A Study of Different Investment Strategies and Portfolio Management

Project Report
On
A Study of Different Investment Strategies and Portfolio Management

Submitted By SOHIEL AZIZ MOTAN 83 Under the Guidance of

SHAGUN MATOO

Bhavans College

Submitted in partial fulfillment of BMS course of

MUMBAI UNIVERSITY MUMBAI

BHAVANS COLLEGE BACHELORS OF MANAGEMENT STUDIES,ANDHERI(W) MUMBAI MONTH - YEAR

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DECLARATION

I, sohiel aziz motani bearing 83 a bonafide student of BHAVANS COLLEGE, Andheri-West (affiliated to Mumbai University) hereby declare that this Project Report entitled TOPIC TITLE, is my individual and original work and that no part of this project report has ever been submitted for the award of any other degree, diploma, fellowship or any other similar titles.

Place: Mumbai Date:

Name of the Student Roll No:

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BHAVANS COLLEGE BACHELORS OF MANAGEMENT STUDIES ANDHERI (W), MUMBAI

CERTIFICATE OF THE GUIDE

This is to certify that the Summer Project Report on TOPIC TITLE is prepared by Name of the Student (Roll No) in partial fulfillment of the requirement for the award of the degree in Bachelors Of Management Studies under my guidance and supervision.

Place: Mumbai Date:

Name of the Guide (Guide) BMS - Department Bhavans College Andheri(W), Mumbai

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BHAVANS COLLEGE CERTIFICATE

This is to certify that Name of the student is a bonafide student of Bachelors Of Management Studies course of the College, affiliated to Mumbai University. This Project Report on TOPIC TITLE, is prepared by him under the guidance of Name of guide, Faculty Bhavans College, Andheri(W), Mumbai in partial fulfillment of the requirement of the award of the degree of Bachelors Of Management Studies of Mumbai University.

Place: Mumbai BMS, BHAVANS COLLEGE

Co-ordinator

Date:

Place: Mumbai BHAVANS COLLEGE

Principal

Date:

Valued By Sl. No. 1. Name of the Examiner Signature Date

2.

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ACKNOWLEDGEMENT( Student can customize his/her own acknowledgement)

The satiation and euphoric that accompany the successful completion of task would be incomplete without the mention of the people who made it possible. So with immense gratitude I acknowledge all those whose guidance and encouragement crowned my efforts with success. With deep sense of gratitude and indebtedness I sincerely thank Name of the Guide (guide), BMS department, BHAVANS COLLEGE my project guide for giving me valuable suggestions and advice throughout the execution of the report. I would like to thank name of principal, Principal, BHAVANS COLLEGE for her everlasting support and motivation. I would like to thank name of the coordinator, BMS department & all the faculty members of BMS Department of BHAVANS COLLEGE. Last but not the least I would like to thank my parents, friends without whose co-operation this project report wouldnt have possible.

Name of the Student Roll No.

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CHAPTER 1
INTRODUCTION
1.1. 1.2. Introduction Objective of the Project

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1.1. Introduction
Savings form an important part of the economy of any nation. With the savings Invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the Investors. Though certainly not the best or deepest of markets in the world, it has reasonable options for an ordinary man to Invest his savings. One needs to Invest and earn return on their idle resources and generate a specified sum of money for a specific goal in life and make a provision for an uncertain future. One of the important reasons why one needs to Invest wisely is to meet the cost of inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it cost to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or service in the future as it does now or did in the past. The sooner one starts Investing the better. By Investing early you allow your Investments more time to grow, whereby the concept of compounding increases your Income, by accumulating the principal and the interest or Dividend earned on it, year after year.

The Three Golden Rules for all Investors are:

Invest Early Invest Regularly Invest for Long Term and not for Short Term

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Stock exchange operations are peculiar in nature and most of the Investors feel insecure in managing their Investment on the stock market because it is difficult for an individual to identify companies which have growth prospects for Investment. Further due to volatile nature of the markets, it requires constant reshuffling of portfolios to capitalize on the growth opportunities. Even after identifying the growth oriented companies and their securities, the trading practices are also complicated, making it a difficult task for Investors to trade in all the exchange and follow up on post trading formalities.

Investors choose to hold groups of securities rather than single security that offer the greater expected returns. They believe that a combination of securities held together will give a beneficial result if they are grouped in a manner to secure higher return after taking into consideration the risk element. That is why professional Investment advice through portfolio
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management service can help the Investors to make an intelligent and informed choice between alternative Investments opportunities without the worry of post trading hassles.

1.2. Objective of the Project

The purpose of the analysis is to determine the Investment behaviour of Investors and Investment preferences for the same. Investors perception will provide a way to accurately measure how the Investors think about the products and services provided by the company. Today s trying economic conditions have forced difficult decisions for companies. Most are making conservative decisions that reflect a survival mode in the business operations. During these difficult times, understanding what Investors on an ongoing basis is critical for survival. Executives need a third party understanding on where Investor s loyalties stand. More than ever management needs ongoing feedback from the Investors, partners and employees in order to continue to innovate and grow.

The main objective of the project is to find out the Needs of the Current Investors and to understand the Strategies of the Investors in making the Investment Decisions For this analysis, customer perception and awareness level will be measured in important areas such as: To understand different Investment Strategies taken by the Investors To understand in depth about different Investment avenues available in India. The type of financial Instruments, they would prefer to Invest. The duration for which they would prefer to keep their money Invested. What are the factors that they consider before Investing?

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To give a recommendations to the Investors that where they should Invest. To know the risk tolerance level of the individual Investor and suggest a suitable portfolio. To develop a profile of sample Indian Individual Investor in terms of their Demographics. To identify the objective of savings of an Investor.

CHAPTER 2
SAVING AND INVESTMENT
2.1. 2.2. 2.3. 2.4. Saving Why Saving? Investment Saving and Investment
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2.5. 2.6. 2.7. 2.8.

How Saver become Investor Need of Investment Investment Avenues in India Steps Involved in Investment Planning

2.1. Saving
Saving can be defined as The part of a person's Income that is not spent Saving are excess of Income over expenditure for any economic unit. Thus, S=YE Where, S is Saving, Y is Income and E is Expenditure.

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2.2. Why Saving?

Saving is abstaining from present consumption for a future use. Saving are sometimes autonomous coming from households as a matter of habit. But bulk of the savings come for specific objectives, like interest Income, future needs, contingencies, precautionary purposes, or growth in future wealth, leading to rise in the standard of living etc.

2.3. What is Investment?

Investment may be defined as the purchase by an individual or institutional Investor of a financial or real asset that produces a return proportional to the risk assumed over some future Investment period. F. Amling

Investment defined as commitment of funds made in the expectation of some positive rate of return. If the Investment is properly undertaken, the return will commensurate with the risk the Investor assumes.
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Fisher & Jordan

Investment refers to acquisition of some assets. It also means the conversion of money into claims on money and use of funds for productive Income earnings assets. In essence, it means the use of funds for productive purpose, for securing some objectives like, Income, appreciation of capital or capital gains, or for further production of goods and services with the objective of securing yield.

2.4. Saving and Investment

Investors are savers but all savers cannot be good Investors, as Investment is a science and an art. Savings are sometimes autonomous and sometimes induced by the incentives like fiscal concessions or Income or capital appreciation. The number of Investors is about 50 million out of population of more than one billion in India. Savers come from all classes except in the case of the population who are below the poverty line. The growths of urbanization and literacy have activated the cult of Investment. More recently, since the eighties the Investment activity has become more popular with the change in the Government Polices towards liberalization and financial deregulation. The process of liberalization and privatization was accelerated by the Government policy changes towards a market oriented economy, through economic and financial reforms stated in July 1991.

2.5. Saver Becoming Investors

The Savers become the Investors in the following term and Invest in unique assets:

FINANICAL ASSETS: Becomes PHYSICAL ASSETS: Saver Investor

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Cash Bank Deposits P.F., L.I.C scheme Pension Scheme Post Office Certificates

- House, Land, Building, Flats - Gold, Silver and Other Metals - Consumer Durables

A Study of Different Investment Strategies and Portfolio Management

Source: Investment Management By. V.A. Avadhani, Himalaya Publishing, Page 45.

2.6. Need of Investment

Investments are both important and useful in the context of present day conditions. The following points have made Investment decision increasingly important. 1. Planning for retirement 2. Interest rate 3. High rate of inflation 4. Increase rate of taxation 5. Income

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1. Planning for retirement: A tremendous increase in working population, proper plans for life span and longevity have ensured the need for Investment decisions. Investment decision have becomes significant as working people retire between the age 55 and 60. The life expectancy has increased due to improved living conditions, medical facilities etc. The earnings from employment should, therefore, be calculated in such a manner that a portion should be put away as savings. Saving from the from the current earning must be Invested in a proper way so that principal and Income thereon will be adequate to meet expenditure on them after their retirement.

2. Interest rate: The level of interest rates is another factor for a sound Investment plan. Interest rates may vary between one Investments to other risky and non- risky Investments. They may also differ due to different benefit schemes offered by the Investments. These aspects must be considered before actually allocating any amount. A high rate of interest may not be the only factor favouring the outlet for Investment. The Investor has to include in his portfolio several kinds on Investments. Stability of interest is as important as receiving a high rate of interest.

3. High rate of inflation: In the conditions of inflation, the prices will rise and purchasing power of rupee will decline. On account of this, capital is eroded every year to the extent of rise in the inflation. The return on any Investment should be regarded as positive, when such return compensates the effect of inflation. For maintaining purchasing power stability, Investors should carefully plan and Invest their funds by making analysis. a. The rate of expected return and inflation rate. b. The possibilities of expected gain or loss on their Investment. c. The limitation imposed by personal and family considerations.
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4. Increase rate of taxation: Taxation is one of the crucial factors in a persons savings. Tax planning is an essential part of overall Investment planning. If the Investment or Disinvestment in securities in made without considering the various provisions of the tax laws, the Investor may find that most of his profits have been eroded by the payment of taxes. Proper planning could lead to a substantial increase in the amount of tax to be paid. On the other hand, good tax planning and Investing in tax savings schemes not only reduces the tax payable by the Investor but also helps him to save taxes on other Incomes. Various tax incentives offered by the government and relevant provisions of the Income Tax Act, the Wealth Tax Act, are important to an Investor in planning Investments.

5. Income: Income is also a factor in making a sound Investment decision. The general increase in employment opportunities which gave rise to Income level and avenues for Investment, have lead to the ability and willingness of working population to save and Invest such savings.

2.7. Investment Avenues in India Savings Bank Account (SB A/c)

Saving Bank account (SB account) is meant to promote the habit of saving among the people. It also facilitates safekeeping of money. In this scheme fund is allowed to be withdrawn whenever required, without any condition. Hence a savings account is a safe, convenient and affordable way to save money. Banks generally put some restrictions on the total number of withdrawals permitted during specific time periods. Banks also stipulate certain minimum balance to be maintained in savings accounts. Normally a higher minimum balance is stipulated in cheque operated accounts as compared to non-cheque operated accounts.

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Features:
The minimum amount to open an account in a nationalized bank is Rs 500. If cheque books are also issued, the minimum balance of Rs 1000 has to be maintained. However in some private or foreign bank the minimum balance is Rs 5,000 or more and can be up Rs. 10,000. One cheque book is issued to a customer at a time.

Return
Interest @ 4 % p.a. with effect from 1/4/2011. The amount of interest will be calculated for each calendar month on the lowest balance in credit of any account between the close of the tenth day and the last day of each month. In Savings Bank account, bank follows the simple interest method. The rate of interest may change from time to time according to the rules of Reserve Bank of India. One can withdraw his/her money by submitting a cheque in the bank and details of the account, i.e. the Money deposited, withdrawn along with the dates and the balance, is recorded in a passbook.

Advantages
It's much safer to keep your money at a bank than to keep a large amount of cash in your home. Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India with regard to several policy and operational parameters, many of the banks also give internet banking facility through with one do the transactions like withdrawals, deposits, statement of account etc. Banks provide Auto-Mated Teller machine (ATM) for 24 hours cash withdrawn, some banks also have 24 hours open branches in very few selected cities.

Mutual Funds
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 internet 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.

Benefits of Investing in Mutual Funds

Professional Management: Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated Investment research team that analyses the performance and prospects of companies and selects suitable Investments to achieve the objectives of the scheme. Diversification: Mutual Funds Invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make Investing easy and convenient.

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Low Costs: Mutual Funds are a relatively less expensive way to Invest compared to directly Investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for Investors. Liquidity: In open-end schemes, the Investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the Investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. Transparency: You get regular information on the value of your Investment in addition to disclosure on the specific Investments made by your scheme, the proportion Invested in each class of assets and the fund manager's Investment strategy and outlook. Flexibility: Through features such as regular Investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically Invest or withdraw funds according to your needs and convenience. Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of Investors. The operations of Mutual Funds are regularly monitored by SEBI.

Types of Mutual Funds

Mutual fund schemes may be classified on the basis of its structure and its objective:-

Open-ended Funds:-

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An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. Closed-ended Funds:A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can Invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the Investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the Investor. Interval Funds:Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices. Load Funds:A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history. No-Load Funds:A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work. Tax Saving Schemes:These schemes offer tax rebates to the Investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for Investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to Investors to save capital gains u/s 54EA and 54EB by Investing in Mutual Funds.

Life Insurance
Life Insurance is a financial resource for ones family and loved ones in case of his death. It is a contract between insurer and an Insurance company in which the company

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provides the beneficiaries with a certain amount of money upon insurer death. In return, insurer pays periodic payments (premiums) in an amount that depends on medical history, age, gender, and occupation. People need Insurance in the first place. An Insurance policy is primarily meant to protect the Income of the familys bread earners. The idea is if any one or both die their dependents continue to live comfortably. The circle of life begins at birth follower by education , marriage and eventually after a lifetime of work we look forward to life of retirement . Our finances too tend to change as we go through the various phases of life. In the first twenty of our life, we are financially and emotionally dependents on our parents and their are no financial commitments to be met in the next twenty years we gain financial independence and provide financial independence to our families. This is also the stage when our Income may be unable to meet the growing expenses of a young household. In the next twenty as we see our Investments grow after our children grow and become financially independent. Insurance is a provision for the distribution of risks that is to say it is a financial provision against loss from unavoidable disasters. The protection which it affords takes form of a guarantee to indemnify the insured if certain specified losses occur. The principle of Insurance so far as the undertaking of the obligation is concerned is that for the payment of a certain sum the guarantee will be given to reimburse the insured. The insurer in accepting the risks so distributes them that the total of all the amounts is paid for this Insurance protection will be sufficient to meet the losses that occur. Insurance then provide divided responsibility. This principle is introduced in most stores where a division is made between the sales clerk and the cashiers department the arrangement dividing the risks of loss. The Insurance principle is similarly applied in any other cases of divided responsibility. As a business however Insurance is usually recognized as some form of securing a promise of indemnity by the payment of premium and the fulfillment of certain other stipulations.

Types of Insurance
Term Insurance Plans Term Insurance is the cheapest form of life Insurance available. Since a term Insurance contract only pays in the event of eventuality the life cover comes at low premium rates . Term Insurance is a useful tool to purchase against risk of early death and protection of an asset. Endowment Plans Endowment plans are savings and protection plans that provide a dual benefit of protection as well as savings. Endowment plans pay a death benefit in the event of an eventuality should the customer survive the benefit period a maturity benefit is paid to the life insured. Whole of life Plans

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A whole of life plan provides life Insurance cover to an individual upto a specified age. A whole of life plan is suitable for an individual who is looking for an extended life Insurance cover and /or wants to pay premium over as long as tenure as possible to reduce the amount of upfront premium payment. Pension Plans Pension plans allow an individual to save in a tax deffered manner. An individual can either contribute through regular premiums or make a single premium Investments. Savings accumulate over the deferment period. Once the contract reaches the vesting age , the individual has the option of choosing an annuity plan from a life Insurance company. An annuity is paid till the life the lifetime of the insured or a pre-determined period depending upon the annuity option chosen by the life insured. Unit Linked Insurance Plans Unit linked Insurance plan (ULIP) is life Insurance solution that provides for the benefits of risk protection and flexibility in Investment. The Investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). The policy value at any time varies according to the value of the underlying assets at the time. In a ULIP, the Invested amount of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund. A Unit is the component of the Fund in a Unit Linked Insurance Policy. The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP Investors have the option of Investing across various schemes, i.e, diversified equity funds, balanced funds, debt funds etc. It is important to remember that in a ULIP, the Investment risk is generally borne by the Investor. In a ULIP, Investors have the choice of Investing in a lump sum (single premium) or making premium payments on an annual, half-yearly, quarterly or monthly basis. Investors also have the flexibility to alter the premium amounts during the policy's tenure. Key Players:- LIC, Bajaj Allianz, ING Vysya, SBI Life, Tata AIG Life, Max New York Life.

Equity Shares
At the most basic level, stock (often referred to as shares) is ownership, or equity, in a company. Investors buy stock in the form of shares, which represent a portion of a company's assets (capital) and earnings (dividends).
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As a shareholder, the extent of your ownership (your stake) in a company depends on the number of shares you own in relation to the total number of shares available For example, if you buy 1000 shares of stock in a company that has issued a total of 100,000 shares, you own one per cent of the company. While one per cent seems like a small holding, very few private Investors are able to accumulate a shareholding of that size in publicly quoted companies, many of which have a market value running into billions of pounds. Your stake may authorize you to vote at the company's annual general meeting, where shareholders usually receive one vote per share. In theory, every stockholder, no matter how small their stake, can exercise some influence over company management at the annual general meeting. In reality, however, most private Investors' stakes are insignificant. Management policy is far more likely to be influenced by the votes of large institutional Investors such as pension funds.

Stock Exchanges
The Bombay Stock Exchange (BSE) and the National stock Exchange India Ltd. (NSE) are the two primary exchanges in India. In addition, there are 22 regional stock exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80% of equity volume traded in India. The average daily turnover Most key stocks are traded on both the exchanges and hence the Investor could buy them on either exchange. Both exchanges have a different settlement cycle, which allows Investors to sift their positions on the bourses. The primary index of BSE is BSE Sensex comprising of 30 stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The scripts traded on the BSE have been classified into A,B1,B2,C, F,Z groups. The A group shares represent those, which are in the carry forward system (Badla). The F group represents the debt market (fixed Income securities) segment. The Z groups scripts are the blacklisted companies. The C group covers the odd lot securities in A, B1, & B2 groups and rights renunciations.

Term Deposits
A deposit held at a financial institution that has a fixed term. These are generally short-term with maturities ranging anywhere from a fifteen days to a few years. When a term

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deposit is purchased, the lender (the customer) understands that the money can only be withdrawn after the term has ended or by giving a predetermined number of days notice. Term deposits are an extremely safe Investment and are therefore very appealing to conservative, low-risk Investors. By having the money tied up Investors will generally get a higher rate with a term deposit compared with a demand deposit. Investor some time pledge these term deposits to take house loan, personal load, education load, etc. these works as the security deposits or asset of the debtor. Here is a list of Term deposit rates of different Banks I have studied:-

Tenure

Standard Chartered 15 days - 59 days 5.25% 60 days 89 days 5.75% 90 days 360 days 6.25% 361 days 8.50% 362 days< 1year 6.25% 1 year < 2years 6.50% 2 years - 4 years 6.75%

ICICI 4% 4% 6.25% 6.25% 6.25% 8% 8%

HDFC 5.50% 5.50% 6.75% 8% 6.75% 8% 8.25%

ABN-Amro Kotak Mahindra 4%-5.5% 4% 5.50% 5.50% 6%-8% 8.50% 6% 8.50% 6% 8.50% 6%-8% 9.25% 6.75% 9.25%

Bonds
A bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the

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principal at a later date, termed maturity. It is a formal contract to repay borrowed money with interest at fixed intervals. Thus a bond is like a loan: the issuer is the borrower, the bond holder is the lender, and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term Investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or commercial paper are considered to be money market Instruments and not bonds. Bonds must be repaid at fixed intervals over a period of time

Different Types of Bonds

In general there are few types of bonds available in the market to buy, like; Government bonds: These bonds are issued by the government to raise money from the public. Bills - Debts securities maturing in less than one year. Notes - Debt securities maturing in one to ten years. Bonds - Debt securities maturing in more than ten years. Marketable securities from the Indian government known collectively as Treasuries and are as Treasury bonds, Treasury notes and Treasury bills. Municipal Bonds: Municipal bonds, known as munis, are the next progression in term of risk. The major advantage in munis is that the returns are free from State/central tax. Local government some time makes their debt non-taxable for residents, thus making some municipal bonds completely tax free. Because of the tax-savings yield in munis is lower than the taxable bonds. Corporate bonds: A company can issue bonds just as it can issue stock. Generally, a short term corporate bond is less than five years; intermediate is five to twelve years, and long term is over 12 years. Corporate bonds are characterized by higher yields because there is a higher risk of a company defaulting than a government. The companys credit quality is most important: the higher the credit quality, lower the interest rate the Investor receives. Zero Coupon Bonds: This is a type of bond that make no coupon payments but instead is issued at a considerable discount to par value.

2.8. Steps Involved in Investment Planning

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Analysis and Profiling of the Instrument

Evaluating the alternatives

Consistent Monitoring

Investment Planning

Analyze the Profile

Preparing an Optimum Portfolio

Investment is not only prediction it has its own reasons behind every up and down in the market. So it is has its own theory to move in particular directions. To get in to the market Investors must go through the following process. Analysis and Profiling of the Instrument: - The first step is performing a Need Analysis check. The requirements and expectations of the Investor should be met by the Instrument. During the profiling Investor should consider their age, their profession, the number of dependents, and their Income. By doing this check, the risk profile of the Investor should be designed.

Evaluating the alternatives: - The next step would be revaluating the needs. Other Investment Instruments and options should be analyzed. The risk-return profile of Investment products is evaluated in this step. Every Investment product varies according to its return potential and riskiness. Investment products giving a high rate of return are generally risky and volatile. The products giving a lower rate of return usually are less risky.

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Analyze the Profile: - The next step would be analyze the risk-return profile of the Investor on to the Investment portfolio. The Investment Instruments are matched with the risk-return profile of the Investor. All the Investment alternatives that offer expected rate of return are evaluate for consideration. Preparing an Optimum Portfolio: - Then according to the risk appetite and return pattern an optimum portfolio is designed for the Investor. The basket of Investment Instrument selected in the previous step are given due weightage and appropriate amount of money is Invested in each of the Investment avenue so as to get maximum return with minimum possible risk. Consistent Monitoring: - Finally a continuous watch on the portfolio is extremely important. Fundamental analysis of the Investment products done in the previous stages would only help in selecting the right product but the right time of entry or exit from a particular stream is evaluated by doing a technical analysis. For this professional portfolio management is a must.

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CHAPTER 3
RISK & RETURN IN INVESTMENTS

3.1. 3.2. 3.3. 3.4. 3.5.

Return Risk Types of Risk Risk-Return Relationship Different Types of Investment in India & Risk Return Associated With It Investors Attitude Towards Risk & Return

3.6.

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3.1. Return
The typical objective of Investment is to make current Income from the Investment in the form of dividends and interest Income. Suitable securities are those whose prices are relatively stable but still pay reasonable dividends or interest, such as blue chip companies. The Investment should earn reasonable and expected return on the Investments. Before the selection of Investment the Investor should keep in mind that certain Investment like, Bank deposits, Public deposits, Debenture, Bonds, etc. will carry fixed rate of return payable periodically. On Investments made in shares of companies, the periodical payments are not assured but it may ensure higher returns from fixed Income securities. But these Instruments carry higher risk than fixed Income Instruments.

3.2. Risk
The Websters New Collegiate Dictionary definition of risk includes the following meanings: . Possibility of loss or injury .. the degree or probability of such loss. This conforms to the connotations put on the term by most Investors. Professional often speaks of downside risk and upside potential. The idea is straightforward enough: Risk has to do with bad outcomes, potential with good ones. In considering economic and political factors, Investors commonly identify five kinds of hazards to which their Investments are exposed.

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3.3. Types of Risk

(A) Systematic Risk: 1. Market Risk 2. Interest Rate Risk 3. Purchasing power Risk (B) Unsystematic Risk: 1. Business Risk 2. Financial Risk

(A) Systematic Risk:

Systematic risk refers to the portion of total variability in return caused by factors affecting the prices of all securities. Economic, Political and Sociological charges are sources of systematic risk. Their effect is to cause prices of nearly all individual common stocks or security to move together in the same manner. For example; if the Economy is moving toward a recession & corporate profits shift downward, stock prices may decline across a broad front. Nearly all stocks listed on the BSE / NSE move in the same direction as the BSE / NSE index. Systematic risk is also called non-diversified risk. If is unavoidable. In short, the variability in a securities total return in directly associated with the overall movements in the general market or Economy is called systematic risk. Systematic risk covers market risk, Interest rate risk & Purchasing power risk 1. Market Risk Market risk is referred to as stock / security variability due to changes in Investors reaction towards tangible & intangible events is the chief cause affecting market risk. The first set that is the tangible events, has a real basis but the intangible events are based on psychological basis. Here, Real Events, comprising of political, social or Economic reason. Intangible Events are related to psychology of Investors or say emotional intangibility of Investors. The initial decline or rise in market price will create an emotional instability of Investors and
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cause a fear of loss or create an undue confidence, relating possibility of profit. The reaction to loss will reduce selling & purchasing prices down & the reaction to gain will bring in the activity of active buying of securities.

2. Interest Rate Risk The price of all securities rise or fall depending on the change in interest rate, Interest rate risk is the difference between the Expected interest rates & the current market interest rate. The markets will have different interest rate fluctuations, according to market situation, supply and demand position of cash or credit. The degree of interest rate risk is related to the length of time to maturity of the security. If the maturity period is long, the market value of the security may fluctuate widely. Further, the market activity & Investor perceptions change with the change in the interest rates & interest rates also depend upon the nature of Instruments such as bonds, debentures, loans and maturity period, credit worthiness of the security issues.

3. Purchasing Power Risk Purchasing power risk is also known as inflation risk. This risks arises out of change in the prices of goods & services & technically it covers both inflation & deflation period. Purchasing power risk is more relevant in case of fixed Income securities; shares are regarded as hedge against inflation. There is always a chance that the purchasing power of Invested money will decline or the real return will decline due to inflation. The behaviour of purchasing power risk can in some way be compared to interest rate risk. They have a systematic influence on the prices of both stocks & bonds. If the consumer price index in a country shows a constant increase of 4% & suddenly jump to 5% in the next. Year, the required rate of return will have to be adjusted with upward revision. Such a change in process will affect government securities, corporate bonds & common stocks.

(B) Unsystematic Risk:

The risk arises out of the uncertainty surrounding a particular firm or industry due to factors like labour Strike, Consumer preference & management policies are called Unsystematic risk. These uncertainties directly affect the financing & operating environment of the firm. Unsystematic risk is also called Diversifiable risk. It is avoidable. Unsystematic

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risk can be minimized or Eliminated through diversification of security holding. Unsystematic risk covers Business risk and Financial risk

1. Business Risk Business risk arises due to the uncertainty of return which depend upon the nature of business. It relates to the variability of the business, sales, Income, expenses & profits. It depends upon the market conditions for the product mix, input supplies, strength of the competitor etc. The business risk may be classified into two kind viz. internal risk and External risk. Internal risk is related to the operating efficiency of the firm. This is manageable by the firm. Interest Business risk loads to fall in revenue & profit of the companies. External risk refers to the policies of government or strategic of competitors or unforeseen situation in market. This risk may not be controlled & corrected by the firm.

2. Financial Risk Financial risk is associated with the way in which a company finances its activities. Generally, financial risk is related to capital structure of a firm. The presence of these interest commitments fixed interest payments due to debt or fixed dividend payments on preference share causes the amount of retained earning availability for equity share dividends to be more variable than if no interest payments were required. Financial risk is avoidable risk to the extent that management has the freedom to decline to borrow or not to borrow funds. A firm with no debt financing has no financial risk. One positive point for using debt Instruments is that it provides a low cost source of funds to a company at the same time providing financial leverage for the equity shareholders & as long as the earning of company are higher than cost of borrowed funds, the earning per share of equity share are increased.

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3.4. Risk - Return Relationship

The risk - return relationship is a fundamental concept in not only financial analysis, but in every aspect of life. If decisions are to lead to benefit maximization, it is necessary that individuals/institutions consider the combined influence on expected (future) return or benefit as well as on risk/cost. The requirement that expected return/benefit be commensurate with risk/cost is known as the "risk/return trade-off" in finance. All Investments have some risks. An Investment in shares of companies has its own risks or uncertainty. These risks arise out of variability of returns or yields and uncertainty of appreciation or depreciation of share prices, loss of liquidity etc. and the overtime can be represented by the variance of the returns. Normally, higher the risk that the Investors take, the higher is the return.

. .

Fig: Risk Return Relationship

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3.5.

Different Types of Investment in India & Risk Return Associated With It

1) Life Insurance Policy:In India the life Insurance corporation offers different types of policies tailor made to suit the varied age group in society. The Whole Life Policies, Limited Payment Life Policy, Convertible Whole Life Assurance Policy, Endowment Assurance Policy, Jeevan Mitra, The Special Endowment Plan with Profits, Jeevan Saathi, The New Money Back Plan, Marriage Endowment, Childrens Differed Endowment Assurance Policy, Jeevan Dhara have gained immense popularity among all classes of people. In LIC there is some scheme have eligible for exemption from tax under section 80C of the Income Tax Act, 1961. Risk associated with Insurance Corporation is as follow:

High R I S K Low Moderate

Low

Moderate RETURN

High

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2) Bank Deposits:Commercial Bank has been extending deposits facilities to the public and has been the Indian Investors greatest Investment opportunity. The various schemes offered by commercial Banks are in the categories of saving accounts. Fixed Deposits, recurring deposits, monthly re-payment plan, cash certificates, childrens deposits schemes and retirement plans. The saving account offers an interest rate of 4% per annum. One fixed deposits the banks give a rate of 6.5% per annum.

High R I S K Low Moderate

Low

Moderate RETURN

High

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3) Provident Funds:Many employers offer recognized provident Fund schemes for the benefit of their employees. In general employees are obliged to contribute a minimum of 8.33% of their salary every month to the PPF, however, they may in certain cases contribute up to a maximum of 30% of their salary, Whatever, may be the employees contribution, the employers contribution is generally restricted to 8.33% only. Employees own contribution can be claimed as a deduction form his total Income under section 80C of Income Tax Act. The interest on Provident Funds is now 10 % per annum. The prime benefit of the provident fund is the facility of loan up to 755 of the sum contributed.

High R I S K Low Moderate

Low

Moderate RETURN

High

The SBI and its subsidiaries operate the public provident funds schemes. It is a 15 year scheme. A minimum sum of Rs. 100/- has to be deposited every year in this fund; the maximum amount which can be deposited in this fund, is Rs.20,000/- in one year. The rate of interest on the PPF is 12% per annum. The PPF scheme offers both Income Tax and Wealth Tax benefits. The deposits made every year qualify for deduction under section 80C and the interest is completely tax free, in addition, loans can also be taken after one year from the close of the year in which the account was opened.

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4) Equity Shares: The Investment in equity share has a number of positive aspect associated with it. These are Capital Appreciation as a hedge against inflation, bonus shares, Right shares, voting rights, marketability, annual dividends and fringe benefits etc. Income tax and wealth tax benefits are also available to Investment in equity share, 50% of the contribution made by Investors in shares of new companies qualifies for deduction under section 80CC. No deduction is available in under section 80CCA with effect from 1993-94 except rebate of Section 88.

High R I S K Low Moderate

Low

Moderate RETURN

High

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5) Government Bonds:The government bond, there is two categories of these bonds, namely, tax-free and taxable. The tax-free bonds are 9 to 10% bonds issued for Rs.1000; interest compounded half-yearly and payable half-yearly. They have a maturity period of 7 to 10 years with the facility for buy-back sometimes provided to small Investors up to certain limits. The taxable bonds yield 13% or above, compounded half-yearly and payable half-yearly. They have normally a face value of Rs.1000/- and have buy-back facilities similar to taxable bonds. Income from these bonds is tax exempt up to Rs.12, 000/- under section 80L.

High R I S K Low Moderate

Low

Moderate RETURN

High

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6) Fixed Deposits with Companies:Fixed Deposits are invited from the public by different private sector companies. Their major selling point is the high rates of interest, which they offer. Some of these companies offer even up to 16% return per annum on deposits; the risk element is high in fixed deposits since they are absolutely unsecured. In addition, there are no tax benefits, An example, may be cited of a well known company. Orkay Silk Mills, The Company delayed the payment of quarterly interest by two months and the matured amount has not been returned to the depositors.

High R I S K Low Moderate

Low

Moderate RETURN

High

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7) Debentures:A debenture is just a loan bond. Debenture holders are lenders but not owners of the company. They dont enjoy any voting rights. Usually Debentures are of the face value of Rs.100/- each. They carry a fixed rate of interest. The ruling rate in the market for debentures is 10% to 14%. There are no Income tax or wealth tax benefits for an Investment in Debenture.

High R I S K Low Moderate

Low

Moderate RETURN

High

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3.6.

Investors Attitude Towards Risk & Return

Understanding and measuring return and risk is fundamental to the Investment process and increases an awareness of the Investment problem. Most Investors are risk averse. They must be aware of the risks in different Investments. To have a higher return the Investor should be able to accept the fact that he has to faced with greater risks. The Investors attempt to maximize their wealth at the minimum risk when risk is established, it can be reduced to a minimum but it cannot be completely eliminated. Risk and Return are related. The higher the risk a person is willing to accept the better he is able to achieve.

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CHAPTER 4
PORTFOLIO MANAGEMENT
4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 4.7. 4.8. 4.9. 4.10. Portfolio Portfolio Management Aspects of Portfolio Management Objectives of Portfolio Management Functions of Portfolio Management Importance of Portfolio Management Advantages of Portfolio Management Steps in Portfolio Management Who can be a Portfolio Manager? Services Offered by Portfolio Management

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

4.2. Portfolio 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 returns from portfolios, comprised 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 funds have developed particular techniques to optimize their portfolio holdings. Thus, portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety and numerous other trade-offs encountered in the attempt to maximize return at a given appetite for risk.

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4.3. Aspects of Portfolio Management

Basically portfolio management involves A proper Investment decision making of what to buy & sell Proper money management in terms of Investment in a basket of assets so as to satisfy the asset preferences of Investors. Reduce the risk and increase returns.

4.4. Objectives of Portfolio Management

The basic objective of Portfolio Management is to maximize yield and minimize risk. The other objectives are as follows: a) Stability of Income: An Investor considers stability of Income from his Investment. He also considers the stability of purchasing power of Income.

b)

Capital Growth: Capital appreciation has become an important Investment principle. Investors seek growth stocks which provide a very large capital appreciation by way of rights, bonus and appreciation in the market price of a share.

c)

Liquidity: An Investment is a liquid asset. It can be converted into cash with the help of a stock exchange. Investment should be liquid as well as marketable. The portfolio should contain a planned proportion of high-grade and readily salable Investment.

d)

Safety: Safety means protection for Investment against loss under reasonably variations. In order to provide safety, a careful review of economic and industry trends is necessary. In other words, errors in portfolio are unavoidable and it requires extensive diversification.

e)

Tax Incentives: Investors try to minimize their tax liabilities from the Investments. The portfolio manager has to keep a list of such Investment avenues along with the return risk, profile, tax implications, yields and other returns.

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4.5. Functions of Portfolio Management

The basic purpose of portfolio management is to maximize yield and minimize risk. Every Investor is risk averse. In order to diversify the risk by Investing into various securities following functions are required to be performed. The functions undertaken by the portfolio management are as follows: To frame the Investment strategy and select an Investment mix to achieve the desired Investment objective. To provide a balanced portfolio which not only can hedge against the inflation but can also optimize returns with the associated degree of risk. To make timely buying and selling of securities. To maximize the after-tax return by Investing in various taxes saving Investment Instruments.

4.6. Importance of Portfolio Management

In the past one-decade, significant changes have taken place in the Investment climate in India. Portfolio management is becoming a rapidly growing area serving a broad array of Investors- both individual and institutional-with Investment portfolios ranging in asset size from thousands to cores of rupees. It is becoming important because of: i. Emergence of institutional Investing on behalf of individuals. A number of financial institutions, mutual funds, and other agencies are undertaking the task of Investing money of small Investors, on their behalf. ii. Growth in the number and the size of invisible fundsa large part of household savings is being directed towards financial assets. iii. Increased market volatility- risk and return parameters of financial assets are continuously changing because of frequent changes in governments industrial and fiscal policies, economic uncertainty and instability. iv. Greater use of computers for processing mass of data.

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v. Professionalization of the field and increase use of analytical methods (e.g. quantitative techniques) in the Investment decision-making, and vi. Larger direct and indirect costs of errors or shortfalls in meeting portfolio objectives- increased competition and greater scrutiny by Investors.

4.7. Advantages of Portfolio Management

Individuals will benefits immensely by taking portfolio management services for the following reason: Whatever may be the status of the capital market; over the long period capital markets have given an excellent return when compared to other forms of Investment. The return from bank deposits, units etc., is much less than from stock market.

The Indian stock markets are very complicated. Though there are thousands of companies that are listed only a few hundred, which have the necessary liquidity. It is impossible for any individual wishing to Invest and sit down and analyses all these intricacies of the market unless he does nothing else. Even if an Investor is able to visualize the market, it is difficult to Investor to trade in all the major exchanges of India, look after his deliveries and payments. This is further complicated by the volatile nature of our markets, which demands constant reshuffling of port

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4.8. Steps in Portfolio Management

Performance Evaluation

Portfolio Revision

Portfolio Execution

STEPS

Selection of Asset Mix

Identification Of Objectives

Portfolio Strategy

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1. Identification of the Objectives

The starting point in this process is to determine the characteristics of the various Investments and then matching them with the individuals need and preferences.

All the personal Investing is designed in order to achieve certain objectives. These objectives may be tangible such as buying a car, house etc. and intangible objectives such as social status, security etc. Similarly, these objectives may be classified as financial or personal objectives. Financial objectives are safety, profitability and liquidity. Personal or individual objectives may be related to personal characteristics of individuals such as family commitments, status, depends, educational requirements, Income, consumption and provision for retirement etc.

2. Formulation of Portfolio Strategy

The aspect of Portfolio Management is the most important element of proper portfolio Investment and speculation. While planning, a careful review should be conducted about the financial situation and current capital market conditions. This will suggest a set of Investment and speculation policies to be followed. The statement of Investment policies includes the portfolio objectives, Strategies and constraints. Portfolio strategy means plan or policy to be followed while Investing in different types of assets. There are different Investment Strategies. They require changes as time passes, Investors wealth changes, security price change, Investors knowledge expands. Therefore, the optional strategic asset allocation also changes. The strategic asset allocation policy would call for broad diversification through an indexed holding of virtually all securities in the asset class.

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3.

Selection of Asset Mix

The most important decision in portfolio management is selection of asset mix. It means spreading out portfolio Investment into different asset classes like bonds, stocks, mutual funds etc. In other words selection of asset mix means Investing in different kinds of assets and reduces risk and volatility and maximizes returns in Investment portfolio. Selection of asset mix refers to the percentage to the Invested in various security classes. The security classes are simply the type of securities as under: money market Instrument fixed Income security equity shares real estate Investment international securities

Once the objective of the portfolio is determined the securities to be included in the portfolio must be selected. Normally the portfolio is selected from a list of high-quality bonds that the portfolio manager has at hand. The portfolio manager has to decide the goals before selecting the common stock. The goal may be to achieve pure growth, growth with some Income or Income only. Once the goal has been selected, the portfolio manager can select the common stocks.

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4. Portfolio Execution

The process of portfolio management involves a logical set of steps common to

any decision, plan, implementation and monitor.

Applying this process to actual portfolios can be complex.

Therefore, in the execution stage, three decisions need to be made, if the percentage holdings of various asset classes are currently different from desired holdings.

The portfolio than, should be rebalanced. If the statement of Investment policy

requires pure Investment strategy, this is only thing, which is done in the execution stage.

However, many portfolio managers engage in the speculative transactions in the

belief that such transactions will generate excess risk-adjusted returns.

Such speculative transactions are usually classified as timing or selection

decisions.

Timing decisions over or under weight various asset classes, industries or

economic sectors from the strategic asset allocation.

Such timing decisions are known as tactical asset allocation and selection
decision deals with securities within a given asset class, industry group or economic sector.

The Investor has to begin with periodically adjusting the asset mix to the desired
mix, which is known as strategic asset allocation.

Then the Investor or portfolio manager can make any tactical asset allocation or
security selection decision.

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5. Portfolio Revision

Portfolio management would be an incomplete exercise without periodic review. The portfolio, which is once selected, has to be continuously reviewed over a period of time and if necessary revised depending on the objectives of Investor. Thus, portfolio revision means changing the asset allocation of a portfolio. Investment portfolio management involves maintaining proper combination of securities, which comprise the Investors portfolio in a manner that they give maximum return with minimum risk.

For this purpose, Investor should have continuous review and scrutiny of his Investment portfolio. Whenever adverse conditions develop, he can dispose of the securities, which are not worth. However, the frequency of review depends upon the size of the portfolio, the sum involved, the kind of securities held and the time available to the Investor. The review should include a careful examination of Investment objectives, targets for portfolio performance, actual results obtained and analysis of reason for variations.

The review should be followed by suitable and timely action. There are techniques of portfolio revision. Investors buy stock according to their objectives and return-risk framework. These fluctuations may be related to economic activity or due to other factors. Ideally Investors should buy when prices are low and sell when prices rise to levels higher than their normal fluctuations. The Investor should decide how often the portfolio should be revised. If revision occurs too often, transaction and analysis costs may be high. If revision is attempted too infrequently the benefits of timing may be foregone. The important factor to take into consideration is, thus, timing for revision of portfolio.

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6. Portfolio Performance Evaluation

Portfolio management involves maintaining a proper combination of securities, which comprise the Investors portfolio in a manner that they give maximum return with minimum risk.

The Investor should have continues review and scrutiny of his Investment portfolio. These rates of return should be based on the market value of the assets of the fund. Complete evaluation of the portfolio performance must include examining a measure of the degree of risk taken by the fund. A portfolio manager, by evaluating his own performance can identify sources of strength or weakness. It can be viewed as a feedback and control mechanism that can make the Investment management process more effective. Good performance in the past might have resulted from good luck, in which case such performance may not be expected to continue in the future. On the other hand, poor performance in the past might have been result of bad luck. Therefore, the first task in performance evaluation is to determine whether past performance was good or poor. Then the second task is to determine whether such performance was due to skill or luck. Good performance in the past may have resulted from the actions of a highly skilled portfolio manager. The performance of portfolio should be measured periodically, preferably once in a month or a quarter. The performance of an individual stock should be compared with the overall performance of the market.

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4.9. Who can be a Portfolio Manager?

Only those who are registered and pay the required license fee are eligible to operate as portfolio managers. An applicant for this purpose should have necessary infrastructure with professionally qualified persons and with a minimum of two persons with experience in this business and a minimum net worth of Rs. 50lakhs. The certificate once granted is valid for three years. Fees payable for registration are Rs 2.5lakhs every for two years and Rs.1lakhs for the third year. From the fourth year onwards, renewal fees per annum are Rs 75000. These are subjected to change by the S.E.B.I.

The S.E.B.I. has imposed a number of obligations and a code of conduct on them. The portfolio manager should have a high standard of integrity, honesty and should not have been convicted of any economic offence or moral turpitude. He should not resort to rigging up of prices, insider trading or creating false markets, etc. their books of accounts are subject to inspection to inspection and audit by S.E.B.I... The observance of the code of conduct and guidelines given by the S.E.B.I. are subject to inspection and penalties for violation are imposed. The manager has to submit periodical returns and documents as may be required by the SEBI from time to time.

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4.10. Services Offered by Portfolio Management

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 portfolios, your account may be unique. Investment Management Solutions in PMS, can be provided in the following ways:

Discretionary

Non Discretionary

Advisory

1. The Discretionary Portfolio Management Services (DPMS)

In this type of services, the client parts with his money in favor of manager, who in return, handles all the paper work, makes all the decisions and gives a good return on the Investment and for this he charges a certain fees. In this discretionary PMS, to maximize the yield, almost all portfolio managers parks the funds in the money market securities such as overnight market, 182 days treasury bills and 90 days commercial bills. Normally, return on such Investment varies from 14 to 18 per cent, depending on the call money rates prevailing at the time of Investment.

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2. The Non Discretionary Portfolio Management Services

The manager function as a counselor, but the Investor is free to accept or reject the managers advice; the manager for a services charge also undertakes the paper work. The manager concentrates on stock market Instruments with a portfolio tailor made to the risk taking ability of the Investor.

3. Advisory Services

Under these services, the portfolio manager only suggests the Investment ideas. The choice as well as the execution of the Investment decisions rest solely with the Investor. Note: In India majority of PMS providers offer Discretionary Services.

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CHAPTER 5
ANALYSIS & INTERPRETATION
5.1. 5.2. Field Survey Analysis & Interpretation

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5.1. Field Survey

The Field Survey was based on the Investment Strategies taken by the small Investors and the Instrument they prefer to Invest. To fulfill the particular I have done Field Survey in about 50 people in my Resident. The entire November Month is devoted to my Project Report

The entire Project is designed like this:

Formation of questionnaire depending upon the Investor mind set and the need. I put strong emphasis on the questionnaire that respondent must fill the questionnaire. For that I restrict my questions to seven. Thus it becomes short and time saving. After gathering the entire data sheet I have put it in the excel sheet and started analyzing.

Objective of the Project: The objectives of the project are mainly Analysis of current Investment Strategies adopted by the different age group and different Income group. Basic acceptance of Investment Instrument towards the Investors. Find out the potential Investor and their needs. Basic trends of Investment in the market.

Limitation of the Study: The limitation or the problem I faced during the project are Non Co-operation of people during the field survey. Small area for field survey. Wrong information given by the respondents. Limited number of respondents.

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5.2. Analysis & Interpretation

GRAPHICAL PRESENTATION

Fig: Distribution of age groups in the sample

Explanation:The above pie chart shows that the sample of 50 is predominantly consists of respondents of the age groups of 18-30 years and 31-40 years. This reveals that most of the Investors are them who are started their carrer recently or working for 10-15 years. This also shows that the age group of greater than 50 years are very less interested in invetment.

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Fig : Distribution of occupation through out the sample

Explanation:This graph shows that the respondents are mostly from the service class (61%) and business person consists of only 37% of respondents.Self employed are very less in numbers.It is quite useful as the service people are regular Investors. Where as the business class Invest large amount in a single time.

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Fig : Distribution of sample annual Income wise

Explanation:In the sample the Income group of Rs. 2,50,000 to Rs. 5,00,000 is dominating. It reveals that this Income group were the major respondent in the survey. The second major Income group is the 7,50,000 to 10,00,000. Most Investors are from the Income group of Rs. 2,50,000 to Rs. 5,00,000 and Rs. 7,50,000 to Rs. 10,00,000 which is enthusiastic for the companies as the potential customers are from the medium Investor and the bid Investors. Combining the two Income group company can have a mixed bag of good Investor in the near future.

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Fig : Distribution of disposible Income

Explanation:Disposible Income is the strong piller of Investment, more the disposible Income for the Investors more they Invest in the Investment Instrument. The pie shows that the major repondents have a disposible Income of Rs.5,000 to Rs.10,000 per month which is good enough for an Investor who is Investing regularly for the longer term. It also depicts that Investors who has a disposible Income of more then 20,000 Rs is 1/5th of the sample. This reveals that Inflation has extremely affected the Disposible Income.

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Fig : First priority of Investment in the sample

Explanation:Tax saving is the major concern now in india. The above pie also show that 40% of people want to Invest for the Tax Savings, but that is for only 1.5 lakh. It is expected that before the Investment Investors focus would be the main criteria where he wants to Invest in depending upon the reponse I have found out that 18% people Invest to secure for Future Uncertainties and 19% fight against inflation and do Invest for only Capital Preservation. Only 9% people focus on their retirement time and Invest for vesting period.

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Fig : Withdraw from Investments Explantion:It shows that how Investors want to stay remain Invested in.42% of Investors want to stay in the market for the 3-5 years, it has been said that 3 years is a market cycle so, Investor usually want stay in for the two cycle. This is the very normal period to remain Invested due to primary BULL and BEAR turn period go through 5-6 years. 23% Investors are the short term Investor as they want to get out of market with in 3 years. But it is healthy for the Investment market thst 18% Investors want to stay Invested for 6-9 years and 17% more than 10 years. These long term Investors are keeping the market more stable than the short term Investors.

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Fig : Risk tolerence ability Explanation:The research showed that the most Investors are risk averse and go for the moderate risk. 42% Investors are in this category. This is good news for the market that only 22% of insvestors are with low risk apetite. The low risk apetite Investor mostly Invested in the fixed return Instruments. 7% Investors have very high and 29% Investors have high risk profile, they useally Invest in the stocks and mutual fund, where the risk is high and the returns are also high in proportion.

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Fig :Risk bearing acceptablilty Explanation:Investors negative return acceptablity shows how he/she can aceept the market updowns positively. If they really take it to the account then they can sustain in the market for the longer time. In the above pie chart Never accept return shows the group with low risk appetite where as once in 3 years & once in 5 years represents the group with moderate risk appetite. once in 7 years & can fluctuate in long run represents the group with high or very high risk appetite. Though this is not applied to all, as risk assumption is different for every other person. Here, 36% Investors need always positive returns or assured return, where as 30% of Investors can have a moderate risk bearing appetite. And rest 34% Investors can bear the High Risk.

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Fig : Disposible Income according to Age groups Explanation:It clearly shows that the age group of 18-30 years has the most disposible Income per month because most of them are single. More the age grows the disposible Income reduced may be because the family expense and the living expense increased. So from the companys point of view 18-30 years age group is the most potential Investors and usually this age group is Investing for more Profit. It has to make a point that Investors with Rs. 5,000 to 10,000 per month are most in the 18-30 years age group.

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Fig : Investment Instrument used by Age groups Explanation:Most of the Investors are Invested in the Insurance sector. The age group of 18-30 years are highly Invested in the mutual funds and share market. This group also Invested equally in the FDs and RBI bonds. The 31-40 years age group is also Invested in all the Instrument but they are quite heavily Invested in the real estate sectors. But the number of respondent in this group is less than the 18-30 years sge group. More than 50 years age group are most Invested in the FD & RBI bonds. They are less Invested in the shares and the mutual funds.

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Fig : Risk tolerence according to Age Explanation:Risk tolerence is the major concern in the Investment market. If the risk is high then return expected is high for the Investors. Age is also considered for the risk tolerence. It is expected that the lower the age group risk tolerence is high. In the above bar graph it is clear that 18-30 years age group have more risk taking ability than the other age groups, number of respondent in very high, high are most in this age group. The reason behind this is that this age group wants to earn more and they are only in the beginning of their carrer. The next group which is next this is the 31-40 age group in which most are family person and for that reason the are with mostly moderate risk profile.

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Fig : Age wise Time Horizon Explanation:Time Horizon is very much important for an Investor because it determines the time period the Investor need to Invest and the market conditions during that time. More the time horizon the risk diluted is more. Those who Invest for very few years (<3 years) they are the short term Investors and the low risk takers. They usually Invest for the high gain in short term. The above bar graph shows that age group 18-30 years dominating in this sector. Most of the respondents are in the 3-5 years group. They remain Invested for the a full cycle of bear turn and bull turn. The age group of 31-40 years are likely to remain Invested in 6-9 years because if they could Invest in the beginning of the bull turn then they can make highest profit after 3 market cycle. Only the Real Estate Investors wants to Invested more than 10 years.

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Fig : Age wise Negative return acceptability. Expalnation:Negative return acceptability shows the Risk tolerence, as shown before risk tolerence is more in 18-30 years age group, this graph also shows that least risk tolerence group is 3140 years age group. The age group of >50 years are also risk averse they can not tolerate any fluctuuation in return part in longer time but they can tolerate minute losses in 7 and 3 years return. 18-30 year age group response are evenly distributed in all ranges of negative return acceptibility.

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Fig : Disposible Income-wise Risk tolerence Explanation:Disposible Income gives the power of Investment to the Investor. But the risk tolerence is the mind set of individual Investors. I have tried to corelate these two. This graph shows that different disposible Income group has different risk tolerence. The < 5,000 Rs Income group is with moderate risk takers. The disposible Income group of Rs. 5,000 - Rs. 10,000 are more risk takers than the previous one. Though the response of this group is more concern about the moderate risk. The next group Rs. 10,000 - Rs. 15,000 has diversified their risk, this group tend to Invest in diversified intrument where risk is diluted due to diversity of risk profile. The Rs. 15,000 - Rs. 20,000 Disposible Income group is the most risk takers in all the groups.

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Relation Between Disposible Income & Time Horizon

Fig:Disposible Income wise Time horizon Explanation:Time horizon decides the tenure the Investor remain Invested in the market. This depics the Investment potential along with risk tolerence. The above graph shows that the Disposible Income group of > 20,000 Rs are intended to quick return,so they intended to Invest for below 3 years. 36% of respondent from more than Rs. 20,000 group. The disposible Income group of Rs. 5,000 - Rs. 10,000 Rs.is tend to Invest for 3-5 years and > 10 years span. Where as Rs. 10,000 - Rs. 15,000 Rs disposible Income group is predominently Invested in the 6-9 years span.

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Fig: Disposible Income wise Investment focus Explanation:Investment focus is the primary mind set of the Investor, before Investment he/she always try to find out the proirity of the Investment and the suitable savings to Invest. Here in every disposible Income group Tax savings is one of the main primary focus. But it has seen that Rs. 10,000 - Rs. 15,000 group is more end towards the Capital Preservation & Tax savings. The above Rs. 20,000 disposible Income group are not focused towards the Retirement, they are focus to tax savings. The Rs. 15,000 - Rs. 20,000 Disposible Income group has a primary focus of all the priorities. This is the group which has a mind set of all the rpimary focuses.

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Fig: Disposible Income wise Negative return acceptabilty Explanation:The safe players are always want less negative return and fixed return in the fixed tenure. Here in ths bar graph the below 5,000 Rs disposible Income group are the safe players, only 9% of this group has a high negative return acceptability. Where as in the 15,000-20,000 Rs disposible Income group has a high Negative return acceptability about 32% respondent are in Can Fluctuate in long run and 23% in Once in 7 years group. But in the above 20,000 Rs disposible Income group, 50% respondents do not want negative return. The 10,000-15,000 group has a greater negative acceptance tan any other group.

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Fig: Occupation wise Investment Explanation:This graph will show how Investors of different category tend to Invest. Here in this bar graph service category are like to Invest in the Fixed Deposits (23%) and Mutual Funds (24%). Fixed deposits gives a fiex return where as in mutual funds the risk is diversified. Business class is more attracted towards the Shares (18%) and real estate (17%) because they have the lum sum amount to Invest in the single time. More over they also Invest in the mutual funds where high risk may be taken for the higher return. For the Self employed category, they are mostly Invested in the Fixed Deposits (37%) and Insurance sector(36%).

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Fig: Occupation wise Primary focus Explanation:In the above bar graph shows how occupation dominate the Investment focus of the Investors. In the Service category the Investment focus is the tax savings, 46% Investor prioritised Tax savings as their first priority of Investment. Where as Income, retirement, capital preservation are the minor priority for them. For the Business class Capital preservation and Future Uncertainity playes a big role in their Investment planning. Nearly 46% Investors are in this category. Self employed are very few in number in my survey so I have not consider them in this explanation.

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Fig: Occupation wise Negative Return Explanation:Negative return acceptance is an another way to find out the risk tolerence.In this graph Self employed category 75% responded they can not accept negative return. Only 25% responded they can accept negative return in 7 years. In Service category most Investors are risk averse, 39% never accept negative return, but few of them are now started to Invest in the riskier profile so negative acceptability is present. For the business class, they are mostly Invested in shares & mutual funds, as results they responded Once in 3 years and Can fluctuate in long term. The Investor who want to stay for 3 years are the short term players,where as the long term players can accept ups & downs in their Investment for the higher return.

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Fig: Occupation wise Time Horizon Explanation:The above graph shows that in all the occupation nearly 22% -25% Investors are want to quit before 3 years. This may be because of the short term Investment. The noticeable thing is that in service category 40% and in Business category 48% Investors are tend to remain Invested for 3-5 years. This is very good indicstion for the Investment institution. In the service category 21% invetors are want to stay Invested for more than 10 years this is because the are Invested in the real estate and long term invesment Instrument like bonds.

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CHAPTER 6
CREATION OF PORTFOLIO
6.1. 6.2. 6.3. Creating Portfolio Funds Selection Portfolio of Investor

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6.1. Creating Portfolio

Making a portfolio is depending on the risk measurement of the investment and the time horizon he/she prefer to invest. But from the point of view of the Portfolio Manager, choosing a Investment Intrument or a fund is more difficult than to measure the risk tolerence and time horizon. For the portfolio managers calculating the risk and return is the main area where they focused. As an investors before investing Must always watch for the risk and return for his/her investment. So before creating the portfolio, risk and return calculation is manditory. To understand the risk of a specified fund, there are some statistical instruments that helps to measure the volatality in respect to the market, industry, and peers. Measuring volatility and risk depics the fluctuation of return investors receive. For this creation of portfolio I have choose Mutual Funds as investment instrument because, it has a diversified investment options from equity market, money market, to debt instrument. To diversified investment Investor can Invest as he/she wanted to. Any one can invest in mutual funds as variation in investment instrument is greater than any other Investment Instrument.

6.2. Funds Selection

There are several option for Saving and Investment. An Investor or A Portfolio Manager can see the Risk Profile of each of the Investment Avenues and then select the best as per the Demographics of the Investor such as Age, Occupation, Annual Income, Disposible Income.

Investment Avenues Saving Bank A/c Equity Mutual Funds RBI Bonds/ Fixed Deposits Real Estate Insurance Post Office Government Securities PPF

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6.3. Portfolio of Investor

Investor A
With 70% Aggressive & 30% Defensive Risk Profile Investable Amount = Rs.500,000. Aggressive Investment= 500,000 x 0.7 = Rs.350,000 Defensive Investment= 500,000 x 0.3 = Rs.150,000 Aggressive Investment Equity = Rs.150,000. Mutual Funds = Rs.200,000. Defensive Investment Post Office = Rs.50,000 Government Securities = Rs.50,000 Fixed deposits = Rs.50,000 Return after One years of the above Investment INVESTMENT Equity Mutual Funds Post Office Govt. Securities Fixed Deposits TOTAL CALCULATION 150,000 X 35% 200,000 X 20% 50,000 X 8.5% 50,000 X 8% 50,000 X 9% EXPECTED RETURN Rs.52,500 Rs.40,000 Rs.4,250 Rs.4,000 Rs.4,500 Rs.105,250/-

On an average the return = Rs.105,250/500,000 = 21.05% which is Good for High Risk Profile Investor

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Investor B
With 50% Aggressive & 50% Defensive Risk Profile Investable amount = Rs.500,000. Aggressive Investment = 500,000 x 0.5 = Rs.250,000 Defensive Investment = 500,000 x 0.5 = Rs.250,000 Aggressive Investment Equity = Rs.100,000. Real Estate = Rs.100,000 Mutual Funds = Rs.50,000. Defensive Investment RBI Bonds = Rs.100,000 Government Securities = Rs.75,000 Fixed deposits = Rs.75,000 Return after One years of the above Investment INVESTMENT Equity Real Estate Mutual Funds RBI Bonds Govt. Securities Fixed Deposits TOTAL CALCULATION 100,000 X 35% 100,000 X 15% 50,000 X 20% 100,000 X 8.5% 75,000 X 8% 75,000 X 9% EXPECTED RETURN Rs.35,000 Rs.15,000 Rs.10,000 Rs.8,500 Rs.6,000 Rs.6,750 Rs.81,250/-

On an average the return =Rs.81,250/500,000 = 16.25% which is Good for Moderate Risk Profile Investor

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CHAPTER 7
CONCLUSIONS & RECOMMENDATIONS

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Conclusion and Recommendation

The over all Project is depending up on the findings that has been explained previously. All my survey findings are corelated and being explain in the above graphs. After completing the survey and watching the analysis I come to this conclusion that before Investment Investors do have focus on Tax savings, Income, Capital preservation etc. They also have a predetermination of the time period of Investment.

Age Group
According to my view the Age Group of 18-30 can be a great potential Investors for the company as they has High Risk Profile, more Disposible Income, and the Time Horizon is perfect 3-5 years. Recommendation for this category is Investor can opt for ULIP as it has a 20%-22% return which is good enough for Investment. The main intention is to get good return in the near future with Insurance to the Investor. They can opt for Risky avenues such as Equity etc Mutual Funds can also be offered as they have high risk profile. Mutual will be a great option as there are variety of Mutual Funds where an Investor can remain Invested. The Age Group of 31-40 years, Investors are with Moderate risk profile, most of the Investors are from the Rs. 10,000 - Rs. 15,000 per month disposible Income. Company will get a good Investor with diluted risk profile. Investor can go for ULIPs and Fixed Deposits as Investment Instrument. Mutual funds can be an option but that must be a debt fund to Invest. The Age Group of 41-50 years, Investors are from the Rs. 15,000 - Rs. 20,000 Disposible Income group. Investor in this group are Invested in Insurance sector, the primary focus of these Investors are Retirement and time horizon is likely to be 6 -9 years. This is also good potential group for the retirement plan in ULIPs. Mutual funds can be a good option for them. For the Age Group of above 50 years, the Risk profile would be low moderate, as the term is not more than 3 years. Investors have Invested in Insurance sector but in this age Insurance would not be a good option for Investor. Investors should try to opt for Fixed Deposits.

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Occupation
If we see the survey data it will be seen that respondents are majorly Service peopole and Business Class. Depending upon the data I conclude that the service class has a time horizon of 3-5 years and risk tolerence Low- Moderate. They Invest in Equity, FDs, Mutual Fund and Insurance. Recommendation Service Class Investor should opt for FDs, ULIPs. Mutual fund which can be a lucrative offer if the Fund is any moderate fund or debt fund. For the business class, the risk profile is high-very high. Most Investor are with negative return acceptability and time horizon is < 3 years. Investor should go for Mutual funds, Equity which have High Risk profile thus Investor can get a high return.

Disposible Income
The disposible Income bracket less than Rs.5000 per month are basically safe Investors and have not and do not prefer Investing in Mutual Funds and Equity. They prefer to go for FDs, Insurance etc Respondents under disposible Income bracket Rs.5,000 - Rs.10,000 have mainly Invested in Insurance and Real Estate. But when survey was done and their preferences was asked these respondents strongly preferred Investing in these Strategies. Disposible Income Bracket of Rs.15,000 - Rs.20,000 are the strong contenders for Investing their money and these people have Invested in Real Estate, Insurance and Fixed Deposits. Moreover there is mixed preferences for their Investments thus proper segmentation of the sample should be done accordingly marketing Strategies should be adopted. Though there is a small percentage of respondents in Disposible Income bracket above Rs.20,000 who least prefer Investing in Mutual Fund. But this is the segment which can be well targeted and their portfolio should be such that gives them more returns.

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CHAPTER 8
ANNEXURE
8.1. 8.2. 8.3. List of Return Expected according to Current Scenario Comparision of Investment Avenues Questionnaire

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8.1. List of Return Expected according to Current Scenario

Types of Investments Company Bonds Bond Mutual Funds Equity Mutual Funds Equities Fixed Deposits PPF Post Office Government Securities ELSS

Historical Returns 6%-8% 8%-10% 20%-25% 30%-35% 7%-10% 9% 8.5% 8% 15%-20%

Risk Profile Medium-high Medium High Very high Low Low Low Low Medium-high

Note: Higher returns for lower risk (because of Govt. guarantees there) that PPF and similar A/c appear to have, is misleading. These do not have much liquidity, and since that is an important measure of risk.

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8.2. Comparison of Investment Avenues

Securities Financial Securities

Equity Debentures

Rate of return Annual Income

Rate of return Capital Appreciation

Risk

Marketability

Tax Benefit

Convenience

Low High

High Low

High Low

High Average

Yes Nil

High High

Financial Securities
Bank Deposits Provident Fund Life Insurance Low Nil Nil Nil High High Low Nil Nil High Average Average Yes Yes Yes High High High

Mutual funds
Growth/equity Income/debt Low High High Low High Low High High Yes Yes High High

Real Assets
Real estate Gold/silver Low Nil High Average Low Average Low Average Limited Nil Average Average

Source: http://www.narachInvestment.com

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8.3. QUESTIONNAIRE FOR INVESTMENT STRATEGIES

Name:__________________________ Age: 18-30 Occupation: Service Business

31-40 Self Employed

41-50

>50 Other

Contact no.______________________ Q 1.What is your Annual Income (Approx)? < 2,50,000 7,50,000 - 10,00,000 2,50,000 - 5,00,000 > 10,00,000 5,00,000 - 7,50,000

Q 2. What is your Monthly Disposable Income? < 5,000 15,000 - 20,000 5,000 - 10,000 > 20,000 10,000 - 15,000

Q 3. What is your First Priority of Investment (Plz give ranking 1-5, where 1- best) Tax Savings Retirement Future Uncertainty Capital Preservation Income

Q 4. When You want to withdraw money from your Investment? Less than 3 years 3 - 5 years 6 - 9 years >10 years

Q 5. Where you have Invested from the followings?(you can tick more than one) Shares Real Estate Q 6. What is applicable to you? Never Accept Negative return Can accept negative return once in 3 years Can accept negative return once in 5 years Can accept negative return once in 7 years Returns can fluctuate in longer term. Q 7. As a Investor do you Favour Risky Avenues / Investments? Yes No Mutual Funds Insurance FD/RBI bonds Debentures

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CHAPTER 7
BIBLIOGRAPHY

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BIBLIOGRAPHY

Books
Investment Analysis & Portfolio Management P.K.Bandgar Investment Management Preeti Singh Security Analysis and Portfolio Management by Ritu Ahuja. Insurance in India by S Swaminathan.

News Papers
India Today The Times of India Economic Times

Magazine
Business Today Business World

Websites
www.narachInvestment.com www.Investopedia.com www.nseindia.com www.bseindia.com www.finance.indiamart.com

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