A project report on portfolio management

A PROJECT REPORT ON

AT

BY XYZ

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CERTIFICATE

This is to certify that Mr. XYZ of INTERNATIONAL INSTITUTE OF MANAGEMENT STUDIES has successfully completed the project work titled “ PORTFOLIO MANAGEMENT(INVESTMENT MANAGEMENT)“ in partial fulfilment of requirement to the award of POST GRADUATE DIPLOMA IN MANAGEMENT(PGDM) prescribed by XYZ.

This project is the record of authentic work carried out during the academic year.

Prof. XYZ Internal Project Guide

Dr. XYZ Director

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DECLARATION I, XYZ, hereby declare that this project is the record of authentic work carried out by use during the academic year 2007-09 and has not been submitted to any other University or Institute towards the award of any degree.

XYZ

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ACKNOWLEDGEMENT This project is an attempt to share my experience and learning during two months of my project with SHAREKHAN Ltd. In Pune.

I would like to express my sincere gratitude to Mr. XYZ for guiding me throughout the project.

I would like to express my thanks in no less measure to my respected Prof. XYZ for his kind co-operation. I would also like to than respected Dr. XYZ sir, my internal project guide for his invaluable guidance.

My deepest regard to my parents and thankful to my friends who have been always immense source of inspiration and support and support to me forever .I would like to delicate my parent and friends, without those co-operation this take would remained achieved.

XYZ

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INDEX CHAPTER

SUBJECT

PAGE NO.

1

INTRODUCTION

6- 7

2

COMPANY PROFILE

8- 11

3

SERVICES

4

ONLINE & OFFLINE ACCOUNT

17- 24

5

DERIVATIVES

25- 31

6

MUTUAL FUNDS

32- 44

7

PORTFOLIO MANAGEMENT

45- 57

8

CONCLUSION

58- 59

9

APPENDICES

60- 61

12- 16

5

6

OBJECTIVE       

To get the maximum knowledge about stock market/share market.

To get clear about the terms NSE, BSE, SENSEX, NIFTY. To know what exactly Portfolio Management System is and how it works.

To know detail about Investment Management.

To get the knowledge about Mutual Funds.

To know how Derivatives are useful for stock market.

As a whole to know about SHARE MARKET AND SHAREKHAN.

SCOPE  The scope is so simple. Get the maximum knowledge of Share market and have experience on stock market which will help you anticipating the future stock market. Means you have a idea that it is the right time to invest or not, market will go up or will go down etc.  Scope of increasing customer relationship by interacting with them, by giving current market status and the near future market analysis etc.  Scope of investing your money in stock market and getting profit out of that.

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COMPANY PROFILE 8

Sharekhan Ltd (SKL) was setup by the Morakhia family who has been in the equity broking business for decades. Till March 31, 2007, Morakhia family owned 43.58% stakes in SKL and the balance primarily held by three venture capital firms namely HSBC Private Equity India Fund Ltd. (14.56%), GA Global Investments Ltd (22.76%) and Intel Pacific Inc. During August 2007, promoters and the PE players exited the SKL and other PE players CVC and Samara Capital along with IDFC picked up their stakes. They also infused fresh capital (Rs 2 billion) through Fully Convertible Debentures (FCD). Post conversion of the FCD, CVC will be the majority stake holder with 45.14% stakes, Samara Capital holding 36.16%, IDFC holding 9.16% and rest with directors and employees of SKL. The main business activity of the company is retail share broking with small presence in the portfolio management services. During FY06-07, SKL booked a net profit of Rs 275.15 million on a total income of Rs as compared to the net profit of Rs 275.66 million booked on a total income of Rs 1,617.38 million in FY05-06. During H1 FY 07-08, SKL booked a net profit of Rs 242.76 million on a total income of Rs 1,815.87 million.

The Company Sharekhan Limited is a retail financial services provider with a focus on equities, derivatives and commodities brokerage execution on the National Stock Exchange of India Ltd. (NSE), Bombay Stock Exchange Ltd. (BSE), National Commodity and Derivatives Exchange India (NCDEX) and Multi Commodity Exchange of India Ltd. (MCX). Sharekhan provides trade execution services through multiple channels - an Internet platform, telephone and retail outlets and is present in 225 cities through a network of 615 locations. The company was awarded the 2005 Most Preferred Stock Broking Brand by Awwaz Consumer Vote.

The Business Challenges • Easily access customer portfolio information in a secure contact centre environment.

• Seamlessly integrate with back-end applications and streamline customer data to contact centre agents.

• Easily manage upgrades and technology issues to accommodate growing customer base.

The Solution

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Sharekhan selected Aspect® EnsemblePro™ from the Aspect Software Unified IP Contact Center product line, a unified contact centre solution delivering advanced multichannel contact capabilities, because it provided the best total value over other solutions evaluated. It enabled Sharekhan to meet customer service needs for inbound call handling, voice self service, predictive outbound dialing, call blending, call monitoring and recording, and creating outbound marketing campaigns, among other capabilities.

The Results • Increased agent efficiency and productivity • Enabled company to execute proactive customer service calls and expand services offered to customers • Enhanced call monitoring for improved service quality Financial services is a highly competitive and volume-driven industry which demands high standards of customer service, effective consultation and quick deliverables. This is something Sharekhan Limited, a retail financial services provider based in India, understands. The company offers several user-friendly services for customers to manage their stock portfolios, including online capabilities linked to an information database to help customers confidently invest, and inbound customer services using voice self-service technology and customer service agents handling telephone orders from clients.

Managing Business Growth With a customer base of more than 260,000, Sharekhan continues to grow at a fast pace. The company required reliable contact centre technology that could handle its growing customer base and expanding services portfolio. Downtime in the contact centre, even for a short period of time, was unacceptable as it could result in financial losses and more importantly, a decrease in customer loyalty.

As a result, customer satisfaction was a top priority in Sharekhan’s agenda. Its primary objective was to help and support its customers in managing their shares portfolio in the best possible manner. In anticipation of market trends, which estimated that multiple applications, up-selling, and cross-selling among stockbrokers would grow in the near future, Sharekhan needed a sound solution to manage complex customer queries.

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Sharekhan is an equities focused organisation tracing its lineage to SSKI, a veteran equities solutions company with over five decades of experience in Indian stock markets.

Sharekhan brings to you a user-friendly online trading facility, coupled with a wealth of content that will help you stalk the right shares. We also run an extensive all-India ground network of franchisees across the country.

Sharekhan Financial Services Private Ltd Incorporated in November 2004 as a wholly owned subsidiary of Sharekhan Ltd, SFSL was primarily involved in the business of share trading till FY07. In April 2007 the proprietary (arbitrage) book of SFSL was transferred to the parent company and currently SFSL is engaged in the IPO funding business only. SFSL is registered with RBI as a Non-Banking Financial Institution (NBFC) During FY06-07, SFSL booked a net profit of Rs 23.92 million on a total income of Rs 1.09 billion as compared to a net profit of Rs 8.75 million booked on a total income of Rs 25.36 million in FY05-06. As on March 31, 2007 SFSL had a networth of Rs 0.13 billion and the parent - Sharekhan Ltd has infused another Rs 0.10 billion of equity capital in January 2008.

ICRA has assigned the A1 (pronounced A one) rating to the Rs 2 billion short -term debt programme of ShareKhan Financial Services Pvt Ltd (SFSL) for IPO financing.

The rating indicates the highest-credit-quality rating assigned by ICRA to shortterm debt instruments. Instruments rated in this category carry the lowest credit risk in the short term. Within this category, certain instruments are assigned the rating of A1+ to reflect their relatively stronger credit quality.

The rating factors in the parentage of Sharekhan Ltd (100% ownership) having adequate experience in the retail equity broking. The rating also factors in the favorable “Sharekhan” brand image, group’s comfortable capitalisation, and adequate risk management systems employed by the Company. The rating is constrained by the dependence of SFSL on the cyclical nature of Sharekhan Ltd’s primary business of equity broking, and short track record of IPO financing and margin funding.

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FINANCIAL PRODUTS AVAILABLE AT SHAREKHAN

SHAREKHAN

EQUITY

DERIVATIVES

MUTUAL FUNDS

CASH

FUTURES

PURCHASES

MARGIN

OPTIONS

IPOs

BONDS

SHAREKHAN BONDS

GOI BONDS

REDEMPTION

BTST

SIP & SWP

SWITCH IN/OUT

SPOT

TRANSFER IN

SERVICES 13

Always wanted help on what the stock market is all about? Been wondering about how all this works? Well, you don't need to fret any more - the Sharekhan FirstStep is a brand new program designed especially for those who are new to investing in shares. All you have to do is open a Sharekhan FirstStep account and we'll guide you through the investing process.

Only you have to fill up a form and u get a login id and after that your Sharekhan First Step is over.

Why choose Sharekhan as your guide?

When beginning your foray in investing in shares, you need a lot of things - from the right tools and the right information at your disposal, to assistance when you need it and advice on investing. We've been in this business for over 80 years now, and with us you get a host of services and tools that are difficult to find in one place anywhere else. The Sharekhan FirstStep program, built specifically for new investors like you, is testament to our commitment to being your guide throughout your investing lifecycle.

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Dematerialisation and trading in the demat mode is the safer and faster alternative to the physical existence of securities. Demat as a parallel solution offers freedom from delays, thefts, forgeries, settlement risks and paper work. This system works through depository participants (DPs) who offer demat services and the securities are held in the electronic form for the investor directly by the Depository.

Sharekhan Depository Services offers dematerialisation services to individual and corporate investors. We have a team of professionals and the latest technological expertise dedicated exclusively to our demat department, apart from a national network of franchisee, making our services quick, convenient and efficient.

At Sharekhan, our commitment is to provide a complete demat solution which is simple, safe and secure

Account Opening Forms 1.

2.

3.

4.

Account opening for individual Account opening for corporate Agreement Copy Tariff Sheet

Other Forms 1. Freezing / De-freezing 2. Transmission 3. Nomination 4. Transposition 5. Account Closing Form 6. Client Master Changes 7. Demat Request Form 8. Pleage Form NSDL 9. Remat Request Form 10. Demat Request Form for Govt. Sec 11. Transmission - Dematerialisation Form

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Get everything you need at a Sharekhan outlet!

All you have to do is walk into any of our 640 share shops across 280 cities in India to get a host of trading related services - our friendly customer service staff will also help you with any accouts related queries you may have.

A Sharekhan outlet offers the following services:              

Online BSE and NSE executions (through BOLT & NEAT terminals) Free access to investment advice from Sharekhan's Research team Sharekhan ValueLine (a monthly publication with reviews of recommendations, stocks to watch out for etc) Daily research reports and market review (High Noon & Eagle Eye) Pre-market Report (Morning Cuppa) Daily trading calls based on Technical Analysis Cool trading products (Daring Derivatives and Market Strategy) Personalised Advice Live Market Information Depository Services: Demat & Remat Transactions Derivatives Trading (Futures and Options) Commodities Trading IPOs & Mutual Funds Distribution Internet-based Online Trading: SpeedTrade

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SHAREKHAN

CLASSIC A/C

ONLINE A/C

OFFLINE A/C

FAST TRADE

TRADE TIGER

Investing online is so much easier ! Classic a/c is done by internet. Simply go to the web page of Sharekhan and u can start trading through net.

This account enables you to buy and sell shares through our website. You get features like a) Streaming quotes (using the applet based system) b) Mutltiple watchlists c) Integrated Banking, demat and digital contracts d) Instant credit and transfer e) Real-time portfolio tracking with price alerts and, of course, the assurance of secure transactions.

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FEATURES OF CLASSIC A/C         

Online trading account for investing in Equities and Derivatives via sharekhan.com Integration of: Online trading + Bank + Demat account Instant cash transfer facility against purchase & sale of shares Make IPO bookings You get Instant order and trade confirmations by e-mail Streaming Quotes Personalised Market Scan with your own customized stock ticker!

Single screen interface for cash and derivatives Your very own Portfolio Tracker!

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The Power and Speed of a Broker's Terminal on your Desktop!

The ideal tool for active traders and jobbers who transact frequently during the day's trading session, Speedtrade enables you to capitalize on intra-day price movements.

Speedtrade is an Internet-based executable application that provides everything a trader needs on ONE screen: 1: Real-time streaming quotes 2: Live Tic-by-Tic Intra-day charting 3: Trading in Cash and Derivatives on a single screen

FEATURES OF FAST TRADE Instant order Execution & Confirmation  Single screen trading terminal  Real-time streaming quotes, tic-by-tic charts  Market summary (most traded scrip, highest value and lots of other relevant statistics)  Hot keys similar to a brokers terminal  Alerts and reminders  Back-up facility to place trades on Direct Phone lines  Single screen interface for cash and derivatives 

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TRADE TIGER • ‘ n ‘ no.of scripts you can add to your profile.

• Minimum investment of Rs. 5 Lacs

OFFLINE A/C • • • •

Offline itself suggest that no online trading.

There is only one Terminal.

There is only one Dealer. You can call him/her as Relationship Manager.

Rs. 1 Lac is the minimum portfolio required for offline trading

CHARGES

CLASSIC A/C FAST TRADE TRADE TIGER OFFLINE A/C

Rs. 750 Rs. 750 Rs. 1000 Rs. 0 (Free)

DOCUMENT REQUIRED 1.

2.

3.

4.

5.

PAN CARD ADRESS PROOF (PASSPORT, DL, RASON CARD etc.)

CHEQUE TWO PHOTOGRAPHS PHOTOGRAPH OF NOMINEE (OPTIONAL)

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BROKARAGE It is the charge taken by the guiding company for helping you in buying and selling your shares. There are different charges for Intraday and Delivery.

INTRADAY The day to day buying and selling or daily transactions are called as Intraday. You have to buy or sell the shares within the day only.

DELIVERY It is the three day transaction. The day you buy the share and the next two days after that day is called as Delivery. It includes thre days. If you are buying any share then you have to sell it within three days including the buying day.

T+2 = Today + 2 days

BROKARAGE CHARGES FOR INTRADAY AND DELIVERY

BUYING

SELLING

INTRADAY

Rs. 0.10

Rs. 0.10

DELIVERY

Rs. 0.50

Rs. 0.50

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PREPAID ACCOUNT There are three types of Prepaid account are provided to the customers accordingly they make transactions more and more. All Prepaid accounts are valid for One year only.

PREPAID ACCOUNTS

BUYING (INTRADAY)

SELLING (INTRADAY)

BUYING (DELIVERY)

SELLING (DELIVERY)

Rs. 2000

Rs. 0.07

Rs. 0.07

Rs. 0.40

Rs. 0.40

Rs. 6000

Rs. 0.025

Rs. 0.025

Rs. 0.25

Rs. 0.25

Rs. 18000

Rs. 0.020

Rs. 0.020

Rs. 0.20

Rs. 0.20

EXPOSURE Sharekhan also helps their customers by providing them a Four time Exposure.

Example :- If a customer invests Rs. 20000, then he will get a exposure of 4 times of Rs. 20000 that means Rs. 20000 * 4 = Rs. 100000.

But only for Five days, within 5 days the customer have to pay back the amount otherwisw they will sell your shares. But yes, they will sell the loss amking shares first. If you make any frod , then also you may face the sane problem.

But Exposure always helps the customer to invest more and more in profit making scripts. It is like an Overdraft which you have to return within 5 days.

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DERIVATIVES Derivatives are financial contracts whose value/price is dependent on the behaviour of the price of one or more basic underlying assets (often simply known as the underlying). These contracts are legally binding agreements, made on the trading screen of stock exchanges, to buy or sell an asset in future. The asset can be a share, index, interest rate, bond, rupee, dollar exchange rate, sugar, crude oil, soybean, coffee and what have you.

Derivatives are financial instruments whose value changes in response to the changes in underlying variables. The main types of derivatives are futures, forwards, options, and swaps.

The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a huge range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), bonds, interest rates, exchange rates, or indexes (such as a stock market index, consumer price index (CPI) — see inflation derivatives — or even an index of weather conditions, or other derivatives). Their performance can determine both the amount and the timing of the pay-offs.

Derivative transactions include a wide assortment of financial contracts including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards and various combinations thereof.

A very simple example of derivatives is curd, which is derivative of milk. The price of curd depends upon the price of milk which in turn depends upon the demand and supply of milk.

The price of Reliance Triple Option Convertible Debenturs (Reliance TOCD) used to very with the price of Reliance shares, And the price of TELCO warrants depends upon the price of Telco shares.

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DERIVATIVES

FUTURE

OPTION

CALL

PUT

FUTURES Futures are exchange-traded contracts to buy or sell an asset in future at a price agreed upon today. The asset can be share, index, interest rate, bond, rupee dollar exchange rate, etc.

The standard terms in any futures contract are; • Quantity of the underlying asset • Quality of the underlying asset(not tequired in case of financial futures) • Expiration date • The unit of price quotation(not the price) • Minimum fluctuation in price(tick size) • Settlement style For example, when you are dealing in May 2007 Satyam futures contract, you know that the market lot, i.e the minimum quantity you can buy or sell, is 600 shares of Satyam, the contract would expiry on May 31,2007, the price is quoted per share, the tick size is 5 paisa per share or (600*0.05)= Rs. 30 per contract/market lot, the contract would be settled in cash and the closing price in the cash market on expiry day would be the settlement price.

PRICING FUTURES 27

Futures price = Spot price + Cost of Carry The Cost of Carry is the sum of all costs incurred if a similar position is taken in cash market and carried to expiry of the futures contract less any revenue that may arise out of holding the asset. The cost typically includes interest cost in case of financial futures. Revenue may be in the form of dividend.

Suppose Reliance shares are quoting at Rs. 1500 in the cash market, The interest rate is about 12% per annum. The cost of carry for one month would be about Rs. 15. As such a Reliance Future contract with one month maturity shoud quote at nearly Rs 1515. Similarly Nifty level in the cash market is about 4000. One month Nifty future should quote at about 4040 As the futures contract approaches expiry, the difference between cash and futures prices (called Basis) reduces as time to expiry reduces; thus futures and cash prices start converging. On expiry day, the futures price should equal cash market price.

Presently both stock and index futures are settled in cash. The closing price in the cash segment is considered as the settlement price. The difference between the trade price and the settlement price is ultimately your profit/loss.

It is not necessary to wait for the expiry day once you have initiated the position.

You can square up your position at any time during the tradind session, booking profit or cutting losses.

ADVANTAGES AND RISKS OF TRADING IN FUTURES OVER CASH The biggest advantage of futures is that you can short sell without having stock and you can carry your position for a long time, which is not possible in the cash segment because of rolling settlement. Conversely you can buy futures and carry the position for a ong time without taking delivery, unlike in the cash segment where you have to take delivery because of rolling settlement

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You expect a Rs.100 stock to go up by Rs.10. One way is to buy the stock in the cash segment by paying Rs.100. You make Rs.10 on investment of Rs.100, giving about 10% returns. Alternatively you take futures position in the stock by paying about Rs.30 toward initial and mark-to-mark margin. You make Rs.10 on investment of Rs.30, i.e about 33% returns.

In the event of corporate announcements like like dividend, bonus, stock, split, rights, the exchanges adjust the position such that economical value of your position on cumbenefit and on ex-benefit day is the same.

EFFECT OF DIVIDEND ON FUTURE While calculating the theoretical price of a futures contract, the interest rate should be taken as net of dividend yield. So on announcement of the dividend, the futures price should be discounted by the dividend amount.

However as per the policy of Sebi and stock exchanges, if the dividend is more than 10% of the market price of the stock on the day of dividend announcement, the future price is adjusted. The exchanges roll over the positions from last-cum-dividend day to the ex-dividend day by reducing the settlement price by dividend. In such a case, the price of futures doesnot affected by the announcement of such exceptional dividends.

Suppose Reliance is trading at Rs.1500 and a two month Reliance future which has 45 days to maturity is trading at Rs.1520. Reliance declares 250% dividend, i.e Rs.25.

The dividend amount is less than 10% of the market price of Reliance, so the exchange would not adjust the position. As such the market adjusts this dividend in the market price and the futures price goes down by Rs.25 to Rs.1495.

MAKE MONEY EVEN AFTER FUTURES QUOTE BELOW CASH MARKET Suppose SBI future is quoting at 1200 while SBI is quoting at Rs.1210 in the cash market. Then • Sell SBI in the cash market at Rs.1210 and simultaneously buy SBI future at 1200 • Receive Rs.1210 and make delivery of SBI cash in the cash market • On expiry of the SBI future contract, the long position would be transefered to your account in the cash segment and a receive order would be issued to you.

• Get your SBI stock stock back.

• Whatever happens to the price of SBI, you earn Rs.1210-1200=10 on your stock.

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OPTIONS Options are contracts that give the buyers the right to buy or sell a specified quantity of certain underlying asset at a specified price on or before a specified date. On the other hand, the seller is under obligation to perform the contract. The underlying asset can be share, index, interest rate, bond, sugar, etc.

The options that give their buyer the right to buy are called Call Option, and those which give their buyer the right to sell are called Put Options.

CALL OPTION Suppose you have a right to buy 1000 shares of Hindustan Lever at Rs.200 per share on or before May 31,2007. In other words you are a buyer of a call option on Hindustan Lever. The option gives you the right to buy 1000 shares. You have the right to buy Hindustan Lever shares at Rs.200 per share.

The seller of this call option who hs given you the right to buy from him is under obligation to sell 1000 shares of Hindustan Lever at Rs.200 per share on or before May 31,2007, whenever asked.

PUT OPTION Suppose you have the right to sell 300 shares of Bharat heavy electricals at Rs.1300 per share on or before May 31st 2007. In other words you are a buyer of a put option on Bharat heavy electricals. The option gives you the right to sell 300 shares. You have the right to sell Bharat heavy electricals share at Rs.1300 per share. The seller of this put option who has given you the right to sell to him is under obligation to buy 300 shares of Bharat heavy electricals at rs.1300 per shares on or before May 31st 2007 whenever asked.

HOW TO BUY CALL AND PUT OPTION Call and put options are traded on-line on the trading screens of the National Stock Exchange and Bombay Stock Exchange like any other securities. You can also place your orders with sharekhan to buy or sell option contracts. We are registered brokers and authorised to deal in futures and options on index and stocks on the National Stock Exchange.

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The price of options is decided between the buyers and sellers on the trading screens of the exchanges in a transparent manner. You can see the best five orders by price and quantity. You can place market, limit and stop loss order etc.. You can modify or delete your pending orders. The whole process is similar to that of trading in shares.

You are not compelled to wait till expiry of the option once you have bought or sold an option. Instead you can buyan option and square up the position by selling the identical option at any time before the contract expires. You can sell an option and square up the position by buying an identical option. You can buy first and sell later or u can initiate your position by selling and then buying-there is no restriction on direction. The difference between the selling and buying prices is your profit/loss. The process is similar to that of trading in shares.

FACTORS AFFECTING THE PRICE OF AN OPTION 1.

2.

3.

4.

5.

Price of the underlying stock or index Strike price /exercise price of an option Time to expiration of the option Risk-free rate of interest Volatility of the price of underlying stock or index.

WHEN OPTION CALLED OUT OF THE MONEY Those options whose intrinsic value is zero are called out of the money, by virtue of the fact that they are not holding any money right now. For example, when SBI is quoting at Rs.1300, an SBI call option with Rs.1320 strike price is out of the money because you have the right to buy at higher price than the spot price of the underlying. All those call options which have their strike price higher than the spot price of the underlying are out of the money.

Similarly when SBI is quoting at Rs.1300,an SBI put option with Rs.1280 strike price is out of the money because you have the right to sell at a price lower than the spot price of the underlying. All those put options which have their strike price lower than the spot price of the underlying are out of the money.

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MUTUAL FUND A mutual fund is a professionally managed firm of collective investments that collects money from many investors and puts it in stocks, bonds, short-term money market instruments, and/or other securities.[1] The fund manager, also known as portfolio manager, invests and trades the fund's underlying securities, realizing capital gains or losses and passing any proceeds to the individual investors.

Currently, the worldwide value of all mutual funds totals more than $26 trillion A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.

Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy).

As you probably know, mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. More than 80 million people, or one half of the households in America, invest in mutual funds. That means that, in the United States alone, trillions of dollars are invested in mutual funds.

In fact, to many people, investing means buying mutual funds. After all, it's common knowledge that investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a savings account, but, for most people, that's where the understanding of funds ends. It doesn't help that mutual fund salespeople speak a strange language that is interspersed with jargon that many investors don't understand.

Originally, mutual funds were heralded as a way for the little guy to get a piece of the market. Instead of spending all your free time buried in the financial pages of the Wall Street Journal, all you had to do was buy a mutual fund and you'd be set on your way to financial freedom. As you might have guessed, it's not that easy. Mutual funds are an excellent idea in theory, but, in reality, they haven't always delivered. Not all mutual funds are created equal, and investing in mutuals isn't as easy as throwing your money at the first salesperson who solicits your business.

A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

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You can make money from a mutual fund in three ways: 1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.

2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.

3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

Advantages of Mutual Funds: • Professional Management - The primary advantage of funds (at least theoretically) is the professional management of your money.

Investors purchase funds because they do not have the time or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.

• Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money.

• Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions.

• Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time.

• Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the minimum investment is small.

Most companies also have automatic purchase plans whereby as little as $100 can be invested on a monthly basis.

Disadvantages of Mutual Funds: • Professional Management - Did you notice how we qualified the advantage of professional management with the word "theoretically"?

Many investors debate whether or not the so-called professionals are any better than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses money, the manager still takes his/her cut. We'll talk about this in detail in a later section.

• Costs - Mutual funds don't exist solely to make your life easier - all funds are in it for a profit. The mutual fund industry is masterful at burying costs under layers of jargon. These costs are so complicated that in this tutorial we have devoted an entire section to the subject.

• Dilution - It's possible to have too much diversification. Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.

• Taxes - When making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gains tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

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Types of Mutual Funds There are two basic types of mutual funds. "Open-ended" or "Open" mutual funds are the most common type of mutual funds. Investors may purchase units from the fund sponsor or redeem units at the valuation promised in the fund documents, usually on a daily basis. "Closed-ended" or "Closed" mutual funds are traded as financial securities, once they are issued, and holders must sell their units on the stock market to receive their funds back.

Open Mutual Funds Open mutual funds are established by a fund sponsor, usually a mutual fund company. The sponsor has promised in the documents of the fund that it will issue and refund or units of the fund at the fund unit value. This type of fund is valued by the fund company or an outside valuation agent. This means that the investments of the fund are valued at "fair market" value, which is the closing market value for listed public securities.

Open mutual funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly "liquid securities", which means that the fund can raise money by selling securities at prices very close to those used for valuations. Funds also have the ability to borrow money for short periods of time to fund redemptions. The documents of open mutual funds usually provide for the suspension of unit redemptions in "extraordinary conditions" such as major interruptions to the financial markets or total demands for redemptions forming a substantial portion of the fund assets in a short period of time.

Closed Mutual Funds Closed mutual funds are really financial securities that are traded on the stock market. A sponsor, a mutual fund company or investment dealer, will create a "trust fund" that raises funds through an underwriting to be invested in a specific fashion.

35

Once underwritten, closed mutual funds trade on stock exchanges like stocks or bonds. Their value is what investors will pay for them. Usually closed mutual funds trade at discounts to their underlying asset value.

Mainly it is for three years. You can not withdraw your money within this three yrea.

But still, it is more profitable.

36

Passed back to

RETURNS

INVESTORS

SECURITIES

FUND MANAGER

Generates

Invest in Pool their money with

37

PICKING A MUTUAL FUND Buying and Selling You can buy some mutual funds (no-load) by contacting the fund companies directly. Other funds are sold through brokers, banks, financial planners, or insurance agents. If you buy through a third party there is a good chance they'll hit you with a sales charge (load).

That being said, more and more funds can be purchased through no-transaction fee programs that offer funds of many companies. Sometimes referred to as a "fund supermarket," this service lets you consolidate your holdings and record keeping, and it still allows you to buy funds without sales charges from many different companies.

Popular examples are Schwab's OneSource, Vanguard's FundAccess, and Fidelity's FundsNetwork. Many large brokerages have similar offerings.

Selling a fund is as easy as purchasing one. All mutual funds will redeem (buy back) your shares on any business day.

In the United States, companies must send you the payment within seven days.

The Value of Your Fund Net asset value (NAV), which is a fund's assets minus liabilities, is the value of a mutual fund. NAV per share is the value of one share in the mutual fund, and it is the number that is quoted in newspapers. You can basically just think of NAV per share as the price of a mutual fund. It fluctuates everyday as fund holdings and shares outstanding change.

When you buy shares, you pay the current NAV per share plus any sales front-end load. When you sell your shares, the fund will pay you NAV less any back-end load.

38

HOW TO READ A MUTUAL FUND TABLE

Columns 1 & 2: 52-Week High and Low - These show the highest and lowest prices the mutual fund has experienced over the previous 52 weeks (one year). This typically does not include the previous day's price.

Column 3: Fund Name - This column lists the name of the mutual fund. The company that manages the fund is written above in bold type.

Column 4: Fund Specifics - Different letters and symbols have various meanings. For example, "N" means no load, "F" is front end load, and "B" means the fund has both front and back-end fees. For other symbols see the legend in the newspaper in which you found the table.

Column 5: Dollar Change -This states the dollar change in the price of the mutual fund from the previous day's trading.

Column 6: % Change - This states the percentage change in the price of the mutual fund from the previous day's trading.

Column 7: Week High - This is the highest price the fund traded at during the past week.

Column 8: Week Low - This is the lowest price the fund traded at during the past week.

39

Column 9: Close - The last price at which the fund was traded is shown in this column.

Column 10: Week's Dollar Change - This represents the dollar change in the price of the mutual fund from the previous week.

Column 11: Week's % Change - This shows the percentage change in the price of the mutual fund from the previous week.

DO NOT BE FOOLED BY MUTUAL FUND ADS Perhaps you've noticed all those mutual fund ads that quote their amazingly high oneyear rates of return. Your first thought is "wow, that mutual fund did great!" Well, yes it did great last year, but then you look at the three-year performance, which is lower, and the five year, which is yet even lower. What's the underlying story here? Let's look at a real example. These figures came from a local paper: 1 year

3 year

5 year

53%

20%

11%

Last year, the fund had excellent performance at 53%. But in the past three years the average annual return was 20%. What did it do in years 1 and 2 to bring the average return down to 20%? Some simple math shows us that the fund made an average return of 3.5% over those first two years: 20% = (53% + 3.5% + 3.5%)/3. Because that is only an average, it is very possible that the fund lost money in one of those years.

It gets worse when we look at the five-year performance. We know that in the last year the fund returned 53% and in years 2 and 3 we are guessing it returned around 3.5%. So what happened in years 4 and 5 to bring the average return down to 11%? Again, by doing some simple calculations we find that the fund must have lost money, an average of -2.5% each year of those two years: 11% = (53% + 3.5% + 3.5% - 2.5% - 2.5%)/5. Now the fund's performance doesn't look so good!

It should be mentioned that, for the sake of simplicity, this example, besides making some big assumptions, doesn't include calculating compound interest. Still, the point wasn't to be technically accurate but to demonstrate how misleading mutual fund ads can be. A fund that loses money for a few years can bump the average up significantly with one or two strong years.

NET ASSET VALUE

40

The net asset value, or NAV, is the current market value of a fund's holdings, less the fund's liabilities, usually expressed as a per-share amount. For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. The public offering price, or POP, is the NAV plus a sales charge. Open-end funds sell shares at the POP and redeem shares at the NAV, and so process orders only after the NAV is determined.

Closed-end funds (the shares of which are traded by investors) may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes.

Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very small or bankrupt companies; they may be derivatives; or they may be private investments in unregistered financial instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the responsibility of the fund manager to form an estimate of their value when computing the NAV. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus.

Turnover Turnover is a measure of the fund's securities transactions, usually calculated over a year's time, and usually expressed as a percentage of net asset value.

This value is usually calculated as the value of all transactions (buying, selling) divided by 2 divided by the fund's total holdings; i.e., the fund counts one security sold and another one bought as one "turnover". Thus turnover measures the replacement of holdings.

41

Expenses Mutual funds bear expenses similar to other companies. The fee structure of a mutual fund can be divided into two or three main components: management fee, nonmanagement expense, and 12b-1/non-12b-1 fees. All expenses are expressed as a percentage of the average daily net assets of the fund.

Management fees The management fee for the fund is usually synonymous with the contractual investment advisory fee charged for the management of a fund's investments. However, as many fund companies include administrative fees in the advisory fee component, when attempting to compare the total management expenses of different funds, it is helpful to define management fee as equal to the contractual advisory fee + the contractual administrator fee. This "levels the playing field" when comparing management fee components across multiple funds.

Contractual advisory fees may be structured as "flat-rate" fees, i.e., a single fee charged to the fund, regardless of the asset size of the fund. However, many funds have contractual fees which include breakpoints, so that as the value of a fund's assets increases, the advisory fee paid decreases. Another way in which the advisory fees remain competitive is by structuring the fee so that it is based on the value of all of the assets of a group or a complex of funds rather than those of a single fund.

Non-management expenses Apart from the management fee, there are certain non-management expenses which most funds must pay. Some of the more significant (in terms of amount) non-management expenses are: transfer agent expenses (this is usually the person you get on the other end of the phone line when you want to purchase/sell shares of a fund), custodian expense (the fund's assets are kept in custody by a bank which charges a custody fee), legal/audit expense, fund accounting expense, registration expense (the SEC charges a registration fee when funds file registration statements with it), board of directors/trustees expense (the disinterested members of the board who oversee the fund are usually paid a fee for their time spent at meetings), and printing and postage expense (incurred when printing and delivering shareholder reports).

42

12b-1/Non-12b-1 service fees 12b-1 service fees/shareholder servicing fees are contractual fees which a fund may charge to cover the marketing expenses of the fund. Non-12b-1 service fees are marketing/shareholder servicing fees which do not fall under SEC rule 12b-1. While funds do not have to charge the full contractual 12b-1 fee, they often do. When investing in a front-end load or no-load fund, the 12b-1 fees for the fund are usually .250% (or 25 basis points). The 12b-1 fees for back-end and level-load share classes are usually between 50 and 75 basis points but may be as much as 100 basis points. While funds are often marketed as "no-load" funds, this does not mean they do not charge a distribution expense through a different mechanism. It is expected that a fund listed on an online brokerage site will be paying for the "shelf-space" in a different manner even if not directly through a 12b-1 fee.

Investor fees and expenses Fees and expenses borne by the investor vary based on the arrangement made with the investor's broker. Sales loads (or contingent deferred sales loads (CDSL) are not included in the fund's total expense ratio (TER) because they do not pass through the statement of operations for the fund. Additionally, funds may charge early redemption fees to discourage investors from swapping money into and out of the fund quickly, which may force the fund to make bad trades to obtain the necessary liquidity. For example, Fidelity Diversified International Fund (FDIVX) charges a 1 percent fee on money removed from the fund in less than 30 days.

Brokerage commissions An additional expense which does not pass through the statement of operations and cannot be controlled by the investor is brokerage commissions. Brokerage commissions are incorporated into the price of the fund and are reported usually 3 months after the fund's annual report in the statement of additional information. Brokerage commissions are directly related to portfolio turnover (portfolio turnover refers to the number of times the fund's assets are bought and sold over the course of a year). Usually the higher the rate of the portfolio turnover, the higher the brokerage commissions. The advisors of mutual fund companies are required to achieve "best execution" through brokerage arrangements so that the commissions charged to the fund will not be excessive.

43

Mutual funds vs. other investments Mutual funds offer several advantages over investing in individual stocks. For example, the transaction costs are divided among all the mutual fund shareholders, who also benefit by having a third party (professional fund managers) apply expertise and dedicate time to manage and research investment options. However, despite the professional management, mutual funds are not immune to risks. They share the same risks associated with the investments made. If the fund invests primarily in stocks, it is usually subject to the same ups and downs and risks as the stock market.

SOME HIGHLIGHTING POINTS ABOUT MUTUAL FUND • • • • • • • • •

A mutual fund brings together a group of people and invests their money in stocks, bonds, and other securities.

The advantages of mutuals are professional management, diversification, economies of scale, simplicity and liquidity.

The disadvantages of mutuals are high costs, over-diversification, possible tax consequences, and the inability of management to guarantee a superior return.

There are many, many types of mutual funds. You can classify funds based on asset class, investing strategy, region, etc.

Mutual funds have lots of costs.

Costs can be broken down into ongoing fees (represented by the expense ratio) and transaction fees (loads).

The biggest problems with mutual funds are their costs and fees.

Mutual funds are easy to buy and sell. You can either buy them directly from the fund company or through a third party.

Mutual fund ads can be very deceiving.

44

45

Portfolio A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or managed by financial professionals.

Prudence suggests that investors should construct an investment portfolio in accordance with risk tolerance and investing objectives. Think of an investment portfolio as a pie that is divided into into pieces of varying sizes representing a variety of asset classes and/or types of investments to accomplish an appropriate risk-return portfolio allocation.

For example, a conservative investor might favor a portfolio with large cap value stocks, broad-based market index funds, investment-grade bonds and a position in liquid, highgrade cash equivalents. In contrast, a risk loving investor might add some small cap growth stocks to an aggressive, large cap growth stock position, assume some high-yield bond exposure, and look to real estate, international, and alternative investment opportunities for his or her portfolio.

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

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

In the case of mutual and exchange-traded funds (ETFs), there are two forms of portfolio management: passive and active. Passive management simply tracks a market index, commonly referred to as indexing or index investing. Active management involves a single manager, co-managers, or a team of managers who attempt to beat the market return by actively managing a fund's portfolio through investment decisions based on research and decisions on individual holdings. Closed-end funds are generally actively managed.

46

Portfolio Manager The person or persons responsible for investing a mutual, exchange-traded or closed-end fund's assets, implementing its investment strategy and managing the day-today portfolio trading.

The portfolio manager is one of the most important factors to consider when looking at fund investing. Portfolio management can be active or passive (index tracking). Historical performance records indicate that only a minority of active fund managers beat the market indexes.

Portfolio (finance) In finance, a portfolio is an appropriate mix of or collection of investments held by an institution or a private individual. In building up an investment portfolio a financial institution will typically conduct its own investment analysis, whilst a private individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services. Holding a portfolio is part of an investment and risklimiting strategy called diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value.

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

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

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

Porfolio formation 47

Many strategies have been developed to form a portfolio.

• • • •

equally-weighted portfolio capitalization-weighted portfolio price-weighted portfolio optimal portfolio (for which the Sharpe ratio is highest)

Models Some of the financial models used in the process of Valuation, stock selection, and management of portfolios include: • • • • • • • • •

Maximizing return, given an acceptable level of risk.

Modern portfolio theory—a model proposed by Harry Markowitz among others.

The single-index model of portfolio variance.

Capital asset pricing model.

Arbitrage pricing theory.

The Jensen Index.

The Treynor Index.

The Sharpe Diagonal (or Index) model.

Value at risk model.

RETURNS Portfolio returns can be calculated either in absolute manner or in relative manner. Absolute return calculation is very straight forward, where return is calculated by considering total investment and total final value. Time duration and cash flow in portfolio doesn't influence final return.

To calculate more accurate return of your investments you have to use complicated statistical models like Internal rate of return or Modified Internal Rate of Return. The only problem with these models are that, they are very complicated and very difficult to compute by pen and paper. You need to have a scientific calculator or some software. Both of these models consider all cash flow(Money In/Money Out) and provide more accurate returns than absolute return. Time is a major factor in these models.

48

MY PORTFOLIO MANGER Free Portfolio Manager with the

Auto Updation Transactions done through Sharekhan on NSE is updated automatically at the end of the day under MyTrade Folder

4 Virtual Folders Create upto four vritual folders and manage all your and your family's portoflio. You can even upload your past equity transactions

BSE/NSE scrips

Transaction History

You can add and maintain scrips listed either on of the exchange i.e.

BSE or NSE.

Keep a trail of all your transactions.

You have a option to input Rights / Bonus / IPO allotment for equity, SIP / SWP etc for MF.

49

Equity / MF Investment

Now you can create differen for equity investments and fund schemes under each f

Reports/Alerts

Track your invesment updated with latest available prices from BSE / NS Monitor your investments through advance reports and stay ahead wit news & alerts

INVESTMENT MANAGEMENT Investment management is the professional management of various securities (shares, bonds etc) 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, whilst 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 refer 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 elements of financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Investment management is a large and important global industry in its own right responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff and create billions in revenue.

Fund manager (or investment advisor in the U.S.) refers to both a firm that provides investment management services and an individual(s) who directs "fund management" decisions.

50

Process and people The 3-P's (Philosophy, Process and People) are often used to describe the reasons why the manager is able to produce above average results. •

•

•

"Philosophy" refers to the over-arching beliefs of the investment organization. For example: (i) Does the manager buy growth or value shares (and why)? (ii) Does he believe in market timing (and on what evidence)? (iii) Does he rely on external research or does he employ a team of researchers? It is helpful if any and all of such fundamental beliefs are supported by proof-statements.

"Process" refers to the way in which the overall philosophy is implemented. For example: Which universe of assets is explored before particular assets are chosen as suitable investments? (ii) How does the manager decide what to buy and when? (iii) How does the manager decide what to sell and when? (iv) Who takes the decisions and are they taken by committee? (v) What controls are in place to ensure that a rogue fund (one very different from others and from what is intended) cannot arise?

"People" refers to the staff, especially the fund managers. The questions are, Who are they? How are they selected? How old are they? Who reports to whom? How deep is the team (and do all the members understand the philosophy and process they are supposed to be using)? And most important of all, How long has the team been working together? This last question is vital because whatever performance record was presented at the outset of the relationship with the client may or may not relate to (have been produced by) a team that is still in place. If the team has changed greatly (high staff turnover or changes to the team), then arguably the performance record is completely unrelated to the existing team (of fund managers).

Investment managers and portfolio structures At the heart of the investment management industry are the managers who invest and divest client investments.

A certified company investment advisor should conduct an assessment of each client's individual needs and risk profile. The advisor then recommends appropriate investments.

51

Asset allocation The different asset classes and the exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of monies among asset classes will have a significant effect on the performance of the fund. Some research suggested that allocation among asset classes have more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices).

Long-term returns It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of investment). For example, over very long holding periods (eg. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are themselves more risky than cash.

Diversification Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz and effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio (individual holdings volatility), and cross-correlations between the returns.

Investment styles

52

Investment Style selection depends upon risk appetite and return expectation. There are a range of different styles of fund management that the institution can implement. For example, growth, value, market neutral, small capitalisation, indexed, etc. Each of these approaches has its distinctive features, adherents and, in any particular financial environment, distinctive risk characteristics. For example, there is evidence that growth styles (buying rapidly growing earnings) are especially effective when the companies able to generate such growth are scarce; conversely, when such growth is plentiful, then there is evidence that value styles tend to outperform the indices particularly successfully.

Performance measurement Fund performance is the acid test of fund management, and in the institutional context accurate measurement is a necessity. For that purpose, institutions measure the performance of each fund (and usually for internal purposes components of each fund) under their management, and performance is also measured by external firms that specialize in performance measurement. The leading performance measurement firms (e.g. Frank Russell in the USA) compile aggregate industry data, e.g., showing how funds in general performed against given indices and peer groups over various time periods.

In a typical case (let us say an equity fund), then the calculation would be made (as far as the client is concerned) every quarter and would show a percentage change compared with the prior quarter (e.g., +4.3% total return in US dollars). This figure would be compared with other similar funds managed within the institution (for purposes of monitoring internal controls), with performance data for peer group funds, and with relevant indices (where available) or tailor-made performance benchmarks where appropriate. The specialist performance measurement firms calculate quartile and decile data and close attention would be paid to the (percentile) ranking of any fund.Generally speaking, it is probably appropriate for an investment firm to persuade its clients to assess performance over longer periods (e.g., 3 to 5 years) to smooth out very short term fluctuations in performance and the influence of the business cycle. This can be difficult however and, industry wide, there is a serious preoccupation with short-term numbers and the effect on the relationship with clients (and resultant business risks for the institutions).An enduring problem is whether to measure before-tax or after-tax performance. After-tax measurement represents the benefit to the investor, but investors' tax positions may vary. Before-tax measurement can be misleading, especially in regimens that tax realised capital gains (and not unrealised). It is thus possible that successful active managers (measured before tax) may produce miserable after-tax results. One possible solution is to report the after-tax position of some standard taxpayer.

53

Risk-adjusted performance measurement Performance measurement should not be reduced to the evaluation of fund returns alone, but must also integrate other fund elements that would be of interest to investors, such as the measure of risk taken. Several other aspects are also part of performance measurement: evaluating if managers have succeeded in reaching their objective, i.e. if their return was sufficiently high to reward the risks taken; how they compare to their peers; and finally whether the portfolio management results were due to luck or the manager’s skill. The need to answer all these questions has led to the development of more sophisticated performance measures, many of which originate in modern portfolio theory.

Modern portfolio theory established the quantitative link that exists between portfolio risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964) highlighted the notion of rewarding risk and produced the first performance indicators, be they risk-adjusted ratios (Sharpe ratio, information ratio) or differential returns compared to benchmarks (alphas). The Sharpe ratio is the simplest and best known performance measure. It measures the return of a portfolio in excess of the risk-free rate, compared to the total risk of the portfolio. This measure is said to be absolute, as it does not refer to any benchmark, avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it does not allow the separation of the performance of the market in which the portfolio is invested from that of the manager. The information ratio is a more general form of the Sharpe ratio in which the risk-free asset is replaced by a benchmark portfolio. This measure is relative, as it evaluates portfolio performance in reference to a benchmark, making the result strongly dependent on this benchmark choice.

Portfolio alpha is obtained by measuring the difference between the return of the portfolio and that of a benchmark portfolio. This measure appears to be the only reliable performance measure to evaluate active management. In fact, we have to distinguish between normal returns, provided by the fair reward for portfolio exposure to different risks, and obtained through passive management, from abnormal performance (or outperformance) due to the manager’s skill, whether through market timing or stock picking. The first component is related to allocation and style investment choices, which may not be under the sole control of the manager, and depends on the economic context, while the second component is an evaluation of the success of the manager’s decisions.

Only the latter, measured by alpha, allows the evaluation of the manager’s true performance.

54

Portfolio normal return may be evaluated using factor models. The first model, proposed

by Jensen (1968), relies on the CAPM and explains portfolio normal returns with the market index as the only factor. It quickly becomes clear, however, that one factor is not enough to explain the returns and that other factors have to be considered. Multi-factor models were developed as an alternative to the CAPM, allowing a better description of portfolio risks and an accurate evaluation of managers’ performance. For example, Fama and French (1993) have highlighted two important factors that characterise a company's risk in addition to market risk. These factors are the book-to-market ratio and the company's size as measured by its market capitalisation. Fama and French therefore proposed a three-factor model to describe portfolio normal returns. Carhart (1997) proposed to add momentum as a fourth factor to allow the persistence of the returns to be taken into account. Also of interest for performance measurement is Sharpe’s (1992) style analysis model, in which factors are style indices. This model allows a custom benchmark for each portfolio to be developed, using the linear combination of style indices that best replicate portfolio style allocation, and leads to an accurate evaluation of portfolio alpha.

Absolute versus relative performance In the USA and the UK, two of the world's most sophisticated fund management markets, the tradition is for institutions to manage client money relative to benchmarks. For example, an institution believes it has done well if it has generated a return of 5% when the average manager (usually culled from amongst its peer class) generates a 4% return.

55

PORT FOLIO Total investment – Rs. 1000000 Investment in equity – Rs. 548456 FOR INTRADAYRs. 50000 Investment in mutual fund – Rs. 358750 OthersRs. 42794

EQUITY NAME AVG. OF RETUR SCRIPT N ON EQUIT Y [%][0708] SBI 14.50 BOI TATA STEEL BHART I AIRTEL JAYPR A. ASSO. NTPC DLF RANBA XY RELIAN CE PETRO

QY T.

RATE PER SHAR E

AMT. TO INVE ST

BROK ERAGE 0.40/10 0RS]

TOTA L

AFTER 1 YEAR RATE/SH ARE [EXPECT ED]

TOTA L AMT. AFTE R1 YEAR

PROFI T OR LOSS

100

1565

626

177000

19874

100 100

318 892

127 357

15712 6 31927 89200

1770

19.54 30.00

15650 0 31800 89200

416 1180

46100 118000

14173 28800

35.30

100

816

81600

326

81926

1200

120000

38074

17

100

237.85

23785

95

23880

300

30000

6120

62.17 24.32

200 100 100

176.95 605 496.50

35390 60500 49650

142 242 200

35532 60742 49850

244 700 560

48800 70000 56000

13268 9258 6150

100

182.00

18200

73

18273

275

27500

9227

693400

144944

TOTAL

•

54845 6

ON TOTAL INVESTEMENT EXPECTED RETURN WITHIN ONE YEAR CAN BE 26.42%

56

MUTUAL FUND NAME

INVESTMENT NAV

UNITS

RETURN

TATA INFASTRACTURE RELIANCE REGULR SAVING DBS MIP (R) UTI GOLD FUND DSW TAX SAVING

500000

33.68

1485

33.36%

EXPEXTED TOTAL RETURN AFTER 1 YEAR 30% 65019.20

100000

22.80

4386

40.9%

32%

132000

50000 100000 500000

12.99 1222.51 14.16

3849 82 3531

28.59% 46% 32.3%

30% 43% 28%

64990 143351 64000

TOTAL

350000

469360.20

•

TOTAL INVETMENT IN MUTUAL FUND Rs.350000 SO ENTRY LOAD@ 2.5% RS.8750

•

COST FOR MF - Rs.358750

•

AVG. RETURN -30.83%

•

PROFIT - Rs. 110610.20

INVESTMENT AMT.

PROFIT

RETURN

EQUITY MUTUAL FUND INTRADA Y Others

548456 358750

144944 110610.20

26.42% 30.83%

Total

1000000

255554.00

25.55%

50000 42794

57

•

RETURN ON TOTAL INVESTMENT -25.55%

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CONCLUSION Besides knowing about the market and knowing about the manufacturing, there are one more important sector to know about i.e. Finance. And when the company is all about Share Trading, Stock market, Bonds, Debentures, Equities, Assets, Commodities like Sharekhan, Portfolio management, mostly Investment management is a basic factor to have a deep knowledge.

During my Summer project I learned so many things.

1. I came to know the detail about Sharekhan Ltd. What this company is all about, what is its basic functions, what services it provides to the customers, how it sales its product and makes profit out of it.

2. During shaking hands with Sharekhan for opening a Online trading account what questions to be asked to the customers, what should be the promises make to the customers, what should be the brokerage rates applied to the customers.

3. The most important thing we came to know that how a portfolio of a customer is maintained so that he/she can make maximum profit out of that.

4. How you can guide your customers while they are investing huge amount of money into stock market, mutual funds etc.

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5. We realise that Sharekhan is Your guide to the financial jungle.

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BIBLIOGRAPHY 1. www.sharekhan.com 2. www.moneycontrol.com 3. www.rediff.com 4. Derivative books by Sharekhan 5. Books on Portfolio management and investment management

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