also need to be different to meet those
needs. No single investment is likely to meet all the needs, so one should keep some money in
bank deposits and liquid funds to meet any urgent need for cash and keep the balance in other

16. investment products/ schemes that would maximize the return and minimize the risk. Investment
allocation can also change depending on one’s risk-return profile.
Objectives of PMS:
There are the following objectives which are fulfilled by Portfolio Management Services.
1. Safety of Fund:
The investment should be preserved, not be lost, and should remain in the returnable
position in cash or kind.
2. Marketability:
The investment made in securities should be marketable that means, the securities must
be listed and traded in stock exchange so as to avoid difficulty in their encashment.
3. Liquidity:
The portfolio must consist of such securities, which could be en-cashed without any
difficulty or involvement of time to meet urgent need for funds. Marketability ensures
liquidity to the portfolio.
4. Reasonable return:
The investment should earn a reasonable return to upkeep the declining value of money
and be compatible with opportunity cost of the money in terms of current income in the
form of interest or dividend.
5. Appreciation in Capital:
The money invested in portfolio should grow and result into capital gains.
6. Tax planning:
Efficient portfolio management is concerned with composite tax planning covering
income tax, capital gain tax, wealth tax and gift tax.
7. Minimize risk:
Risk avoidance and minimization of risk are important objective of portfolio
management. Portfolio managers achieve these objectives by effective investment
planning and periodical review of market, situation and economic environment affecting
the financial market.
Portfolio construction:
The Portfolio construction of Rational investors wish to maximize the returns on their funds for a
given level of risk. All investments possess varying degrees of risk. Returns come in the form of
income, such as interest or dividends, or through growth in capital values (i.e. capital gains).
The portfolio construction process can broadly characterized as comprising the following steps:
1. Setting objectives:

17. The first step in building a portfolio is to determine the main objectives of the fund given
the constraints (i.e. tax and liquidity requirements) that may apply. Each investor has
different objectives, time horizons and attitude towards risk. Pension funds have long-
term obligations and, as a result, invest for the long term. Their objective may be to
maximize total returns in excess of the inflation rate. An individual may have certain
liabilities and wish to match them at a future date. Assessing a client’s risk tolerance can
be difficult. The concepts of efficient portfolios and diversification must also be
considered when setting up the investment objectives.
2. Defining Policy:
Once the objectives have been set, a suitable investment policy must be established. The
standard procedure is for the money manager to ask clients to select their preferred mix
of assets, for example equities and bonds, to provide an idea of the normal mix desired.
Clients are then asked to specify limits or maximum and minimum amounts they will
allow to be invested in the different assets available. The main asset classes are cash,
equities, gilts/bonds and other debt instruments, derivatives, property and overseas assets.
Alternative investments, such as private equity, are also growing in popularity, and will
be discussed later. Attaining the optimal asset mix overtime is one of the key factors of
successful investing.
3. Applying Portfolio Strategy:
At either end of the portfolio management spectrum of strategies are active and passive
strategies. An active strategy involves predicting trends and changing expectations about
the likely future performance of the various asset classes and actively dealing in and out
investment to seek a better performance. For example, if the manager expects interest
rates to rise, bond prices are likely to fall and so bonds should be sold, unless this
expectation is already factored into bond prices. AT this stage, the active fund manager
should also determining the style of the portfolio. For example, will the fund invest
primarily in companies with large market capitalization, in shares of companies expected
to generate high growth rates, or in companies whose valuations are low? A passive
strategy usually involves buying securities to match a preselected market index.
Alternatively, a portfolio can be set up to match the investor’s choice of tailor-made
index. Passive strategies rely on diversification to reduce risk. Outperformance versus the
chosen index is not expected. This strategy requires minimum input from the portfolio
manager. In practice, many active funds are managed somewhere between the active and
passive extremes, the core holdings of the fund being passively managed and the balance
being actively managed.
4. Asset Selection:
Once the strategy is decided, the fund manager must select individual assets in which to
invest. Usually a systematic procedure known as an investment process is established,
which sets guidelines or criteria for asset selection. Active strategies require that the fund
manager apply analytical skills and judgement for asset selection in order to identify
undervalued assets and to try to generate superior performance.

18. 5. Performance assessments:
In order to assess the success of the fund manager, the performance of the fund is
periodically measured against a pre-agreed benchmark- perhaps a suitable stock exchange
index or against a group of similar portfolios (peer group comparison). The portfolio
construction process is continuously iterative, reflecting changes internally and
externally. For example, expected movements in exchange rates may make overseas
investment more attractive, leading to changes in asset allocation. Or, if many large-scale
investors simultaneously decide to switch from passive to more active strategies, pressure
will be put on the fund managers to offer more active funds. Poor performance of a fund
may lead to modifications in individual asset holdings or, as an extreme measure; the
manager of the fund may changed altogether.
Steps to selection process
Types of Assets:
The structure of a portfolio will depend ultimately on the investor’s objectives and on the asset
selection decision reached. The portfolio structure takes into account a range of factors,
including the investor’s time horizon, attitude to risk, liquidity requirements, tax position and
availability of investments. The main asset classes are cash, bonds and other fixed income
securities, equities, derivatives, property and overseas assets.
Cash and Cash Instruments:

19. Cash can be invested over any desired period, to generate interest income, in a range of highly
liquid or easily redeemable instruments, from simple bank deposits, negotiable certificates of
deposits, commercial paper (short term corporate debt) and Treasury bills (short term
government debt) to money market funds, which actively manage cash resources across a range
of domestic and foreign markets. Cash is normally held over the short term pending use
elsewhere (perhaps for paying claims by a non-life insurance company or for paying pensions),
but may be held over the longer term as well. Returns on cash are driven by the general demand
for funds in an economy, interest rates, and expected rate of inflation. A portfolio will normally
maintain at least a small proportion of its funds in cash in order to take advantage of buying
opportunities.
Bonds:
Bonds are debt instruments on which the issuer (the borrower) agrees to make interest payments
at periodic intervals over the life of the bond- this can be for two to thirty years or, sometimes, in
perpetuity. Interest payments can be fixed or variable, the latter being linked to prevailing levels
of interest rates. Bond markets are international and have grown rapidly over recent years. The
bond markets are highly liquid, with many issuers of similar standing, including governments
(sovereigns) and state-guaranteed organizations. Corporate bonds are bonds that are issued by
companies. To assist investors and to help in the efficient pricing of bond issues, many bond
issues are given ratings by specialist agencies such as standard & Poor’s and Moody’s. The
highest investment grade is AAA, going all the way down to D, which is graded as in default.
Depending on expected movements in future interest rates, the capital values of bonds fluctuate
daily, providing investors with the potential for capital gains or losses. Future interest rates are
driven by the likely demand/supply of money in an economy, future inflation rates, political
events and interest rates elsewhere in world markets. Investors with short-term horizons and
liquidity requirements may choose to invest in bonds because of their relatively higher return
than cash and their prospects for possible capital appreciation. Long-term investors, such as
pension funds, may acquire bonds for the higher income and may hold them until redemption –
for perhaps seven or fifteen years. Because of the greater risk, long bonds (over ten years to
maturity) tend to be more volatile in price than medium- and short- term bonds, and have a
higher yield.
Equities:
Equities consists of shares in company representing the capital originally provided by
shareholders. An ordinary shareholder owns a proportional share of the company and an ordinary
share carries the residual risk and rewards after all liabilities and costs have been paid. Ordinary
shares carry the right to receive income in the form of dividends (once declared out of
distributable profits) and any residual claim on the company’s assets once its liabilities have been
paid in full. Preference shares are another type of share capital. They differ from ordinary shares
in that the dividend on a preference share is usually fixed at some amount and does not change.
Also, preference shares usually do not carry voting rights and, in the event of firm failure,
preference shareholders are paid before ordinary shareholders. Returns from investing in equities
are generating in the form of dividend income and capital gain arising from the ultimate sale of
the shares. The level of dividends may vary from year to year, reflecting the changing
profitability of a company. Similarly, the market price of a share will change from day to day to
reflect all relevant available information. Although not guaranteed, equity prices generally rise

20. over time, reflecting general economic growth, and have been found over the long term to
generate growing levels of income in excess of the rate of inflation. Grated, there may be periods
of time, even years, when equity prices trend downwards – usually during recessionary times.
The overall long-term prospect, however, for capital appreciation makes equities an attractive
investment preposition for major institutional investors.
Derivatives:
Derivative instruments are financial assets that are derived from existing primary assets as
opposed to being issued by a company or government entity. The two most popular derivatives
are futures and options. The extent to which a fund may incorporate derivative products in the
fund will be specified in the fund rules and depending on the type of fund established for the
client and depending on the type of fund established for the clients and depending on the client,
may not be allowable at all.
A future contract is an agreement in the form of a standardized contract between two
counterparties to exchange an asset at a fixed price and date in the future. The underlying asset of
the futures contract can be a commodity or a financial security. Each contract specifies the type
and amount of the asset to be exchanged, and where it is to be delivered (usually one of a few
approved locations for that particular asset). Futures contracts can be set up for the delivery of
steel, oil and coffee. Likewise, financial futures contracts can specify the delivery of foreign
currency or a range of government bonds. The buyer of a futures contract takes a ‘long position’,
and will make a profit if the value of the contract rises after the purchase. The seller of the
futures contract takes a ‘short position’ and will, in turn, make a profit if the price of the futures
contracts falls. When the futures contract expires, the seller of the contract is required to deliver
the underlying asset to the buyer of the contract. Regarding financial futures contracts, however,
in the vast majority of cases no physical delivery of the underlying asset takes place as many
contracts are cash settled or closed out with the offsetting position before the expiry date.
An open contract is an agreement that gives the owner the right, but not obligation, to buy or sell
(depending on the type of option) a certain asset for a specified period of time. A call option
gives the holder the right to buy the asset. A put option gives the holder the right to sell the asset.
European options can be exercised only on the options’ expiry date. US options can be exercised
at any time before the contract’s maturity date. Option contract on stocks or stock indices are
particularly popular. Buying an option involves paying a premium; selling an option involves
receiving the premium. Options have the potential for large gains or losses, and are considered to
be high-risk instruments. Sometimes, however, option contracts are used to reduce risk. For
example, fund managers can use a call option to reduce risk when they own an asset only very
specific funds are allowed to hold options.
Property:

21. Property investment can be made either directly by buying properties, or indirectly by buying
shares in listed companies. Only major institutional investors with long-term time horizons and
no liquidity pressures tend to make direct property investments. These institutions purchase
freehold and leasehold properties as part of a property portfolio held for the long term, perhaps
twenty or more years. Property sectors of interest would include prime, quality, well-located
commercial office and shop properties, modern industrial warehouses and estates, hotels,
farmland and woodland. Returns are generated from annual rents and any capital gains on
realization. These investments are often highly illiquid.
Portfolio Diversification:
There are several different factors that cause risk or lead to variability in returns on an
individual investment. Factors that may influence risk in any given investment vehicle
include uncertainty of income, interest rates, inflation, exchange rates, tax rates, the state
of the economy, default risk and liquidity risk (the risk of not being able to sell on the
investment). In addition, an investor will assess the risk of a given investment (portfolio)
within the context of other types of investments that may already be owned, i.e. stakes in
pension funds, life insurance policies with saving components, and property.
One way to control portfolio risk is via diversification, whereby investments are made in
a wide variety of assets so that the exposure to the risk of any particular security is
limited. This concept is based on the old adage ‘do not put all your eggs in one basket’. If
an investor owns shares in only one company, that investment will fluctuate depending
on the factors influencing that company. If that company goes bankrupt, the investor
might lose 100 % of the investment. If, however, the investor owns shares in several
companies in different sectors, then the likelihood of those companies going bankrupt
simultaneously is greatly diminished. Thus, diversification reduces risk. Although
bankruptcy risk has been considered here, the same principle applies to other forms of
risk.
TECHNOQUES OF PORTFOLIO MANAGEMENT
Various types of portfolio require different techniques to be adopted to achieve the desired
objectives. Some of the techniques followed in India by portfolio managers are summarized
below
(1). Equity portfolio –
Equity portfolio is affected by internal and external factors:
(a) Internal factors –

22. Pertain to the inner working of the particular company of which equity shares are held these
factors generally include:
(1) Market value of shares
(2) Book value of shares
(3) Price earnings ratio (P/E ratio)
(4) Dividend payout ratio
(b) External factors –
(1) Government policies
(2) Norms prescribed by institutions
(3) Business environment
(4) Trade cycles
(2). Equity stock analysis –
The basic objective behind the analysis is to determine the probable future – value of the shares
of the concerned company. It is carried out primarily fewer than two ways. :
(a) Earnings per share
(b) Price earnings ratio
(A) Trend of earning: -
➢ A higher price-earnings ratio discount expected profit growth. Conversely, a downward trend
in earning results in a low price-earnings ratio to discount anticipated decrease in profits, price
and dividend. Rising EPS causes appreciation in price of shares, which benefits investors in
lower tax brackets? Such investors have not pay tax or to give lower rate tax on capital gains.
➢ Many institutional investors like stability and growth and support high EPS.
➢ Growth of EPS is diluted when a company finances internally its expansion program and
offers new stock.
➢ EPS increase rapidly and result in higher P/E ratio when a company finances its expansion
program from internal sources and borrowings without offering new stock.
(B) Quality of reported earning: -

23. Quality of reported earnings affects P/E ratio. The factors that affect the quality of reported
Earnings are as under:
➢ Depreciation allowances: -
Larger (Non Cash) deduction for depreciation provides more funds to company to finance
profitable expansion schemes internally. This builds up future earning power of company.
➢ Research and development outlets : -
There is higher P/E ratio for a company, which carries R&D programs. R&D enhances profit
earning strength of the company through increased future sales.
➢ Inventory and other non-recurring type of profit : -
Low cost inventory may be sold at higher price due to inflationary conditions among profit but
such profit may not always occur and hence low P/E ratio.
(C) Dividend policy: -
Dividend policy is significant in affecting P/E ratio. With higher dividend ratio, equity price
goes up and thus raises P/E ratio. Dividend rates are raised to push in share prices up. Dividend
cover is calculated to find out the time the dividend is protected, In terms of earnings. It is
calculated as under:
Dividend Cover = EPS / Dividend per Share
(D) Investors demand: -
Demand from institutional investors for equity also enhances the P/E ratio.
(3) Quality of management: -
Investors decide about the ability and caliber of management and hold and dispose of equity
academy. P/E ratio is more where a company is managed by reputed entrepreneurs with good
past records of management performance.
Types of Portfolios
The different types of Portfolio which is carried by any Fund Manager to maximize profit and
minimize losses are different as per their objectives .They are as follows.
Aggressive Portfolio:

24. Objective: Growth. This strategy might be appropriate for investors who seek high growth and
who can tolerate wide fluctuations in market values, over the short term.
Growth Portfolio:
Objective: Growth. This strategy might be appropriate for investors who have a preference for
growth and who can withstand significant fluctuations in market value.

25. Balanced Portfolio:
Objective: Capital appreciation and income. This strategy might be appropriate for investors
who want the potential for capital appreciation and some growth, and who can withstand
moderate fluctuations in market value.
Conservative Portfolio:
Objective: Income and capital appreciation. This strategy may be appropriate for investors who
want to preserve their capital and minimize fluctuations in market value.

26. I
Risk and Risk Aversion:
Portfolio theory also assumes that investors are basically risk averse, meaning that, given a
choice between two assets with equal rates of return they will select the asset with lower level of
risk.
For example, they purchased various type of insurance including life insurance, Health insurance
and car insurance. The combination of risk preference and risk aversion can be explained by an
attitude towards risk that depends on the amount of money involved.
A discussion of portfolio or fund management must include some thought given to the concept of
risk. Any portfolio that is being developed will have certain risk constraints specified in the fund
rules, very often to cater to a particular segment of investor who possesses a particular level of
risk appetite. It is, therefore, important to spend some time discussing the basic theories of
quantifying the level of risk in an investment, and to attempt to explain the way in which market
values of investments are determined.
Definition of Risk:
Although there is a difference in the specific definitions of risk and uncertainty, for our purpose
and in most financial literature the two terms are used interchangeably. In fact, one way to define
risk is the uncertainty of future outcomes. An alternative definition might be the probability of an
adverse outcome.
Composite risks involve the different risk as explained below:-
1. Interest rate risk:
It occurs due to variability cause in return by changes in level of interest rate. In long runs
all interest rate move up or downwards. These changes affect the value of security. RBI,
in India, is the monitoring authority which affect the change in interest rate. Any upward
revision in interest rate affects fixed income security, which carry old lower rate of
interest and thus declining market value. Thus it establishes an inverse relationship in the
prize of security.
TYPES RISK EXTENT
Cash Equivalent Less vulnerable to interest rate
risk
Long term Bond More vulnerable to interest
rate risk
2. Purchasing power risk:-

27. It is known as inflation risk also. This risk emanates from the very fact that inflation
affects the purchasing power adversely. Purchasing power risk is more in inflationary
times in bonds and fixed income securities. It is desirable to invest in such securities
during deflationary period or a period of decelerating inflation. Purchasing power risk is
less in flexible income securities like equity shares or common stuffs where rise in
dividend income offset increase in the rate of inflation and provide advantage of capital
gains.
3. Business Risk:-
Business risk emanates from sale and purchase of securities affected by business
cycles, technological change etc. Business cycle affects all the type of securities
viz. there is cheerful movement in boom due to bullish trend in stock prizes where as
bearish trend in depression brings downfall in the prizes of all types of securities.
Flexible income securities are nearly affected than fix rate securities during depression
brings downfall in the prizes of all types of securities. Flexible income securities are
nearly affected than fix rate securities during depression due to decline in the market
prize.
4. Financial Risk:-
Financial risk emanates from the changes in the capital structure of the company. It is
also known as leveraged risk and expressed in term of debt equity ratio. Excess of debts
against equity in the capital structure indicates the company to be highly geared or highly
levered. Although leveraged company’s earnings per share (EPS) are more but
dependence on borrowing exposes it to the risk of winding up. For, its inability to the
honor its commitments towards the creditors are most important.
Here it is imperative to express the relationship between risk and return, which is
depicted graphically below:-
Maximize returns, minimize risks: