CHAPTER NO.

INTRODUCTION

1.1 INTRODUCTION
For most of the investors throughout their life, they will be earning and spending money.
Rarely, investor’s current money income exactly balances with their consumption desires.
Sometimes, investors may have more money than they want to spend; at other times, they
may want to purchase more than they can afford. These imbalances will lead investors
either to borrow or to save to maximize the long-run benefits from their income.

When current income exceeds current consumption desires, people tend to save the
excess. They can do any of several things with these savings. One possibility is to put the
money under a mattress or bury it in the backyard until some future time when
consumption desires exceed current income. When they retrieve their savings from the
mattress or backyard, they have the same amount they saved.

Another possibility is that they can give up the immediate possession of these savings for
a future larger amount of money that will be available for future consumption. This trade-
off of present consumption for a higher level of future consumption is the reason for
saving. What investor does with the savings to make them increase over time is
investment. In contrast, when current income is less than current consumption desires,
people borrow to make up the difference. Those who give up immediate possession of
savings (that is, defer consumption) expect to receive in the future a greater amount than
they gave up. Conversely, those who consume more than their current income (that is,
borrowed) must be willing to pay back in the future more than they borrowed.

The rate of exchange between future consumption (future rupee) and current consumption
(current rupee) is the pure rate of interest. Both people’s willingness to pay this difference
for borrowed funds and their desire to receive a surplus on their savings give rise to an
interest rate referred to as the pure time value of money. This interest rate is established in
the capital market by a comparison of the supply of excess income available (savings) to
be invested and the demand for excess consumption (borrowing) at a given time.

An investment is the current commitment of rupee for a period of time in order to derive
future payments that will compensate the investor for
(1) The time the funds are committed,
(2) The expected rate of inflation, and
(3) The uncertainty of the future payments.

The “Investor” can be an individual, a government, a pension fund, or a corporation.

Similarly, this definition includes all types of investments, including investments by
corporations in plant and equipment and investments by individuals in stocks, bonds,
commodities, or real estate. This study emphasizes investments by individual investors. In
all cases, the investor is trading a known rupee amount today for some expected future
stream of payments that will be greater than the current outlay.

Definition of Individual investor: “An individual who purchases small amounts of

securities for themselves, as opposed to an institutional investor, Also called as Retail
Investor or Small Investor.” At this point, researcher has answered the questions about
why people invest and what they want from their investments. They invest to earn a
return from savings due to their deferred consumption. They want a rate of return that
compensates them for the time, the expected rate of inflation, and the uncertainty of the
return.
In today’s world everybody is running for money and it is considered as a root of
happiness. For secure life and for bright future people start investing. Every time
investors are confused with investment avenues and their risk return profile. So, even if
Researcher focuses on past, present or future, investment is such a topic that needs
constant upgradation as economy changes. The research study will be helpful for the
investors to choose proper investment avenue and to create profitable investment
portfolio.

1.2 HISTORICAL BACKGROUND

Investing in Ancient Mesopotamia
Most investing history books start in Europe in the 16th century. However, we like to
start way earlier. We believe the history of investing can be traced back to the famous
Code of Hammurabi, written around 1700 BCE.
That code provided the framework for a lot of civilization’s most crucial laws. Most
importantly for this article, it gave us a legal framework for investment. Essentially, the
law established a way to pledge collateral in exchange for investing in a project. In the
Code of Hammurabi, land was required to be pledged as collateral. Anyone who broke
their obligation as debtor/creditor was punished.
When we talk about investing, however, we’re typically talking about the modern
investment structure of stock trading, securities trading, and banking. In that case, let’s
jump ahead to the 17th century.

1602 and the Amsterdam Stock Exchange.

When you look online for information about the first stock market, you’ll pretty much
always be told that it’s the Amsterdam Stock Exchange. That’s generally accepted as fact,
although there were a number of similar institutions that sprung up around Europe around
this time (Antwerp had a financial exchange system in the 16th century, for example)
For years, it was accepted as fact that the Amsterdam Stock Exchange was the world’s
first stock market.
However, many historians disagree, stating that stock markets could be found in various
forms throughout Europe during the Medieval and Renaissance ages.
In Fernand Braudel’s 1983 text, “The Wheels of Commerce”, for example, he claims that
the roots of stock markets could more accurately be traced back to the Mediterranean.
Stock markets date back to before 1328 in Florence, for example, and may have appeared
even earlier in Venice. Genoa also had an active stock market throughout the Medieval
Period.
Outside of Italy, evidence of stock markets and stock market-like structures could be seen
in German towns and French cities, for example. German towns sold shares in local
mines at the fairs in Leipzig, while French cities sold municipal stocks.
Braudel concludes by stating that “All evidence points to the Mediterranean as the cradle
of the stock market”.
However, he goes on to praise the Amsterdam Stock Exchange by admitting it “…was the
volume, the fluidity of the market and publicity it received, and the speculative freedom
of transactions” that made the Amsterdam Stock Exchange the most notable way for
individuals to invest (Source).
Generally speaking, investing is as old as human civilization. However, the stock markets
of Medieval, Renaissance, and Enlightenment-era Europe all brought investing to the
forefront of civilization in a more organized and standardized way than we had ever seen
before.

1.3 MEANING OF INVESTMENT

Investment is the employment of funds with the aim of getting return on it. In general
terms, investment means the use of money in the hope of making more money. In finance,
investment means the purchase of a financial product or other item of value with an
expectation of favorable future returns.

Investment of hard earned money is a crucial activity of every human being. Investment
is the commitment of funds which have been saved from current consumption with the
hope that some benefits will be received in future. Thus, it is a reward for waiting for
money. Savings of the people are invested in assets depending on their risk and return
demands.

Investment refers to the concept of deferred consumption, which involves purchasing an

asset, giving a loan or keeping funds in a bank account with the aim of generating future
returns. Various investment options are available, offering differing risk-reward tradeoffs.
An understanding of the core concepts and a thorough analysis of the options can help an
investor create a portfolio that maximizes returns while minimizing risk exposure.

There are Two concepts of Investment:

1) Economic Investment: The concept of economic investment means addition to the

capital stock of the society. The capital stock of the society is the goods which are used in
the production of other goods. The term investment implies the formation of new and
productive capital in the form of new construction and producers durable instrument such
as plant and machinery. Inventories and human capital are also included in this concept.
Thus, an investment, in economic terms, means an increase in building, equipment, and
inventory.

2) Financial Investment: This is an allocation of monetary resources to assets that are

expected to yield some gain or return over a given period of time. It means an exchange
of financial claims such as shares and bonds, real estate, etc. Financial investment
involves contrasts written on pieces of paper such as shares and debentures. People invest
their funds in shares, debentures, fixed deposits, national saving certificates, life
insurance policies, provident fund etc. in their view investment is a commitment of funds
to derive future income in the form of interest, dividends, rent, premiums, pension
benefits and the appreciation of the value of their principal capital. In primitive
economies most investments are of the real variety whereas in a modern economy much
investment is of the
financial variety.

The economic and financial concepts of investment are related to each other because
investment is a part of the savings of individuals which flow into the capital market either
directly or through institutions. Thus, investment decisions and financial decisions
interact with each other. Financial decisions are primarily concerned with the sources of
money where as investment decisions are traditionally concerned with uses or budgeting
of money.

1.4 INVESTMENT OBJECTIVES

Investing is a wide spread practice and many have made their fortunes in the process. 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 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,
dependents, educational requirements, income,
consumption and provision for retirement etc.
The objectives can be classified on the basis of the investors approach as follows:

a) Short term high priority objectives: Investors have a high priority towards
achieving certain objectives in a short time. For example, a young couple will give high
priority to buy a house. Thus, investors will go for high priority objectives and invest
their money accordingly.

b) Long term high priority objectives: Some investors look forward and invest on the
basis of objectives of long term needs. They want to achieve financial independence in
long period. For example, investing for post retirement period or education of a child etc.
investors, usually prefer a diversified approach while selecting different types of
investments.

c) Low priority objectives: These objectives have low priority in investing. These
objectives are not painful. After investing in high priority assets, investors can invest in
these low priority assets. For example, provision for tour, domestic
appliances etc.
d) Money making objectives: Investors put their surplus money in these kinds of
investment. Their objective is to maximize wealth. Usually, the investors invest in shares
of companies which provide capital appreciation apart from regular income from
dividend.

Every investor has common objectives with regard to the investment of their
capital. The importance of each objective varies from investor to investor and depends
upon the age and the amount of capital they have. These objectives are broadly defined as
follows.

a. Lifestyle – Investors want to ensure that their assets can meet their financial needs
over their lifetimes.

b. Financial security – Investors want to protect their financial needs against

financial risks at all times.
c. Return – Investors want a balance of risk and return that is suitable to their
personal risk preferences.

d.Value for money – Investors want to minimize the costs of managing their assets and
their financial needs.

e. Peace of mind – Investors do not want to worry about the day to day movements of
markets and their present and future financial security.

Achieving the sum of these objectives depends very much on the investor having all their
assets and needs managed centrally, with portfolios planned to meet lifetime needs, with
one overall investment strategy ensuring that the disposition of assets will match
individual needs and risk preferences.

1.4 INVESTMENT ATTRIBUTES

Every investor has certain specific objective to achieve through his long term or short
term investment. Such objectives may be monetary/financial or personal in character.

The Three financial objectives are:-

1. Safety & Security of the fund invested (Principal amount)
2. Profitability (Through interest, dividend and capital appreciation)
3. Liquidity (Convertibility into cash as and when required)

These objectives are universal in character as every investors will like to have a fair
balance of these three financial objectives. An investor will not like to take undue risk
about his principal amount even when the interest rate offered is extremely attractive.
These factors are known as investment attributes.
There are personal objectives which are given due consideration by every investor while
selecting suitable avenues for investment. Personal objectives may be like provision for
old age and sickness, provision for house construction, provision for education and
marriage of children’s and finally provision for dependents including wife, parents or
physically handicapped member of the family.

Investment Avenue selected should be suitable for achieving both the financial and
personal objectives. Advantages and disadvantages of various investment avenues need to
be considered in the context of such investment objectives.

1) Period of Investment :- It is one major consideration while selecting avenue for

investment. Such period may be, a. Short Term (up to one year) – To meet such
objectives, investment avenues that carry minimum or no risk are suitable.b. Medium
Term (1 year to 3 years) – Investment avenues that offers better returns and may carry
slightly more risk can be considered, and lastly c. Long Term (3 years and above) –
As the time horizon is adequate, investor can look at investment that offers best
returns and are considered more risky.

2) Risk in Investment :- Risk is another factor which needs careful consideration while
selecting the avenue for investment. Risk is a normal feature of every investment as an
investor has to part with his money immediately and has to collect it back with some
benefit in due course. The risk may be more in some investment avenues and less in
others.
Risk connected with the investment are, liquidity risk, inflation risk, market risk, business
risk, political risk etc. Thus, the objective of an investor should be to minimize the risk
and to maximize the return out of the investment made.

1.5 INVESTMENT ALTERNATIVES

Wide varieties of investment avenues are now available in India. An investor can himself
select the best avenue after studying the merits and demerits of different avenues. Even
financial advertisements, newspaper supplements on financial matters and investment
journals offer guidance to investors in the selection of suitable investment avenues.

Investment avenues are the outlets of funds. A bewildering range of investment

alternatives are available, they fall into two broad categories, viz, financial assets and real
assets. Financial assets are paper (or electronic) claim on some issuer such as the
government or a corporate body. The important financial assets are equity shares,
corporate debentures government securities, deposit with banks, post office schemes,
mutual fund shares, insurance policies, and derivative instruments. Real assets are
represented by tangible assets like residential house, commercial property, agricultural
farm, gold, precious stones, and art object. As the economy advances, the relative
importance of financial assets tends to increase. Of course, by and large the two forms of
investments are complementary and not competitive.

Investors are free to select any one or more alternative avenues depending upon their
needs. All categories of investors are equally interested in safety, liquidity and reasonable
return on the funds invested by them.

In India, investment alternatives are continuously increasing along with new

developments in the financial market. Investment is now possible in corporate securities,
public provident fund, mutual fund etc. Thus, wide varieties of investment avenues are
now available to the investors. However, the investors should be very careful about their
hard earned money. An investor can select the best avenue after studying the merits and
demerits of the following investment alternatives:

1) Shares
2) Debentures and Bonds
3) Public Deposits
4) Bank Deposits
5) Post Office Savings
6) Public Provident Fund (PPF)
7) Money Market Instruments
8) Mutual Fund Schemes
9) Life Insurance Schemes
10) Real Estates
11) Gold-Silver
12) Derivative Instruments
13) Commodity Market (commodities)
For sensible investing, investors should be familiar with the characteristics and features of
various investment alternatives. These are the various investment avenues; where
individual investors can invest their hard earn money.

1.6 INVESTMENT PATTERN IN INDIA

1) SHARES

‘Share means a share in the share capital of a company. A company is a business

organization. The shares which are issued by companies are of two types i.e. Equity
shares and Preference shares. It is registered as per Companies Act, 1956 Every
company has share capital. The share capital of a company is divided into number of
equal parts and each of such part is known as a 'share'. A public limited company has to
complete three stages. The first is registration. The second is raising capital and the third
is commencement of business. A public limited company issues shares to the public for
raising capital. The first public issue is known as Initial Public Offerings (IPO). The
shares can be issued at par, premium or discount. Each share has a face value of Rs 1,
2 ,5 or 10. In order to issue shares a prospectus is prepared and it is got approved from
Securities and Exchange Board of India (SEBI). These shares are listed
with the stock exchange so that the shareholders can sale these shares in the
market. The company has to make an application to the stock exchange for listing of
shares.

The shares are also called as "stock". Nowadays, shares are issued in DEMAT form. It
means shares are credited to a separate account of the applicant opened with depository
participant. This is also called paperless security because shares are not issued in
physical form. Demat account is compulsory when the shares are issued through Book
Building Process, Book Building is a method of public issue of shares by a company in
which the price is determined by the investors subject to a price band or range of prices
given by the company.

2) DEBENTURES AND BONDS

A debenture is a document issued by a company as an evidence of a debt. It is a
certificate issued by a company under its seal, acknowledging a debt due by it to its
holders. The term debenture includes debenture stock, bonds and any other securities
issued by a company. The Companies Act provides that a company can raise loans from
the public by issue of debentures. The debenture holder becomes the creditor of the
company. The debenture holder gets interest on the debenture which is fixed at the time
of issue. The debentures are also issued to the public just like issue of shares. However,
there is a need for credit rating before issue of debentures or Bonds. Bonds are issued by
Government companies and the
debentures are issued by the Private sector companies. Therefore, bonds may be tax
saving but debentures are not tax saving investment

Bonds refer to debt instruments bearing interest on maturity. In simple terms,

organizations may borrow funds by issuing debt securities named bonds, having a fixed
maturity period (more than one year) and pay a specified rate of interest (coupon rate)
on the principal amount to the holders. Bonds have a maturity period of more than one
year which differentiates it from other debt securities like commercial papers, treasury
bills and other money market instruments.

3)PUBLIC DEPOSITS

The Companies Act provides that companies can accept deposits directly from the
public. This mode of raising funds has become popular in the 1990s, because the bank
credit had become costlier. As per provisions of the Companies ACT, a company cannot
accept deposits for a period of less than 6 months and more than 36
months. However, deposits up to 10% of the paid up capital and free reserves can be
accepted for a minimum period of three months for meeting short-term requirements.
Again, a company cannot accept or renew deposits in excess of 35% of its paid up
capital and free reserves.

4) BANK DEPOSITS
Investment of surplus money in bank deposits is quite popular among the investors
(Particularly among salaried people). Banks (Co-operative and Commercial) collect
working capital for their business through deposits called bank deposits. The deposits
are given by the customers for specific period and the bank pays interest on them. In
India, all types of banks accept deposits by offering interest. The deposits can be
accepted from individuals, institutions and even business enterprises, the business and
profitability of banks depend on deposit collection. For depositing money in the bank,
an investor/depositor has to open an account in a bank

5) POST OFFICE SAVINGS

Post office operates as a financial institution. It collects small savings of the people
through savings bank accounts facility. In addition, time deposits and government loans
are also collected through post offices. Certain government securities such as Kisan
Vikas Patras, National Saving Certificates, etc. are sold through post offices. New
schemes are regularly introduced by the Postal Department in order to collect savings of
the people. This includes recurring deposits, monthly income scheme, PPF and so on.

6)MUTUAL FUNDS

Mutual fund is a financial intermediary which collects savings of the people for secured
and profitable investment. The main function of mutual fund is to mobilize the savings
of the general public and invest them in stock market securities. The entire income of
mutual fund is distributed among the investors in proportion to their investments-
Expenses for managing the fund are charged to the fund, like mutual funds in India are
registered as trusts under the Indian Trust Act. The trustees are appointed and they look
after the management of the trust. They decide the investment policy and give the
benefit of professional investment through the mutual funds. These funds are managed
by financial and professional experts. The savings collected from small investors are
invested in a safe, secured and profitable manner. Therefore, it is said that mutual fund
is a boon to the small investors.
7)LIFE INSURANCE POLICIES

Nothing is more important to a person than the feeling that their family is financially
secure - at all times. “Life insurance is a contract whereby the insurer, in consideration
of a premium paid either in a lumpsum or in periodical installments undertakes to pay an
annuity or certain sum of money either on the death of the insured or on the expiry of a
certain number of years, whichever is earlier.”

8)INVESTMENT IN REAL ESTATES

Investment in real estate includes properties like building, industrial land,

plantations, farm houses, agricultural land near cities and flats or houses. Such
properties attract the attention of affluent investors. It is an attractive, as well as
profitable investment avenue today. A residential building represents the most attractive
real estate property for majority of investors. The prices of real estate are increasing day
by day. The land is limited on the earth but the population has been increasing. As the
demand increases but the supply of land is limited, the prices tend to increase.
Therefore, it is attractive investment which generates higher return during a short period
of time.

9) INVESTMENT IN GOLD AND SILVER

Gold and silver are the precious objects. Everybody likes gold and hence requires gold
or silver. These two precious metals are used for making ornaments and also for
investment of surplus funds over a long period of time. In India, gold is an obsession
deep-rooted in mythology, religious rites and it is very psychological. In every family at
least a little quantity of gold and silver is available. Some people buy these metals as an
investment. The prices of gold and silver are also increasing continuously. The prices
also depend upon demand and supply of gold. The supply has been increasing at low
speed. However, the demand has been increasing very fast. Therefore, the prices also go
on increasing. People use gold and silver at the time of marriages and other festivals.
Apart from gold and silver, precious stones such as diamonds, rubies and pearls are also
appealing for long term investment particularly among rich people.

1.7 INTRODUCTION OF PORTFOLIO

“Portfolio means combined holding of many kinds of financial securities i.e. shares,
debentures, government bonds, units and other financial assets.” The term investment
portfolio refers to the various assets of an investor which are to be considered as a unit.
It is not merely a collection of unrelated assets but a carefully blended asset combination
within a unified framework. It is necessary for investors to take all decisions as regards
their wealth position in a context of portfolio. Making a portfolio means putting ones
eggs in different baskets with varying element of risk and return. The object of portfolio
is to reduce risk by diversification and maximise gains. Thus, portfolio is a combination
of various instruments of investment. It is also a combination of securities with
different risk-return characteristics. A portfolio is built up out of the wealth or income of
the investor over a period of time with a view to manage the risk-return preferences. The
analysis of risk-return characteristics of individual securities in the portfolio is made
from time to time and changed that may take place in combination with other securities
are adjusted accordingly. The object of portfolio is to reduce risk by diversification and
maximize gains.

1.8 PORTFOLIO MANAGEMENT

Portfolio management means selection of securities and constant shifting of the portfolio
in the light of varying attractiveness of the constituents of the portfolio. It is a choice of
selecting and revising spectrum of securities to it in with the characteristics of an
investor.

Portfolio management includes portfolio planning, selection and construction, review

and evaluation of securities. The skill in portfolio management lies in achieving a sound
balance between the objectives of safety, liquidity and profitability.
Timing is an important aspect of portfolio revision. Ideally, investors should sell at
market tops and buy at market bottoms. Investors may switch from bonds to share in a
bullish market and vice-versa in a bearish market.
Portfolio management is all about strengths, weaknesses, opportunities and threats in the
choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other
tradeoffs encountered in the attempt to maximize return at a given appetite for risk.
Portfolio management is an art and science of making decisions about investment mix
and policy, matching investments to objectives, asset allocation for individuals and
institutions, and balancing risk against performance.

Portfolio management in common parlance refers to the selection of securities and their
continuous shifting in the portfolio to optimize the returns to suit the objectives of the
investor. This however requires financial expertise in selecting the right mix of
securities in changing market conditions to get the best out of the stock market. In India,
as well as in many western countries, portfolio management service has assumed the
role of specialized service now a days and a number of professional merchant bankers
compete aggressively to provide the best to high net-worth clients, who have little time
to manage their investments. The idea is catching up with the boom in the capital market
and an increasing number of people are inclined to make the profits out of their hard
earned savings.

Markowitz analysed the implications of the fact that the investors, although seeking high
expected returns, generally wish to avoid risk. It is the basis of all scientific portfolio
management. Although the expected return on a portfolio is directly related to the
expected returns on component securities, it is not possible to deduce a portfolio
riskiness simply by knowing the riskiness of individual securities. The riskiness of
portfolio depends upon the attributes of individual securities as well as the
interrelationships among securities.

A professional, who manages other people's or institution's investment portfolio with the
object of profitability, growth and risk minimization is known as a portfolio manager.
He is expected to manage the investor's assets prudently and choose particular
investment avenues appropriate for particular times aiming at maximization of profit.
Portfolio management includes portfolio planning, selection and construction, review
and evaluation of securities. The skill in portfolio management lies in achieving a sound
balance between the objectives of safety, liquidity and profitability. Timing is an
important aspect of portfolio revision. Ideally, investors should sell at market tops and
buy at market bottoms. They should be guarded against buying at high prices and selling
at low prices. Timing is a crucial factor while switching between shares and bonds.
Investors may switch from bonds to shares in a bullish market and vice-versa in a
bearish market. Portfolio management service is one of the merchant banking activities
recognized by Securities and Exchange Board of India (SEBI). The portfolio
management service can be rendered either by the SEBI recognized categories I and II
merchant bankers or portfolio managers or discretionary portfolio manager as defined in
clause (e) and (f) of rule 2 SEBI (portfolio managers) Rules 1993.

According to the definitions as contained in the above clauses, a portfolio manager

means any person who pursuant to contract or arrangement with a client, advises or
directs of undertakes on behalf of the client (whether as a discretionary portfolio
manager or otherwise) the management or administration of a portfolio of securities or
the funds of the client, as the case may be. A merchant banker acting as a portfolio
Manager shall also be bound by the rules and regulations as applicable to the portfolio
manager. Realizing the importance of portfolio management services, the SEBI has laid
down certain guidelines for the proper and professional conduct of portfolio
management services. As per guidelines only recognized merchant bankers registered
with SEBI are authorized to offer these services.

Portfolio management or investment helps investors in effective and efficient

management of their investment to achieve their financial goals. The rapid growth of
capital markets in India has opened up new investment avenues for investors. The stock
markets have become attractive investment options for the common man. But investors
should be able to effectively and efficiently manage investments in order to keep
maximum returns with minimum risk. A portfolio manager by virtue of his knowledge,
background and experience is expected to study the various avenues available for
profitable investment and advise his client to enable the latter to maximize the return on
his investment and at the same time safeguard the funds invested.
1.9 OBJECTIVES OF PORTFOLIO MANAGEMENT

1) Security/Safety of Principal: Security not only involves keeping the principal sum
intact but also keeping intact its purchasing power intact. Safety means protection for
investment against loss under reasonably variations. In order to provide safety, a careful
review of economic and industry trends its necessary.
In other words, errors in portfolio are unavoidable and it requires extensive
diversification. Even investor wants that his basic amount of investment should remain
safe.

2) Stability of Income: So as to facilitate planning more accurately and

systematically the reinvestment consumption of income is important.

3) Capital Growth: This can be attained by reinvesting in growth securities or through

purchase of growth securities. Capital appreciation has become an important investment
principle. Investors seek growth stocks which provides a very large capital appreciation
by way of rights, bonus and appreciation in the market price of a share.

4) Marketability: It is the case with which a security can be bought or sold. This is
essential for providing flexibility to investment portfolio.

5) Liquidity i.e. nearness to money: It is desirable to investor so as to take

advantage of attractive opportunities upcoming in the market.

6) Diversification: The basic objective of building a portfolio is to reduce risk of loss of

capital and / or income by investing in various types of securities and over a wide range
of industries.

7) Favorable Tax status (Tax Incentives): The effective yield an investor gets form his
investment depends on tax to which it is subject. By minimizing the tax burden, yield
can be effectively improved. Investors try to minimise 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. Investment
programmers without considering tax implications may be costly to the investor.

1.10 PORTFOLIO MANAGEMENT PROCESS

Portfolio management is on-going process involving the following basic tasks:

i. Identification of the investor’s objectives, constraints and preferences.
ii. Strategies are to be developed and implemented in tune with investment policy
formulated.
iii. Review and monitoring of the performance of the portfolio.
iv. Finally the evaluation of the portfolio and make some adjustments for the future.

1.11 CONSTRUCTION OF PORTFOLIO:

Portfolio construction means determining the actual composition of portfolio. It refers to

the allocation of funds among a variety of financial assets open for investment.

Portfolio theory concerns itself with the principles governing such allocation. Therefore,
the objective of the theory is to elaborate the principles in which the risk can be
minimized subject to a desired level of return on the portfolio or maximize the return
subject to the constraints of a certain level of risk. The portfolio manager has to set out
all the alternative investments along with their projected return and risk, and choose
investments which satisfy the requirements of the investor and cater to his
preferences.

It is a critical stage because asset mix is the single most determinant of portfolio
performance. Portfolio construction requires a knowledge of the different aspects of
securities. The components of portfolio construction are (a) Asset allocation (b) Security
selection and (c) Portfolio structure. Asset allocation means setting the asset mix.
Security selection involves choosing the appropriate security to meet the portfolio
targets and portfolio structure involves setting the amount of each security to be
included in the portfolio.
Investing in securities presupposes risk. A common way of reducing risk is to follow the
principle of diversification. Diversification is investing in a number of different
securities rather than concentrating in one or two securities. The diversification assures
the benefit of obtaining the anticipated return on the portfolio of securities. In a
diversified portfolio, some securities may not perform as expected but other securities
may exceed expectations with the effect that the actual results of the portfolio will be
reasonably close to the anticipated results.

1.12 FORMULATING THE PORTFOLIO OBJECTIVES

The portfolio objectives can be determined by ascertaining the constraints on portfolio.

The greater the number of constraints and the more binding these constraints, more
conservative the portfolio must be. The following are the six possible portfolio
constraints which are evaluated to determine the appropriate objectives:

1. Need for current income to meet the living expenses.

2. Need for constant income to face inflation.
3. Need for safety principal to liquidate the investments on a short notice.
4. Need for safety principal to reduce the effect of purchasing power.
5. Need for tax exemption.
6. Temperament

1.13 NEED FOR DESIGNING AN INVESTMENT PORTFOLIO

There are large numbers of savers in India. It is also surprising that the saving rate in
India is as high as 32% of GDP per annum and investment at 34% of GDP. High levels
of investment could not generate comparable rates of growth of output because of poor
investment strategy, high capital output ratios, low productivity of capital and high rates
of obsolescence of capital. Thus, the use of capital in India is wasteful and inefficient.
The portfolio managers lack the expertise and experience.

The average Indian household saves around 55% in financial form and 45% in physical
form. As per latest RBI data, savings in the financial form is held 64% in cash and bank
deposits which gives negative real returns. Around 24% of financial savings is held in
the form of Insurance, Provident Fund, Pension Funds and 5% is in Government
Securities like post office savings, NSCs, Public Provident Funds, National Savings
Schemes etc. The investment in capital market instruments is around 6% of the total
financial savings. Their objectives are capital appreciation, safety marketability,
liquidity and hedge against inflation.
The investors should follow proper strategy for investment management. Therefore,
portfolio management becomes desirable. Indian markets are developing and all the
basic principles and theories of portfolio management would apply in the market.

Since 1952, investors have better understood the dimension of attractiveness and why
the rational and professional management of portfolios includes more than the listing of
securities by the magnitude of their expected returns. The great 1952 event was the
publication of Harry Markowitz's celebrated article "Portfolio selection." Markowitz
analysed the implications of the fact that investors although seeking high expected
returns generally wish to avoid risk. Since there is overwhelming evidence that risk
aversion characterizes most investors, especially most large-investor's rationality in
portfolio management demands that account be taken not only expected returns for a
portfolio but also of the risk that is incurred. Although the expected return on a portfolio
is directly related to the expected returns on component securities, it is impossible to
deduce a portfolio's riskiness simply by knowing the riskiness of individual securities.
The riskiness of portfolios depends not only on the attributes of individual securities, but
also on the interrelationships among securities. Therefore, it is primarily for this reason
that portfolio management is desirable.

Another reason for the need for portfolio management is that it depends upon the
preferences of individual investors. It is possible to estimate expected returns for
individual securities without regard to any investor, but it is impossible to construct on
optimal portfolio for an investor without taking personal preferences into account. The
output of security analysts is essential for portfolio management or at least portfolio
managers make use of security analysts output but this output must be analyzed with
reference to the tastes and financial circumstances of individual investors when building
portfolios.
Portfolio management is still in its infancy in India. Professional portfolio
management started in India after the setting up of public sector mutual funds in 1987.

After the success of mutual funds in portfolio management, a number of brokers and
investment consultants have become portfolio managers. Basically portfolio
management is required for proper investment decision-making regarding buy and sell
of securities. There is a need for proper money management in terms of investment as a
basket of assets so as to satisfy the as preferences of the investors and to reduce the risk
and increase the returns on investment

1.14 TYPES OF PORTFOLIO

When it comes to investing there are many options available to individuals. A person
can invest in stocks, bonds, mutual funds, etc. Once a person invests in multiple
products their performance needs to be tracked and strategies made to ensure the
investor reaps the most profit possible. This is where the investment portfolio comes
into play. According to Investor Awareness, it is a term that describes all investments
owned. To take this definition a little farther, an investment portfolio is a significant
aspect in diversification. Maintaining a diverse portfolio helps to mitigate loss because
the investor has not placed all of their eggs in one basket. There are different types of
investment portfolios. Perhaps the most common type’s individuals are exposed to are:

Conservative, Balanced and Aggressive Growth. A portfolio is a combination of

different investment assets mixed and matched for the purpose of achieving an investor's
goals. Items that are considered a part of Investors portfolio can include any asset that
they own - from real items such as art and real estate, to equities, fixed-income
instruments and their cash and equivalents. For the purpose of this section, Investors
will focus on the most liquid asset types: equities, fixed-income securities and cash and
equivalents. The asset mix they choose according to their aims and strategy will
determine the risk and expected return on their portfolio.
1. Aggressive Investment Portfolio

In general, aggressive investment strategies - those that shoot for the highest possible
return - are most appropriate for investors who, for the sake of this potential high return,
have a high risk tolerance and a longer time horizon. Aggressive portfolios generally
have a higher investment in equities. Aggressive investment portfolios are for investors
not afraid of high risk. This type of portfolio may incorporate mutual funds that aim for
high capital gain, equities, stocks, bonds, cash and maybe some commodities. In the
short-term, growth will be very small and some loss will be observed. As a result,
aggressive portfolios perform better in the long term - about five years or longer. An
actively traded aggressive portfolio will typically gain maximum returns for the
investor. The loss factor is why only individuals who are willing to take a high financial
risk should seek an aggressive investment portfolio.

An aggressive portfolio contains high growth investments that will hopefully appreciate
in value. This strategy attempts to achieve high long-term growth by investing in often
risky but profitable, short-term stocks. Under normal market conditions, the Aggressive
Growth Portfolio will invest approximately 100% of its total assets in equity securities.
The Aggressive Growth Portfolio can invest up to 100% of its total assets in equity
securities and up to 25% of its total assets in fixed income securities.

2. Balanced or Moderate Investment Portfolio

A moderately aggressive portfolio is meant for individuals with a longer time horizon
and an average risk tolerance. Investors who find these types of portfolios attractive are
seeking to balance the amount of risk and return contained within the fund. The
portfolio would consist of approximately 50-55% equities, 35-40% bonds, 5-10% cash
and equivalents.

The Moderate Portfolio's primary investment objective is to seek long-term capital

appreciation and also the Moderate Portfolio seeks current income.

3. Conservative Investment Portfolio

The conservative investment strategies, which put safety at a high priority, are most
appropriate for investors who are risk averse and have a shorter time horizon.
Conservative portfolios will generally consist mainly of cash and cash equivalents, or
high-quality fixed-income instruments. The main goal of a conservative portfolio
strategy is to maintain the real value of the portfolio, or to protect the value of the
portfolio against inflation. The portfolio shown below would yield a high amount of
current income from the bonds and would also yield long-term capital growth potential
from the investment in high quality equities.

The conservative investment portfolio is geared towards preserving capital. A minimal

risk investment strategy is used. This type of portfolio is ideal for retirees who are
focused more on having assets available than a stream of income from interest. Since the
primary goal is to preserve capital, investors can dip into their principal to supplement
living expenses instead of relying on the portfolio's earned income. The Conservative
Portfolio's primary investment objective is to seek preservation of capital and current
income. The Conservative Portfolio also seeks capital appreciation. Under normal
market conditions, the Conservative Portfolio will invest approximately 65% of its total
assets in fixed income securities and cash and approximately 35% of its total assets in
equity securities. The Conservative Portfolio can invest up to 100% of its total assets in
fixed income securities and or some time up to 20% of its total assets in equity
securities.
Investors can further break down the above asset classes into subclasses, which also
have different risks and potential returns. For example, an investor might divide the
equity portion between large companies, small companies and international firms. The
bond portion might be allocated between those that are short-term and long-term,
government versus corporate debt, and so forth. More advanced investors might also
have some of the alternative assets such as options and futures in the mix. As, the
number of possible asset allocations is practically unlimited.
1.15 NEED AND IMPORTANCE OF PORTFOLIO MANAGEMENT

Portfolio management is a process encompassing many activities of investment in assets

and securities. It is a dynamic and flexible concept and involves regular and systematic
analysis, judgment and action. The objective of this service is to help the unknown and
investors with the expertise of professionals in investment portfolio management. It
involves construction of a portfolio based upon the investor’s objectives, constraints,
preferences for risk and returns and tax liability. The portfolio is reviewed and adjusted
from time to time in tune with the market conditions. The evaluation of portfolio is to be
done in terms of targets set for risk and returns. The changes in the portfolio are to be
effected to meet the changing condition.

Portfolio construction refers to the allocation of surplus funds in hand among a variety
of financial assets open for investment. Portfolio theory concerns itself with the
principles governing such allocation. The modern view of investment is oriented more
go towards the assembly of proper combination of individual securities to form
investment portfolio.

A combination of securities held together will give a beneficial result if they grouped in
a manner to secure higher returns after taking into consideration the risk elements. The
modern theory is the view that by diversification risk can be reduced. Diversification
can be made by the investor either by having a large number of shares of companies in
different regions, in different industries or those producing different types of product
lines. Modern theory believes in the perspective of combination of securities under
constraints of risk and returns

1.16 FINANCIAL PLANNING PROCESS

Financial planning is must for every household. Financial planning goes beyond
savings. It is an investment with a purpose. It is a plan to save and spend future income.
It should be carefully budgeted. Financial Planning is the process of meeting investor’s
life goals through proper management of their finances. Life goals can include buying a
house, saving for their child’s higher education or planning for retirement. In Today’s
world it was found that people living beyond their means, having credit card debt,
making risky investments and doing things that are irresponsible and against the basic
principles of financial planning. Further the proliferation of new and often complex
financial products demands more financial expertise. Also turbulent conditions and
changing tax laws compound the need for adequate financial planning. Thus it has
become inevitable for all to get into financial planning and understanding financial
products.
Financial planning envisages both short term and long term savings. A portion of the
savings is invested in certain assets. There are various investment options in the form of
assets: bank deposits, government saving schemes, shares, mutual funds, insurance,
commodities, bonds, debentures, company fixed deposits etc.

(SOURCE : SEBI, Financial Education for Middle Income Group) (SOURCE : SEBI,
Financial Education for Middle Income Group) (SOURCE : SEBI, Financial Education
for Middle Income Group) (SOURCE : SEBI, Financial Education for Middle Income
Group)

Financial planning is not something that happens by itself. It requires focus and
discipline. It is a six step process that helps investor takes a ‘big picture’ look at where
investor is and where investor want to be financially.

1.16 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Securities and Exchange Board of India (SEBI) has been established with the prime
mandate to protect the interest of investors in securities. It is also mandated to promote
the development of, and to regulate the securities market.

The securities market enables capital formation in the economy and enhances wealth of
investors who make the right choices. The investor confidence is the key pre requisite
for the emergence of a vibrant and deep capital market. The role of regulator in creating
and enhancing investor confidence is, therefore, paramount.

Accordingly, Securities and Exchange Board of India (SEBI) was set up by an Act of
Parliament of India in April, 1992 with a mandate to
a. Protect the interest of investors
b. Promote the development of and
c. Regulate the securities market

1) Market Regulation:

SEBI prescribes the conditions for issuer companies to raise capital from the pubic so as
to protect the interest of the suppliers of capital (investors). The extensive disclosures
prescribed for issuers facilitate informed investment decision making by investors while
simultaneously ensuring quality of the issuer. Further, it has prescribed norms for such
corporate on ‘ongoing’ basis and also during their restructuring (like substantial
acquisition, buy back and delisting of shares) to safeguard the interest of investors.
To ensure fair and high standards of service to investors, SEBI allows only fit and
proper entities to operate in the capital markets as intermediaries. In this regard, it has
prescribed detailed and uniform norms of their registration. Further, to ensure market
integrity, it has prescribed norms for fair market practices including prohibiting
fraudulent and unfair trade practices and insider trading. Detailed norms for
safeguarding the interest of investors in secondary markets have also been prescribed.
SEBI also prescribes conditions for operation of collective investor schemes, including
Mutual Funds.

2) Market Development:

On an ongoing basis, SEBI initiates measures to widen and deepen the securities
markets by bringing changes in market micro and macrostructure. The major market
development measures undertaken by SEBI include shift from the non transparent open
out cry system to the transparent screen based on line trading system, elimination of
problems of physical certificates by shifting to electronic mode (Demat), implementing
robust risk management framework in stock market trading etc. In the recent past SEBI
has initiated ASBA (application supported by blocked amount) to eliminate problems
pertaining to refunds in public issues.

SEBI’s major policy decisions are formulated through a consultative process involving
expert committees with representation from industry, academia, investors’ associations.
Further, public comments are invited before implementation of major changes,
rendering the whole process participative.

3) Investor Protection:

The above mentioned regulatory framework and the market development measures of
SEBI are invariably geared towards protecting the interest of investors. Besides, SEBI
also has a comprehensive mechanism to facilitate redressal of investor’s grievances.
Further, in keeping with its belief that an informed investor is a protected investor, SEBI
promotes education and awareness of investors. Moreover, mechanisms for dispute
redressal (arbitration at stock exchanges) and to compensate investors have also
beenprovided.
4) Enforcement:

SEBI ascertains compliance to its norms by carrying out inspections of registered

intermediaries, investigations and while processing of documents filed with it, including
investors complaints. SEBI is vested with the power of civil court to call for information
and records, to issue summons, to inspect and to investigate entities associated with
securities markets. If breach of norms is established, SEBI suspends or cancels the
license granted to intermediaries. Besides, SEBI issues prohibitive and cease and desist
orders against intermediaries and non intermediaries and also imposes monetary
penalties through adjudication proceedings. Apart from these civil proceedings, SEBI
also launches criminal proceedings against entities for breach of norms. All such orders
of SEBI are available in the website (www.sebi.gov.in), serving as a warning to
potential defaulter.
 CHAPTER NO. 2
RESEARCH METHODOLOGY
2.1 RESEARCH METHODOLOGY

Research is a generally used word which when used gives individual

suggestions about the new search in addition to the existing research. The word research
is made up of two words i.e. ‘re’ which means again & again and ‘search’ which
means to examine carefully or investigating in depth or to test carefully. There are
various different definitions of research given by different authors from time to time.
C.C. Crawford (2011) defines research as a systematic and refined technique of
thinking, employing specialized tools instruments and procedures to obtain a more
adequate solution to a problem. According to Cliffor Woody, the research comprises
problems definition and redefinition, hypothesis formulation or
coating solutions; data collection, organizing and evaluation of data; making deductions
and making conclusions; and reaching conclusions; and the final stage is to perform
testing of conclusions derived so as to know whether they fit the hypothesis formulated.

In simpler words the term ‘research’ means the ordered sequence consisting
of investigating the stated problem, developing hypothesis, gathering the data and
analysing the data in order to draw out some certain conclusions in the form of solution
towards the stated problem or in the form of generation of some sort of theoretical
formulation for the given framework. This chapter of the study i.e Research
Methodology is designed to explain the research methodology implemented for carrying
out the research analysis work on the topic of various factors affecting saving and
investment decisions of salaried individuals.

As the name suggests research Methodology is an approach adopted in order to chalk

out the results of the stated problem on or the problem taken which is at times referred
as the research problem. In research methodology, the researcher uses different criteria
for searching for an answer or solving the stated research problem.
Research Methodology is desirable to enable the smooth running of operation adopted
for the research, in this manner making the research an efficient research and by being
able to yield maximum information out of it with the minimum expenditure of time,
efforts and money. The adopted research methodology is commonly known as the
research process. Research process adopted for carrying out this research is discussed in
the following sections of the chapter.

2.2 RESEARCH PROCESS ADOPTED FOR DIRECTING THIS

RESEARCH WORK

Identification of the problem

Review of literature

Setting of objectives

Formulation of hypothesis

Setting up of research design

Selection of sample

Pilot testing of the sample

Collection of the data

Selection of the statistical tool

Analysis of data collection

Findings, Conclusion and Suggestions of the study

Figure: Research Process

The purpose of the study is to understand the investors perception towards portfolio
management. A quantitative technique is going to investigate both risky and non risky
investments.

2.3 Objective of the Study

The objectives of the study is as follows:

Primary Objectives

1) To compare the Investor’s perception towards investment in various risky and non
risky investment avenues.
2) To study the investor’s preference towards various risky and non-risky investment
avenues.
3) To determine the factors influencing selection of various avenues as an investment
option in the creation of a portfolio.
4) To study the association of investors perceptions towards various investment avenues
with demographics of investors.
2.4 Research Design

The study undertaken is descriptive in nature and based on field survey with the retail
investors who have invested in risky and non risky investments and to investigate in
detail the various aspects related to the research objective.

2.5 Research Scale

The study is a comparative study to know the investors perception between mutual
funds other than non-risky investments. The study also aims to determine the preferred
investment source among investors and also to investigate the various factors considered
by investors when investing in mutual funds. To measure all these a survey method was
adopted. This survey was conducted through a developed scale on the basis of extensive
literature review and pilot study.
A structured questionnaire was prepared for the study and it was prepared by studying
various past studies undertaken by researchers and considering the views of industry
experts, practitioner and others.

 
2.6 Development of Hypothesis

Ho1a: There is no significant difference between Non-Risky investment and Risky

investments on the basis of return on investment.
Ho1b: There is no significant difference between Non-Risky investment and Risky
investments on the basis of transparency in investment.
Ho1c: There is no significant difference between Non-Risky investment and Risky
investments on the basis of liquidity in investment.
Ho1d: There is no significant difference between Non-Risky investment and Risky
investments on the basis of tax benefits in investment.
Ho1e: There is no significant difference between Non-Risky investment and Risky
investments on the basis of professional management in investment

2.7 Collection of Data

The data collection is an important task of research study, the data collection is to be
done in two ways i.e. primary data and secondary data. Here also both of the ways are
adopted.

2.8 Tools of Data Analysis

2.8.1 Validity & Reliability

The concepts of validity and reliability are most important in determining the quality of
survey information. In the present study researchers evaluated the questionnaire with
respect to: Validity and Reliability.
In the present study content validity was built by careful selection of which items to be
included. Each and every item are selected in a manner that they act in accordance with
the survey specifications which is drawn up by a systematic and careful examination of
the subject domain.
To be reliable means measurement must be consistent from individual to individual
surveyed, across settings and at different times.

2.8.2 Statistical Tools

After collection of data the next step which begins is simplification and analysis of the
data. Therefore the next task of the researcher is to tabulate the data which means to
arrange the data in logical order. In the present study with the use of computer the data
is tabulated. the collected data was entered into MS Excel .
The descriptive statistics provides frequencies and measures of central tendency of this
research analysis. So, frequencies of this analysis can be refer to histograms, Pie Charts
or bar charts of various subcategories, such as gender, level of occupations and level of
educations. It also would be useful to know at the mean of the variables, which indicates
a measure of central tendency that offers a general picture of the research. Following
test were applied to analyse the data to draw the meaningful interpretation Factor
Analysis, Regression, Chi Square Test.

2. 9 Sampling Methods
2.9.1 Sampling techniques
 In the present study for the data collection non probability Judgemental sampling was
used.
2.9.2 Sample size
 The large number of the sample size was taken approximately (number) with their
demographic details like age, profession, gender, etc so that the relevant conclusion can
drawn on the study.
2.9.3 Sampling Unit
 Retail Investors who have invested in Mutual Funds and Other Non Risky Investment
options.
2.9.4 Investment avenues covered
 Banks, PPF, Bonds, Insurance, Mutual Funds and instruments of Post Office like NSC
, MIS.
 CHAPTER NO.3
LITERARURE REVIEW
3.1 REVIEW OF LITERATURE

Review of Literature is considered to be a process of clear-cut, systematic method for

identifying, evaluating, and combining the existing body of completed and recorded
work produced by various scholars, researchers, and practitioners.

The review of literature is said to be an evaluative report of various concerned

information found in the literatures available related to the selected area of the study of
the researcher. The review also helps in describing, summarizing, evaluating and
clarifying the various literatures available. It also gives a theoretical base to the
researcher for the research and also helps the researcher to determine and identify the
nature of the research to be taken up. The works which are considered to be irrelevant
are discarded and those which are considered to be peripheral are to be looked up
critically for the further research.

3.2 Objectives of the review of literature

 It surveys the literature in the chosen area of study

 It judgementally analyses the information collected by identifying the various gaps in
current knowledge and by showcasing the limitations of various, studies, points of view
and researches and also by framing areas for further study and by studying the areas of
arguments.
 It represents the concerned literature in a very structured manner.

Markowitz Theory(1956)(1)The portfolio theory became popular with Nobel Prize

winner Markowitz Theory which is known as Modern Portfolio Theory or MPTModern
Portfolio Theory – MPTAccording to the theory, it's possible to construct an "efficient
frontier" of optimal portfolios offering the maximum possible expected return for a
given level of risk. This theory was pioneered by Harry Markowitz in his paper
"Portfolio Selection," published in 1952 by the Journal of Finance.

There are four basic steps involved in portfolio construction:

1. Security valuation
2. Asset allocation
3. Portfolio optimization
4. Performance measurement

Following are important aspects of MPT theory

It helps to find out Efficient Frontier which is a line created from the risk-reward graph,
comprised of optimal portfolios. The optimal portfolios plotted along the curve have the
highest expected return possible for the given amount of risk. This further leads to find
out Markowitz Efficient Set . It is a set of portfolios with returns that are maximized for
a given level of risk based on mean-variance portfolio construction.
The efficient "solution set" to a given set of mean-variance parameters (a given riskless
asset and a given risky basket of assets) can be graphed into what is called the
Markowitz efficient frontier. It explains the Two Kinds of Risk Modern portfolio theory
states that the risk for individual stock returns has two components:

Systematic Risk - These are market risks that cannot be diversified away. Interest rates,
recessions and wars are examples of systematic risks.

Unsystematic Risk - Also known as "specific risk", this risk is specific to individual
stocks and can be diversified away as you increase the number of stocks in your
portfolio. It represents the component of a stock's return that is not correlated with
General market moves.
For a well-diversified portfolio, the risk - or average deviation from the mean – of each
stock contributes little to portfolio risk. Instead, it is the difference – or covariance -
between individual stock's levels of risk that determines overall portfolio risk. As a
result, investors benefit from holding diversified portfolios instead of individual stocks.

The work of Markowitz was extended by the William Sharpe, John Linter and Jan
Mossin through the development of the Capital Asset Pricing Model (CAPM).

Portfolio Theories (1959)(2): Modern Portfolio Theory (“MPT”) is also called “portfolio
theory” or “portfolio management theory.” MPT is a sophisticated investment approach
first developed by Professor Harry Markowitz of the University of Chicago, in 1952.
Thirty-eight years later, in 1990, he shared a Nobel Prize with Merton Miller and
William Sharpe for what has become the frame upon which institutions and savvy
investors construct their investment portfolios. Dr. Markowitz was among the first to
quantify risk and demonstrate quantitatively why and how portfolio diversification can
work to reduce risk, and increase returns for investors.

While the technical underpinnings of MPT are complex, and drawn from financial
economics, probability and statistical theory, its conclusion is simple and easy to
understand: a diversified portfolio, of uncorrelated asset classes, can provide the highest
returns with the least amount of volatility. Many investors are under the delusion that
their portfolios are diversified if they are in individual stocks, mutual funds, bonds, and
international stocks. While these are all different investments, they are all still in the
same asset class and generally move in concert with each other. When the bubble burst
in the stock market, this was made painfully clear! Proper diversification according to
MPT is in different asset classes that move independently from one another.
Arbitrage Pricing Theory ( 1976 )(3):A model which tries to explain a stock’s return
based upon FUNDAMENTAL FACTORS.To Qualify as a Fundamental Factor, a
variable must possess several characteristics
1. Important Economic Factor that enters the Valuation of ALL stocks or firms.
2. Must have a STABLE Impact on a Firm’s Value over time
3. Must be INDEPENDENT of other Fundamental Factors
4. Must have a VARIANCE

Fundamental Factors that Have been suggested include

1. REAL GDP Growth
2. Interest Rates
3. Inflation
4. Equity Risk Premiums

Assumptions of APT
1. Capital Markets are perfectly competitive
2. Investors prefer more wealth to less wealth with certainty
3. Asset Returns can be related to a set of fundamental factors

Dr. John Lintner Professionally Managed Futures(1983)(4) One of the most

uncorrelated and independent investments versus stocks are futures. The value of
professionally managed futures was thoroughly researched by Dr. John Lintner, of
Harvard University, in a 1983 landmark study, “The Potential Role of Managed Futures
Accounts in Portfolios of Stocks and Bonds.” Lintner wrote that “the combine portfolios
of stocks (or stocks and bonds) after including judicious investments... in leveraged
managed futures accounts show substantially less risk at every possible level of
expected return than portfolios of stocks (or stocks and bonds) alone.” Lintne
specifically showed how managed futures can decrease portfolio risk, while
simultaneously enhancing overall portfolio performance.
Donald E. Fischer and Ronald J.Jordan (1995)(5) provided a comprehensive
introduction to the area of security analysis and portfolio management in their book
which has seven parts. . In first chapter It is noted that the measurement of return and
risk were the main focus of the job of the security analyst and the portfolio manager.
This unit explored the debt and equity instrument which are primary categories.
Investment categories involve financial and real assets .Financial assets are piece of
paper representing an indirect claim to real assets by someone else.

They cleared that speculation and investment are two distinct terms by the time horizon
and by the risk return characteristics of the investment. In this text they emphasized on
investments and investment analysis although there was speculative situations. They
found the alternative investment vehicles and their more silent attributes. The
functioning of major security market and how investor decides to buy or sell particular
security type is examined in 2nd chapter. Part two has elaborated the framework of risk
and return. And its measures. In Security analysis investors see two properties inherent
in securities: the return expected from holding the security and the risk that the return
that is achieved will be less than the return that was expected. The probability
distribution theory, Beta, graph of SML is the statistical tools used to measure various
types of risk.

The top down approach is referred in chapter 4&5. This is approach of E-I-C framework
i.e. economy industry-company approach for estimating future dividend and stock price.
The economic forecast is important for making investment decision concerning both the
timing of an investment and the relative investment among the various industries in the
economy so economic terms are also discussed. And critically evaluated with some
economic forecasting techniques i.e anticipatory survey, indicators, economic models
and opportunistic model building .They observed hoe economic analysis could best be
meshed with the industry analysis .The concept of industry life cycle ,end use analysis,
regression and input output analysis were explained .How an analyst estimate return and
risk for stocks and to translate information into expectations about holding period yields
are demonstrated in next three chapters. And showed the importance of information. The
unit explained the traditional and scientific techniques of forecasting of earnings and
expenses.

To overcome the drawbacks of last techniques the modern portfolio analyse tools are
used in no computer situations. They proved how the newer techniques are strengthened.

Active and passive are two strategies of bond management. A passive strategy involves
a buy and hold philosophy whish has taken a back seat where in the investors objectives
are to achieve broad diversification, predictable returns and low management
costs. .Now a day’s active strategy has taken a centre stage .these are explained in the
unit Bond Management.

There was also discussion on convertibles which also provides more income than the
underlying common stocks. The chapter no.15 concentrated on mystical approach called
technical analysis which shows the direction of general market and individual stocks as
well as fundamentalism. The next topic discussed on the implications of random walk
for the both fundamental and technical analysis. They reviewed the two approaches and
presented theory to stock price behaviour. The fundamentalist considered financial and
economic variable while chartist studied the historical price patterns as they believed
history repeats itself, to predict future price movements. The random walk school had
weak form of efficient market hypothesis. It demonstrated on successive price changes
over a short period were independent and had empirical tests.i.e run test, filter
test ,correlation analysis The result supported to the random walk hypothesis.

The portfolio is the combination (packages) of securities may or may not have the
aggregate characteristics of their individual parts. The efficiency of such combination
evaluated in one of the unit .and analysed the range of possible portfolio that could be
constituted from a given set of securities. This unit proceeded logically from the
construction of feasible portfolios two securities to bigger portfolio from large universe
of securities some portfolio dominate other that they provide either
1. The same return in lower risk
2. The same risk but higher return.

These criteria distinguish portfolios that are feasible from those that are more
“efficient.” The idea of Sharpe in simplifying the portfolio analysis process was
introduced in next unit. In addition .Modern selection techniques by the work of
Markowitz and others are examined. The next topic expanded on a capital market theory
which is concerned with how asset pricing should occur if investors behaved as
Markowitz suggested. The CAPM
model uses the results of capital market theory to derive a linear relationship between
the expected returns and systematic risk of individual securities and portfolio. In a Last
chapter the authors explained on various types of managed portfolios looking at broad
categories as well as at differences among portfolios in each category. and examined its
sources of information.

The managed portfolios included open end and closed end investment companies or
mutual funds, dual funds, money market funds bonds, index funds pension funds
ERISA, rust agreements, common trusts and professional investment counsel. The
Sharpe, Treyner Jensen approaches are the measures of performance evaluation of above
instruments.

Dr. G.P.Jakhotia and Mrs. M.G. Jjakhotiya (2001)(6)in their book ‘finance for one and
All’elaborated the techniques of investment management for individual investors .He
discussed reasons for making investment and listed five important reasons for
investment such as :
1. Regular income
2. Growth of Wealth
3. Contingency arrangement
4. fighting inflation
5. Oldage or post retirement Provision

Then he discussed the factors deciding of optional portfolio investment in which he

listed 12 sensitive factors

• Rate of Return
• Degree of Risk
• Degree of inflation
• Rate of growth
• Liquidity or Marketability
• Tax benefits and allied advantage
• Frequency of return
• Speculative interest
• Social beliefs and customs
• Degree of control
• Risk coverage
• Volume of fund required

Further they have given model for assessment of individuals portfolio mix he has
suggested that individual investors should form a group and meet for assessing each
ones portfolio .An arthemetic average of all assessment may be the most accurate
assessment of an individual’s portfolio. The model has 5 steps below 1. For each
nvestment marks/credit/value is given as 0 to 5 scale as follows –0 – nil ,1-poor, 2-
marginal , 3 – good , 4 – verygood, 5- excellent.The rate of return from real estste is
good .so it has credit of 3 to this factor .There is no risk in acquiring and holding real
estate .Here the factor of degree of risk gives value 5 to the realestate.

2. There are 8 factors considered for investing in particular ivestment according to their
importance for investing in real estate, the important factor is rate of return and this
factors ranks first getting weightage of ‘8’ the least important factor will get weightage
of ‘1’.

3. Value allocated to factor X weighted to factor = weighted value.

4. The total of all the weighted values of all the factors under each investment This total
is called ‘Total weighted value’.Total weighted X amount invested in each item of
investment = product.
5. The effect of secondary weight age used is removed i.e. amount invested in
investment. Super product / Total investment.

6. The effect of primary weightages removed to calculate performance factor as

Secondary weightage / Total of primary weigtages.

G.Cotter Cunningham(2004) (7)in his book ‘YourFinancial Action Plan explained into
twelve simple steps for achieving money success. The consumer’s personal financial
issues comprehensively and objectively covered into the book. It has twelve chapters’.
The basic financial issues such as creating a will, building a savings nest egg and
making and sticking to a monthly budget is explained in a first chapter. The survey in
this book showed that people who pays their bills as they come in where more satisfied
and less stressed than those who didn’t. with this the second chapter focused on how to
gain control over the expenditure.

This chapter helps to be solvent and have good credit records. In the next chapter
number three he looked on sure five ways to keep one out of the debtors doldrums by
sticking to a budget. This chapter shaded light on creating a comfortable budget and
recognizing shopping pitfalls which will help to reduce stress.

The fourth chapter covered on retirement planning. It explained four golden rules or
things to do as a priority. It includes

1. Shuck off debts

2. Pay down mortgage completely before retirement
3. Do not count on social security
4. Do not forgot to consider long term care insurance

This will help us for heading down the rocky road. The importance of reading Bank
account regularly and keeping safe of important documents is mentioned in the next
chapter. The fifth chapter ‘Willing it’ looked at the deadly business of funerals.
Insurance is there to protect against the unlikely and the unthinkable. How regularly we
shop around for the best insurance quotes and coverage is mentioned into the chapter
VII. The buying or leasing a car is another important financial decision. The next
chapter guided on buying and leasing the car. The rule of thumb for applying for credit
card and for checking credit report is stated in chapter nine. The borrowing
responsibility, tax deduction and home ownership are things discussed in the subsequent
chapters. The author says financial knowledge means financial power. The 12 steps
programs for financial literacy discussed in this book are –
1. Keep emergency funds
2. Pay bills on time
3. Follow monthly budget
4. Save for retirement
5. Read bank account statements
6. Get a will
7. Shop around the insurance quotes
8. Shop around best credit card interest rates
9. Check credit report annually repair as needed
10. Never carry on balance on credit cards
11. Shop around the better rate of mortgage
12. Adjust w-4 form of pension plan annually.

These books provided the knowledge for making planning for better financial future. In
the appendix it lists 22 models letters needed in the case of making correspondence with
financial institutes. The practical utility of the book increased due to last part of this
book. As Cunningham is an authority on personal finance with more than a decade of
experience shared his rich experience an tips for the investors.

This book serves as a guide to every investor in managing his financial goal. The lesson
of the books although based on American investors it helps for all the investors of the
world. In a country like India its utility remains beyond doubts.

Valery Polkovnichenko(2005) (8) in his study ‘Household Portfolio Diversification: A

Case for Rank-Dependent Preferences’ has supported for rank dependent preferences
The rank-dependent expected utility model also known as anticipated utility. This
model comprises generalized expected utility model of choice under uncertainty, This
model explained the behaviour of people that people both purchase lottery tickets
which indicates risk taking preferences and insurance are implying risk aversion. For
the survey of consumer expenditure data was used.He figure out two widespread pattern
inconsistent with expected utility.One is majority of household had investment in well
diversified fund .They had poor portfolios of stock. Second are households who had
moresavings but their investment in equity was very low. He argued that portfolio
choice models with rank-dependent preferences are used parameters as possible and
with fully rational assumptions which are constant and quantitative with the observed
diversification. He suggested there is need to integrate the models of rank-dependent
preferences in portfolio theory and asset pricing.

Angha Pathak (2005)(9) in her doctoral work, “ Comparative Study of Consumption,

Savings, and investment pattern of Salary earners in Kolhapur” studied the
determinants of consumption savings and investment. She studied single headed and
multiheaded salary earners families with variables like saving habits, investment is
various options. The researcher observed positive correlation between income and
investment in shares. The study revealed the differences in saving and investment across
the different levels of income. The consumption pattern also observed positive relation
with different levels of income. The sector of the respondent determining the regularity
of income was affecting saving level and propensity. She suggested to increase the
female participation in employment to increase consumption saving and investment.

Gnana Desigan C, S. Kalaiselvi and L. Anusuya (2006)(10) studied women investors‘

perception towards investment. An empirical study focuses on investment pattern of
women investors. Research concluded with finding that age of the women investors and
level of awareness about investment is not associated and no significant association
between educational level and level of awareness about investment. Significant
association was found between occupation and level of awareness, monthly income and
level of awareness and absence of association between marital status and level of
awareness.

Efe Aksuyek Zurich, (2008) (11) in his study of Information Theory and Portfolio
Management tries to understand the link of information theory to the theory of optimal
investments in a stock market. For that reason, he considers two scenarios. First, he
investigates an optimal portfolio construction problem in a stock market with known
distributions of stocks returns. Then he examines a universal approach for portfolio
construction in a stock market without knowledge about distributions of stocks returns.
He observed that the connection between information theory and portfolio management
lies on the data compression and universal codes. Besides the properties of long-optimal
portfolio are very challenging and powerful. Unfortunately, it is not perfectly
constructible because in reality we do not have knowledge about the true distributions of
stock returns. Therefore the universal portfolio makes more sense in terms of practical
usage.

P Chandra’s(2008) (12),”Investment analysis and portfolio management” Book helps to

lay investor to be a sophisticated professional. The book discusses the techniques and
principles useful in systematic and rational investment Management. It has valuable
insights and practises along with the spread sheets. The book constitutes with seven
parts.
Introduction in part first have 3 chapters which provide overview in field on
investments, features of investment alternatives, how the security market is functioning.
Investors peruse the approaches as Fundamental approach, psychological approach,
academic approach eclectic approach. The contrary thinking’s, patience, composure,
flexibility and decisiveness are important qualities. An investment is a sacrifice of
current money or other resources for future benefits.

Investment is different from speculation as well as gambling. The deposits and

insurance are classified as non-marketable financial assets ape the points discussed in
this chapter.
Rate of return, Risk, Marketability Tax shelter, Convenience are the criteria relevant for
evaluation investment alternative. It describes the process of Portfolio management. It
has 7 steps
1. Specification of investment objectives and constraints- Investor has to decide the
objectives and it importance and identify constraints
2. Choice of Assets Mix-Investor decides the proportion of investments in various
investment options
3. Formulation of Portfolio strategy-Active and passive are the two strategies. An active
strategy strives to earn risk adjusted returns by resorting market timings security
selection and sector rotation .A passive strategy involves holding diversified portfolio
with predetermined risk.
4. Selection of Securities- In an active portfolio strategy, investors go by fundamental
and technical analysis of scrips and company. The credit rating, YTM, terms to
maturity, tax shelters and liquidity is the factors considered in selection of securities.
5. Portfolio Execution – This is practical stage for selling or buying the securities which
shows investment results.
6. Portfolio Revision – the rebalancing of securities is important. An Investor rotates
securities
7. Portfolio Evaluation-It means to assess whether the portfolio return is commensurate
with its risk exposure. Such review provides useful feedback to improve the quality of
portfolio management process. The investment alternatives are explained in chapter two.
The chapter three describes on security market. Part II covers basic concepts and
methods useful in investments.

Chapter four introduces the concepts of risk and return. Risk and return are two sides of
coin. He explains total return i.e. current return and capital return as well as total risk i.e.
unique risk and market risk. There are three well known risk premiums equity risk
premium, bond horizon premium and bond default premium. The more accurate rule of
thumb is rule of 69 than the rule of 72 i.e..35 +(69 is divided by interest rate) is stated.
The chapter five explains the method for analysing the time value of money Chapter six
discusses the tool of financial statement analysis which is helpful for investment
decision in present as well as future. Economic value and Accounting value are distinct
separately.

Part III has four chapters which explain the Modern Portfolio Theory. Chapter seven
gives the introduction and basic tenets of portfolio theory. Here we come to know to
measure the risk and return. How to apply the Morkowitz theory (1950) to obtain the
inputs required. Markowitz is the first person who tried to quantify the risk , to reduce
risk he gives the tool of diversification of portfolio and how to construct best possible
risky portfolio with the help of diversification. Markowitz model is based on
information. His theory needs securities, expected returns, variance co-variance n(n-1)/2
in numbers e.g for 100 securities theory needs 100 expected returns ,100 variance and
4950 covariance which is not possible for lage number of securities in the portfolio.
Markowotz also suggested index for for generating co-variance . With this clue
W.Sharpe has developed a model of single index which expresses the return on each
security as a function of the return on a broad market index. This model is helpful
simplification. It represents a major practical advance in portfolio analysis.

Chapter eight dwells on the equilibrium relationships between risk and return . This
chapter discusses on CAPM Capital asset pricing Model) and explains the basics of APT
(Arbitrage pricing theory) Multifactor model as alternative to the CAPM. It describes
the stock market as a complex adaptive system. An efficient market hypothesis is
explained in chapter nine.

The chapter ten describes the essence of behavioural finance. Part IV to VII has chapters
TEN chapters from XI to XX explains on fixed income securities, equity shares,
derivatives and other investment options. Part VIII focuses on Portfolio Management
consists chapter 21 to chapter24 .It presents a Framework for portfolio management,
Basic guidelines for investment decisions, Strategies and various issues in international
investing Clifford Paul (2008)(13) made survey for 1655 people from Tricchi to study
on saving pattern. His descriptive type of study examined socio economic characteristics
of
people.

For that Age, education, Marital status ,no. of children income saving pattern purpose of
saving knowledge, attitude, beliefs opinions took into account. A simple random
sampling method is used to collect quantitative data. The sample size was calculated by
using the sample calculator 10.at 5%level of confidence. The above socio economic
characteristics contribute significantly to the saving pattern was the hypothesis of this
study. The primary data was collected through questionnaire and secondary data from
various reports. The econometric analysis tools used for analysis i.e. z-test, chi-square,
auto regression, `least square etc.

The findings of study were people saved their income for future education; building
house, medical expenses and money saved depended on income level. People are
unaware that insurance is a saving avenue. They felt that insurance product is only for
tax and risk. There were no rational expectations of the people for return on their
investments. The researcher examined the determinants of savings. He concluded the
spread of saving avenues reason have an impact and changes in the external
environment have an impact on private savings. A Public savings seemed to crowd out
private saving. The returns and reason of saving have a significant impact on saving
pattern.

A Study of Psychographic Segmentation of Investors in Satara City (2009) (14) was

conducted by Priyanka Zanvar. The study focused on psychographic segmentation and
investment pattern of people resides in Satara city on the basis of selected demographic
parameters viz Age, Income, Sex, Education and Occupation. Available investment
avenues in Indian economy viz Insurance, P.P.F., Mutual Fund, Shares, Real estste,
Gold, Bank Deposits, etc have been taken for study.

VALS model was used to determine Psychographic dimensions of investors. VALS is

values and lifestyles. It is a way of viewing people on the basis of their attitudes, needs,
wants, beliefs, and demographics. She concluded that majority of respondents prefer
long term duration for investment. They do investment for 5 and more than 5 years.
Sample investors expect 10% to 15% return on their investment. The majority of sample
investors in socio economic class A1 rely on Financial Advisors and Consultants for
advice.

B.Raju and K.M Rao(2011)(15) studied risk adjustment performance evaluation of

selected Indian Mutual funds .The mutual fund industry made its beginning with UTI in
1964 however , from 1993 onward the industry was opened for private sector. This
offered an important as well as safe avenue for investment, the portfolio of risk averse
investor received popularity however the returns from this mode of investment remained
a point of discussion. The mutual fund performance in a systematic way is studied by
these two researchers for 20 mutual fund schemes. These mutual fund schemes were
relative to banking sector, FMCG sector index funds and infrastructure sector funds .
They studied for the period of 2008-2010. They used monthly NAV data during Jan
2008 to Dec 2010. They compared the returns of different mutual fund schemes with
benchmark of stock market index. The performance of selected mutual fund schemes
has been evaluated by using six performance measures.

A. Rate of Return
B. Sharpe measure
C. Treyneros Measure
D. Jensen differential return measure
E. Sharpe differential return measure
F. Farna’s component of investment performance.

Banking sector and FMCG sector funds were better performed than index funds. Out of
20 schemes 11 scheme s given higher return than market further the risk in term of S.D.
of returns for the 4 sectors shows that FMCG schemes were less riskier than the market.
In terms of risk in FMCG schemes viz.ICICI Prudential FMCG growth, Franklin FMCG
Fund growth, UTIIndia lifestyle fund growth, SBI Magnum sector umbrella –FMCG
and Kotak life style fund growth has less variation in returns as compared to the other
three sectors and the market.

On the whole, out of 20 selected schemes all five FMCG schemes are less risky than the
other during the study period 2008-10 The researcher found FMCG schemes were more
defensive. He calculated Treyners index, Sharpe’s index along with Jensis Alpha at
selected mutual fund. He concluded that many selected schemes failed to outperformed
the market with low average Beta. Disproportionate unsystematic risk, mismatch of the
risk and return relationship in some schemes failure of infrastructure and index schemes
are the other significant observations in the study. The researcher poited out the risks in
mual fund as tha common trust on mutual fund is not justified while selecting the mutual
fund in the portfolio. It is necessary to consider the performance of mutual fund and
make proper changes in their portfolio.
Ms. Vrushali Bhushan Shah (2011)(16)in her Ph.D work , “A Study of investment
pattern of investors in Satara on the bases of socio Economics classes”, conduced survey
of 1400 investors. The objective of this study was to find out whether there exists a
definite investment pattern of investors pertaining to specific socio-economic class and
to locate influencing factors for investment.The T-test ,U-Test,factor
analysis ,Regression Analysis, cluster Analysis were the statistical tools used for
analysis.The study highlighted on investment objectives, sources of information and
their reliability as viewed by sample investors of different Socio-economic Classes of
Urban as well as Rural area. The factors preferred for selection of investment evealed
with their current portfolio. She argued that these results would aid industry to frame
such investment instruments which would suit the needs of investors. Further the
sources of information and their reliability would serve as guiding force towards
marketing such instruments. Similarly the Government would be able to gauge
perception of investors from different economic strata about their own investment
instruments and investor inclination towards other financial instruments. She argued that
the common investors stand to benefit if they get an opportunity to review their current
portfolio in light of their own objectives and also for getting knowledge about array of
investment avenues and sources of information available. The results generated from
study would serve as guiding factors to investors for selecting different instruments in
future.

F. Relliy & K. Brown (2012)(17)tried to make investment background hence focused

on investment setting ,asset allocation decision, selecting investments in a global market
under the first section. There was discussionon the reasons of individuals save and
invest their income. According to them An investment is the current commitment of
their savingsfor a specific period of time in order to derive future payments that will
compensate the investor for 1. The time the funds are committed 2. The expected rate of
inflation and 3.The uncertainty of the future payments.

The ways to quantify the historical & expected rate of return and risk is explained which
helps to analyse alternative investment opportunities .The historical returns are often
used by investors when he is attempting to estimate the expected rates of return and risk
for an asset class.

The holding period, the historical average rate of return for an individual investment, the
average rate of return for a portfolio of investment were the measures used. The study
presented the traditional measure of risk for a historical time series of returns by using
variance and standard deviation. The expected rate of return for an investment which
dealt with uncertainty .The mean is used for that. The uncertainty (risk) of expected
return which helps to financial stability of investment. They considered the financial
assets as bonds and stock and other assets art and antiques. The Variance and S.D.used
to find the uncertainty and alternative measures of risk and C.V. for relative measures of
risk. They noticed that the estimation of required rate of return was complicated because
the rates on individual investments changed over the time .There was wide range of rate
of return available on alternative investment.

The overall required rate of return on alternative investments was determined by three
variables 1. The economy’s RRFR influenced by investment opportunities in the
economy
2. Variable that influenced the NRFR which include short run Ease or tightness in the
capital market and the expected rate of inflation.
3. The risk premium on the investment. The risk premium can be related to fundamental
factors including business risk, financial risk, liquidity risk exchange rate risk, country
risk or it can be a function of assets systematic market risk (beta).

The second chapter explained on developments in investment theory, efficient capital

markets, an introduction to portfolio management and APM and multifactor models of
return and risk In short risk drives return therefore the practice of investing funds and
managing portfolios should focus primarily on managing risk rather than managing
return. The author examined the practical implication of risk management in the context
of asset allocation. An asset allocation is the process of deciding how to distribute an
investors’ wealth among different countries and asset classes. (Asset classes is
comprised of securities of similar characteristic)
The asset allocation decision is not an isolated choice rather it is a component of a
structured four steps portfolio management process to develop an investment policy
statement.

A carefully constructed policy statement determined the types of assets included in a

portfolio. It looked upon that the risky investor seeks capital appreciation , income or
even capital preservation over the long time periods should stipulate a sizeable
allocation to the equity portion in their portfolio .It has noted that a strategy’s risk
depends on the investors goal and time horizon. The investor needed to prudentluly
manage risk within the context of their investment goal and preference, income,
spending and investment behaviour will change over a person’s life time They reviewed
the importance of developing in an investment policy statement before implementing an
investment plan .By forcing investors to examine their need ,risk tolerance and
familiarity with the capital market .A policy statement helped investors correctly
identified appropriate objectives and constraints . In addition the policy statement
provides a standard by which to evaluate the
performance of the portfolio manager .The importance of asset allocation decision in
determining long run portfolio investment return and risks. Because the asset allocation
decision follows setting the objectives and constrains .The success of the investment
program depended on the construction of the statement of policy He reviewed historical
data to show the importance of asset allocation decision and discuss and the need for
investor education This chapter concluded by examining asset allocation strategy across
national borders to show the effects of regulations for US based investor is not
necessarily appropriate for a non US based investor

This book explained on the topic of transition between modern portfolio theory and
CAPM along with industry specific characteristic lines . The theory and practise of
using multifactor models of risk and expected return is discussed The connection
between the arbitrage price theory and empirical implementation of the APT continues
to be stressed both conceptually. He used Morningstar style of classification of data for
presenting examples. This topic emphasized on cash flow and relative valuation
approaches and macro economic variables of market and macro analysis of
industry .There is focus on relative merits of passive v/s active management techniques
for equity portfolio management along with tax efficiency and equity portfolio
investment strategies and equity style analysis. In addition the role of various
government sponsored entities is explained because major credit liquidity problem was
encouraged by the US bond market.
They examined the specific factors that determine the required rate of return 1. The real
risk free return which is based on the real rate of growth.2. The nominal risk free rate
which is influenced by capital market conditions and expected real rate of return of
inflation 3.A risk premium which is a function of fundamental factors such as business
or the systematic risk of the asset relative to the market portfolio i.e. Beta he discussed
the risk return combination available on alternative investment at a point in time (SML)
& three factors can cause changes in this relationships (-1) a change in the interest risk
of an individual investment i.e. its (fundamental and market risk ) will cause a
movement along the SML 2. A change in inventor’s attitudes towards risk will cause a
change in the required return per unit of risk i.e.a change in the market risk premium.
Such a change will cause a change in the slope of the SML .finally a change is expected
real growth in capital conditions or in the expected rate of inflation will cause a parallel
shift of the SML.

Utpal Bhattacharya,Andreas Hackethal, Simon Kaesler, Benjamin Loos, Steffen Meyer

(2012)(18) they recorded the favourable effects of unbiased investment advise in article
‘Unbiased Financial Advice to Retail Investors Sufficient? ‘.The samples near to 8000
active retail customers at random They took Large Field Study.They found that very
few investors who most need the financial advice likely to obtain it and About 5%
investors hardly followed the advise and did not improve their portfolio efficiency by
much . They came to conclude that the mere availability of unbiased financial advice
was a necessary but not sufficient condition for benefiting retail investors.

Ms. Sachi Prakash( 2012)(19) in her article ‘Retail banking strategy: critically of
Financial Literacy and credit counselling in Indian Context ‘explained on the need of
financial education and credit councelling.In India banks have remained only initiatives
even after considerable time though banks are beneficiaries of financial education and
can act and strengthen financial stability and credit counselling centres. In a part of
introduction the developments of banks due to IT is put forth .An article discusses on
what and why is financial education ,importance of financial education, initiatives of
RBI and banks and its evaluation .Financial literacy refers to the ability to make
informed judgements and to take effective decisions regarding the use and management
of money. Financial Literacy is the set of skills and knowledge that allows an individual
to understand: • The financial principles that is essential to make informed financial
decisions • The Financial product that impact ones financial well being Financial
Literacy should go beyond just acquiring financial information and advice.
It is the ability to know, monitor and effectively use financial resources to enhance the
well being and economic status of one.

The rising competition ,problem of financial exclusion shortage of banking facilities,

increasing consumerism (especially of the urban middle class) rising complexity of
financial products are the reasons mentioned which rises the need financial education It
supported with the instance of subprime crises which gives lessons to all and
emphasizes the importance of customer education The financial education is essential
just not people who do not make the decision and invest but for understanding of
product , process , pricing and protection .
The recent rapid developments have given access to financial services to people but
many of them have limited knowledge or experience in them .Another major trend that
has been seen is that consumers think they are more financially literate than really is the
case e.g. 1. Increasing use of credit card and misutilization of credit 2. Considered
floating rate housing loan as a cheaper to fixed rate housing loan.
Monika Hansal and S.K.Singla(2012) (20) studied on performance Evaluation of Private
Banks in India. They attempted to measure the efficiency of the banks of the 18 private
sector banks in India in five years from 2007 to 2011. A one of the important objective
of their study is to evaluate the performance of private sector banks with the help of
CAMEL model, with this objective and the hypothesis was performance of the bank is
uniform in all parameters of camel model in a particular year. For the study secondary
data has been explored. A CAMEL stands for capital adequacy, asset quality,
management, Earnings and liquidity. On the basis of single parameters of camel model
the composite score for each bank has been calculated. Hypothesis is tested with the
help of Friedman Rank Test. The study examined the areas of banking business of old
private sector banks that may have been influenced by the new generation private sector
banks. The impact of new private sector banks based on parameters such a growth,
credit quality, operational efficiency, and profitability etc has been analysed. The study
concludes that the performance of the bank is not uniform in all the parameters of
CAMEL model

Portfolio studies in US market (21)examined in CFA institute book (2012) Corporate

fiancé and portfolio management observed that the mature financial market of USA
offered good returns to the investors the CFA study conducted by Robert for 1990 to
2002 shows that the United states 401(k) plans are employers sponsor individual
retirement plan . This allows individuals to save and to get tax benefits The study
observes that individual shares like Enron has resulted into sixteen times benefit during
the decade but the financial distress of Enron resulted in bankruptcy of Enron These
shares become worthless .The share price came down by 90% which shows high risk in
investing particular share. The same story is true about Indian market also Rakesh
Zunzunwala _ Warren buffet of share market also lost one thousand corers in midcap
shares (2013) This call for risk reduction technique known as Portfolio
diversification .Portfolio diversification helps investors to avoid disasters investments
outcomes .It also reduce overall volatility of returns.The return in the individual security
and its standard deviation is higher compared to portfolio investment .The volatility is
effectively reduced through reduction S.D.in returns. The S.D.of equally weighted
portfolio to S.D. Of randomly selected security is known as diversification ratio .This
helps in measuring returns from diversified portfolio two simple portfolios.The Author
has given a caution that if serious downturn takes place in the market the diversified
portfolio also cannot save from downside side protection. During 2007-09 the average
return for the E.W.P. including dividends was 48.5%(Pg no 287) The diversification
benefits were small as all the indices declined in unison .The lesson is clear that
portfolio diversification generally reduce their risk but does not necessarily provide the
same level of protection during severe market turmoil.
Steps in portfolio selection
The actual portfolio needs to be prepared on the bases of following steps

1. The planning step – It is based on clients needs which includes his objectives and
constraints .On the bases of this investment policy statement is prepared .It becomes
benchmark.
2. The next step is execution step were asset allocation is done .Further security analysis
is conducted the by using top down or bottom up approach under top down analysis
micro Economic conditions are considered hile in bottom up approach company specific
analysis is conducted The last step is feedback step were portfolio monitoring and
rebalancing is done and finally performance of the portfolio is measured and reporting is
done .

3. Pooled investments helps in reducing the risk .this consists of mutual funds .In mutual
funds there are money market funds bond market funds Stock mutual funds and
balanced funds. In addition to mutual funds exchange traded funds are also
available .they combine features of closed and open end mutual funds. Ms. Tejasvi
Rajaram Shinde ( 2012)(22) in her M.Phil dissertation titled, “ A Study of Relationship
between financial literacy and individual investment inclination in Satara” conducted
survey of businessman, serviceman and professionals . The study is for the concept of
financial literacy, scale for determining financial literacy, different investment avenues
available, and regarding demographic details of investors, their current investment and
investment inclination, sources of information, importance of parameters for investment
and awareness regarding investment avenues. She concluded that the overall the
financial literacy among respondents is good. The respondents have their investment in
bank deposits, gold/silver, real estate, insurance and PPF/PF. She also observed that low
investment in avenues like bonds, precious stones, pigmy, pathasanthas, etc. The
researcher pointed out that respondents prefer parameters like Investment Performance,
Track Record, Management Reputation and Responsiveness to Enquires. While seeking
the advise on investment they prefer financial advisors like CA, Portfolio Manager and
Bankers. The portfolio pattern of the respondents was not based on risk and return
analysis . She observed that the Independent Sample ‘t’ test was not significant and it
indicates that there was similarity in the investment preferences of respondents with
different occupations. The respondents were more inclined to invest in gold/silver and
real estate even though the rates were increasing . The Hypothesis testing proved that
there was no significant relationship between demographic factors and financial literacy,
investment inclination and financial literacy National Council For Applied Economic
Research (2011)(23) conducted investors survey in India sponsored by Securities
Exchange Board of India on How Households Save and Invest:
Evidence from NCAER Household Survey.The broad findings of the survey shows that
National Level the percentage of investors is nearly 20 in urban areas while it is much
lower(6 per cent) in rural India. The estimated number of investor households in India
was 24.5million who constitute about 11 per cent of total households. It observed the
strongpreference of investors was towards mutual funds (43 per cent) and secondary
markets (22 per cent). In urban areas, 41 per cent of investors invested in mutual funds
and 21 per centsecondary markets, whereas, 46 per cent rural population chooses mutual
funds and 22 percent secondary markets. There was a significant magnitude of small
savers among all households. Eleven to 25 per cent of all households save in post office
savings schemes. Thesurvey observed that the investors are not participating in share
marker. It poined out thatmore than 16 per cent of the highly educated non-participants,
as well as 16 per cent of themiddle and upper income groups feel that non-participation
was due to the perceived nonsafety of returns.
Consumer Financial Literacy Survey (2012) was conducted by Harris Interactive Inc.
PublicRelations Research of USA. he 2012 Financial Literacy survey was conducted by
telephonewithin the United States by Harris Interactive on behalf of the NFCC (National
Foundationfor Credit Counseling) and the NBPCA (the Network Branded Prepaid Card
Association)between March 16 and March 19, 2012 among 1,007 adults ages 18+.
Results were weightedfor age, sex, geographic region, and race where necessary to align
them with their actual proportions in the population.

Charul Shah( 2013 ) (24) inhis article on ‘Plan on track but idle cash must be invested
described the cash flow statement in square diagram and asset allocation in Pie diagram.
It explains how one can achieve just not essential goal but discretionary goals as well.
An Asset allocation before plan, after plan and existing plan are the three plans of IT
professional that has high income, small family, but little knowledge of financial
planning explained. The cash flow statement shows the total income and expenditures as
household expenses, insurance premium and investible funds. The investible funds have
allocated in equity 1 %, gold 5 % cash 31 % and debt 63 % respectively .The monthly
salary was Rs. 43573 and Rs.26970 as expenses, Rs.16602 was surplus.

1. Rs. 2 lakhs in one year for wedding

2. Rs 5 lakhs in four years for down payment for house worth rs 25 lakhs, 3 .Rs 2 corers
for retirement corpus besides Child’s education and marriage are the
goals.

The less important goals include buying car and a holiday abroad.
The recommended plan constitutes equity 50 % ,gold 5 % cash 5 % and debt40 %
respectively.. After financial planners advise his plan has the SIP Rs. 5000 p.m. +cash
Rs. 6000 is equal to 1.2 lahks which adds Rs 7000 this would take care of his first goal.
The SIP of Rs. 9000 pm in equity mutual fund for the house down payment and
insurance costs Rs. 1000 pm for policy of Rs.1 crorer and Rs. 6376 p.m. And Rs. 3873
would help build a corpus for education and marriage in 23 years .His plan is drastically
improved, the income has risen and expenditure has gone down. The adviser suggested
to have balanced fund. Debt fund as well as equity fund .His plan reworked to ensure the
use of surplus cash. His new plan helped to raise income and surplus cash considerably.
The first preference is given for health and adequate family insurance .The equity and
debt funds are expected to give returns of 12 % and 10 % respectively. Inflation is
assumed at 8 % p.a.

The investment with disciplined approach ,the defined short and long term goals and the
diversity in portfolio and its follow up ,experts advise etc gives a benefit to the investor
this is underlined in study Santosh Danolkar (2013)(25) in his cover story article how
to survive this crises as given important suggestions to protect the portfolio during
volatile situations .He suggested to build a stable foundations. This will help to bear the
downside withoutserious adverse effect .A contingency reserve will help in this
respect .He also suggested to have sufficient insurance cover of accident, hospitalization
or any medical emergency.
He suggested to review the position so that based on return portfolio can be changed
for this again financial goal setting is necessary .the suggestions given by sanket
Dhanodkar are simple but practically significant. Babar Zaidle (2013)(26)discussed
NPS Funds Performance in his article NPS has
been started since 2009 has given poor returns in the last 5 years .The NPS scheme of
Kotak Pension Fund has given negative returns for equities, cororate bonds and
government bonds .The experience of other schemes like ICICI Pru pension fund, UTI
retirement solution, Reliance pension fund, SBI pension fund .The story is the same .the
short term returns were negative 2.2 % 3.9 % .But even long term returns were also not
impressive .Although the returns were positive they were in the range of 5 to 6 % the
SIP returns were also below the rate of EPF (8.67 %) The SIP returns were 2.94% for
equities, 6% for government bonds and 8 % for corporate bonds. The total experience of
NPS Funds raises the basic sustainability of pension funds and how this scheme will
protect the interest of investors in the long run.

Chaitanya (2013)(27) studied gold loan Market future prospects in India’ in this research
paper the trend in gold loan market structure of layers in gold market Trends in gold
prices, growth of NBFC was expected .in the portfolio of Indian investors gold always
occupies important role. This resulted into heavy import of gold. As the bank have
started giving finance for purchasing gold .The gold loan market has grown
tremendously .The researcher observe that the region wise concentration of gold market
is observed for southern area .It has been observed that the organized players are
exploring the potential and trying to expand their networks into North, East , and West
regions .lenders provide loans by securing gold assets as collateral ,compared with the
rest of the world .In India the gold loan market is a big business until a decade
back ,most of the lending was in the unorganized sector through pawnbrokers and
moneylenders. However this scenario changed with the entrance of organised sector
players such as banks and non banking finance companies NBFC’s which now
command more than 25 % of the market.Of late
,banks have improved their gold loan product features and services coupled with
comparatively lower interest rates and charges ,banks stand to gain market share at the
expense of NBFC’s in the near future.

The researcher explained the development of gold loan market in which NBFC
companies are playing important role.The gold market which had shown impressive
growth of 70 -80% during F.Y.2011-12. The increase in gold prices resulted in
investment demand at global level the gold prices compared to other assets have
increased at higher rate and it can act as an investment to hedge against
inflation .During 2008-12The total gold loans increased by 65 % but the NBFC gold
loans increased by 98%.the reasearcher concluded that NBFC entered as significant
player in growing goldmarket .Further she attributed changing consumers perception
towords gold loan as asignificant cause .The researer concluded that the demand for
gold will grow in thelong run and it needs innovative methods to cater the increasing
customer baseThe discussion of Investor Guide Staff (2013)(28) on ‘Real Estate as a
Stable and Reliable Investment’says that yet the real estate market isn’t an abstract
concept onlyavailable to a special anoint group of angelic investors who happen to have
been inthe right place at the right time.For investment right time and right place is
importantVirtually any way of making money in the modern world works just about the
same46 way, It focuses on the Real estate investment because of incredibly reliable way
ofmaking money.and it gives more stability in the returns it generates on investment that
make it a different sort of animal in the investing game. Sure, buying a piece of
undeveloped land in the hinterland of the territory you live in probably isn’t going to be
as profitable as throwing all your life savings into Microsoft would have been 20 years
ago It has pointed out worrying about share prices, buying high, selling low, bulls,
bears,and all that other jargon that goes along with investing in the stock market are
headache.With real estate gives the benefit of capitalizing on an endlessly restless
country that is always shape-shifting and reconfiguring itself in new places and
reinventing its existence in new ways Harris Interactive Inc. Public Relations Research
(2014)(29) Conducted survey ofconsumer financial literacy survey in 2013. The
methodology followed of this surveywas based on telephonic answers with systemeatic
and baised sampling technique.Survey methodology The 2013 financial literacy survey
was conducted online withinthe United States by Haris Interactive on behalf of the
NFCC (National Foundationfor Credit Counsiling) and the NBPCA (The Network
Branded Prepaid CardAssociation) via its quick query omnibus between March 4 and
Mrach 6, 2013 among2037 adults ages 18+. Figures of age, sex, race / ethinicity,
education, region andhousehold income were weighted where necessary to bring them
into line with theiractual proportions in the population. Propensity score weighting was
used to adjust for respondent’s propensity to be online. Prior to this year this surevey
was conducted by telephone.

The survey observed just over two in five U.S. adults (43%) report that they have a
budget and keep close track of their expenditures. More than half (56%) admit they do
not have a budget, including more than 1 in 5 (22%) who say they don’t have a good
idea of how much they spend on housing, food, and entertainment. Though the
likelihood of having a budget has not changed over the past 5 years, the proportion of
adults who do not pay all of their bills on time has increased from 28% in 2011 to 33%
in 2012 – that is, fully one-third of U.S. adults, or more than 77 million Americans, do
not pay all of their bills on time. If they were facing financial problems related to debt,
U.S. adults continue to say they would first turn to their friends and 47 family for help
(27%).Two in five adults (40%) say they are now saving less than last year, and nearly
the same proportion (39%) do not have any non-retirement savings. Though there had
been an increase in the proportion of adults who have savings between 2008 (63%) and
2010 (67%), that proportion had begun (and now continues) to decline since 2010 (67%
2010, 64% 2011, 59% 2012). In case of spending half (or more) of adults were spending
less – more than one in four U.S. adults (28%) say they are now spending more than last
year. The findings of survey shows the impact of 2008 recession in the US economy as
well as the financial behavior of the citizens in the developed economy.Vijay Singhal
discussed portfolio Risk and return where he has given various formules and methods of
risk return measurements.
CHAPTER NO. 4
DATA ANALYSIS
 4.1 Sex wise Profile Data. Number of responses: 130 responses.

GENDER FREQUECY PERCENTAGE

MALE 70 53.8%

FEMALE 59 45.4%

PREFER NOT TO SAY 01 0.8%

Through the study we received a majority of male respondents that answered the
questionnaire regarding Portfolio Management.
 4.2 Marital Status. Number of responses: 130 responses.

MARITIAL STATUS FREQUENCY PERCENTAGE

MARRIED 45 34.6%

UNMARRIED 85 65.4%

The majority of respondents were unmarried. Only about 34.6% of the total respondents were
married.
 4.3 Forms response chart. Question title: Educational Background. Number
of responses: 130 responses.

EDUCATIONAL FREQUENCY PERCENTAGE

BACKGROUND
UNDER GRADUATE 54 41.5%

40%GRADUATE 52 40%

POST GRADUATE 24 18.5%

The majority respondents that took part in this study consisted of Graduate individuals and
under graduate individuals
4.4 Forms response chart. Question title: Occupation. Number of responses: 130
responses.

OCCUPATION FREQUENCY PERCENTAGE

STUDENT 66 50.8%

SALARIED 37 28.5%

PROFFESIONAL 16 12.3%

11 8.5%
BUSINESS

The majority of individuals that took part in the study were students, followed by salaried
individuals, Profesionals and Business owners respectively.
4.5 Forms response chart. Question title: No of earning members. Number of
responses: 130 responses.

NO.OF EARNING FREQUENCY PERCENTAGE

MEMBERS
1 28 21.5%

2 82 63.1%

3 & ABOVE 20 15.4%

Through the study conductedttT

Through the study conducted, It was noted that most of the respondents had two earning
members in their family.
4.6 Forms response chart. Question title: Select the various investments in your
portfolio. Number of responses: 130 responses.

VARIOUS PORTFOLIO’S FREQUENCY PERCENTAGE

SHARES 57 43.8%

DEBUNTURES/BONDS 31 23.8%

MUTUAL FUNDS 57 43.8%

FIXED DEPOSITS 62 47.7%

INSURANCE POLICIES 58 44.6%

REAL ESTATE 41 31.5%

GOLD/SILVER 57 43.8%

OTHERS 17 13.1%

Fixed Deposits as an investment portfolio was the choice of 47.7% of the respondents,
making it the most desirable option. Followed by Insurance policies at 44.6%
respondents. Shares, Mutual Funds, and Gold/silver were also a lucrative choice for
ivestment chosen by the individuals at 43.8%.
 4.7 Forms response chart. Question title: In which sector do you prefer to
invest your money ? Number of responses: 130 responses.

PREFERED SECTOR FREQUENCY PERCENTAGE

PRIVATE 41 31.5%

GOVERNMENT 53 40.8%

PUBLIC 24 18.5%

FOREIGN 12 9.2%

Through the study, it was observed that 40.8% of the respondents preferred to invest in the
Government sector where as 31.5% chose private sector as their preference followed by
public sector and foreign sector at 18.5% and 9.2% respectively.
 4.8 Forms response chart. Question title: What is your investment objective
? Number of responses: 130 responses.

INVESTMENT FREQUENCY PERCENTAGE

OBJECTIVE
INCOME AND CAPITAL 32 24.6%
PRESERVATION
LONG TERM GROWTH 76 58.5%

SHORT TERM GROWTH 22 16.9%

The objective for a respondents investment mostly was long term growth of capital followed
by income and capital preservation and short term growth respectively.
4.9 Forms response chart. Question title: What is the main purpose behind
investment ? Number of responses: 130 responses.

PURPOSE OF FREQUENCY PERCENTAGE

INVESTMENT
WEALTH CREATIONS 54 41.5%

TAX SAVINNGS 27 20.8%

EARN RETURNS 22 16.9%

FUTURE EXPENSES 27 20.8%

The main purpose of investments for 41.5% of individuals was Wealth creation, followed by
Tax saving and Future expenses at 20.8% and Earning returns at 16.9%.
 4.10 Forms response chart. Question title: Which factor do you consider
before investing ? Number of responses: 130 responses.

FACTORS INFLUECING FREQUENCHY PERCENTAGE

INEVESTMENT
LOW RISK 33 25.4%

HIGH RETURN 51 39.2%

MATURITY PERIOD 29 22.3%

SAFETY OF PRINCIPAL 17 13.1%

High Return on the respondents investment is a crucial factor considered by 39.2% followed
by Low risk in investment at 25.4%, Maturity Period at 22.3% and safety of principal at
13.1%
 4.11 Forms response chart. Question title: How often do you monitor your
investment ? Number of responses: 130 responses.

MONITOR INVESTMENT FREQUENCY PERCENTAGE

DAILY 17 13.1%

MONTHLY 72 55.4%

OCCASIONALLY 41 31.5%

55.4% of the total respondents claim to monitor their investments on a monthly basis, where
as 31.5% of investors occasionally monitor their investments and 13.1% monito them
occasionally.
 4.12 Forms response chart. Question title: What percentage of your income
do you invest ? Number of responses: 130 responses.

PERCENTAGE OF INCOME FREQUENCY PERCENTAGE

INVESTED
0-15% 45 34.6%

15-30% 65 50%

30-50% 20 15.4%

50% of the total respondents invest 15-30% of their income in investment portfolio’s,
followed by 34.6% of respondents who invest 0-15% of their income and 34.6% invest 30-
50% of their total income.
4.13 Forms response chart. Question title: What is the time period you prefer to
invest ? Number of responses: 130 responses.

PERIOD OF INVESTMENT FFREQUENCY PERCENTAGE

SHORT TERM 24 18.5%

MEDIUN TERM 70 53.8%

LONG TERM 36 27.7%

53.8% of the total respondents prefer to invest in Medium term investments, ranging from 1-5
years, followed by 27.7% who prefer investing 9in long term investment schemes, ranging
from 5years and above and the last is 18.%% of individuals who prefer short term investment
schemes.
 4.14 Forms response chart. Question title: Do you have a formal budget for
family expenditure ? Number of responses: 130 responses.

FAMILY BUDGET FOR FREQUENCY PERCENTAGE

EXPENDITURE
YES 65 50%

NO 65 50%

The respondents were divided in equal halves at the response of whether they prepare a
formal budget for their family expenditure.
 4.15 Forms response chart. Question title: What is your source of Investment advice ?
Number of responses: 130 responses.

SOURCE OF INVESTMENT FREQUENCY PERCENTAGE

ADVICE
NEWPAPERS AND BOOKS 40 30.8%

ADVISORS 53 40.8%

INTERNET 55 42.3%

CERTIFIED FINANCIAQL 44 33.8%

PLANNERS
FAMILY OR FRIENDS 54 41.5%

NEW CHANNELS 34 26.2%

42.3% of respondents chose internet to be their source of investment advice, followed by

Family and friends at 41.5% and Advisors at 40.8%. the others relied on certified financial
planners, newspapers and books and news channels at 33.8%, 30.8% and 26.2% respectively.
CHAPTER NO. 5
CONCLUSION
5.1 INTRODUCTION

The previous chapter i.e. chapter 5 explains and discuss in detail the empirical analysis
and independent factors related to the various formulated objectives. This chapter
discuss the managerial implications of the empirical analysis and the suggestions to the
important stakeholders and their idea of portfolio management.

5.2 SYNOPSIS OF THE STUDY

Chapter 1 presents the overview of the saving and investment. It discusses the
conceptual aspect of saving and investment, their types and importance as well. It
highlighted the various available saving and investment avenues in the market and the
various types of risk and return associated with them. It also discuss about the factors
affecting and influencing the saving and investment decisions of salaried individuals.

Chapter 2 discuss about the existing literature related to the study. In this chapter the
review of literature relating to various national and international study and research id
done. After the review various factors were identified and were used in the study. The
research gap was identified and various objectives and hypothesis Was formulated
related with the same.

Chapter 3 dealt with the research method followed for designing the research. This
chapter also discuss about the research design adopted for the present research and the
various methods used for collecting and analysing the data.

Chapter 4 discuss about the descriptive analysis of the study i.e. the data collected for
the study is discussed in the descriptive form with the help of various tables and figures.
It also highlights the implication drawn out from each of the descriptive analysis to give
the crux of the data collected for the study.

Chapter 5 deals with the investigation of the formulated objectives of the study along
with the respective hypothesis testing for the same. The various statistical were used for
the same.
5.3 CONCLUSION

There is a perceptible change in the Indian Economic scenario, especially after the
initiation of Liberalized Economic Policy in 1991. This can be seen from the increasing
rate of Gross Domestic Product (GDP) and Domestic Saving and Investment. Since
1980s, rate of domestic saving and number of small investors are growing rapidly.
Investor‘s preferences are also shifting from physical assets to financial assets and
within the financial assets there is a gradual shift from bank deposits to securitized
instruments such as shares, debentures and units of UTI and other Mutual Funds.

However small investors are still hesitant to enter the capital market directly because of
lack of information and knowledge about the capital market, fear of risk, small size of
savings available for investment, complicated nature of capital market operation, etc. It
is also rare to find investors investing their entire savings in a single security. Under
such conditions emergence and rapid growth of intermediaries like mutual funds and
asset management companies is quite natural. Emergence of Mutual Funds and asset
management companies can be said to be one of the important factors to mobilize funds
from small and household savers and to invest them for obtaining maximum benefits
with reduced risk.

Mutual funds offer the small unit holders the benefits of prudent and professional fund
management, collective investment and reduced risk through diversification. Through,
asset management companies, an investor can tend to invest in a group of securities
called portfolio. Creation of portfolio helps to reduce risk without sacrificing returns.
Asset management companies utilize the skills of specialized portfolio managers in
constructing the optimal portfolio for the investor taking into consideration the risk-
return characteristics of all possible portfolios. Thus, current investment scenario has
changed drastically and professional portfolio management, backed by competent
research, began to be practiced by mutual funds, investment consultants and big brokers.

The origin of Indian Mutual Fund Industry can be traced with UTI which was
established in 1964. UTI enjoyed complete monopoly in the Mutual Fund Industry till
1987 and than other public sector mutual funds entered into the market. Mutual funds
industry has been made open to the private sector in 1992-93. Although the Mutual
Fund Industry in India is growing rapidly, it is still facing some challenges such as
building the perfect portfolio for the client, periodic review and revision of investment
portfolios of investors, constructing customized portfolio in accordance with the risk-
return appetite of the investor, etc. Thus, there seems a vast potential for improvement in
the working and mechanism of Mutual Funds and portfolio management of asset
management companies in India. This necessitates a comprehensive study of portfolio
management and services rendered by asset management companies which would help
in suggesting remedial measures for improvement in the working of asset management
companies.

There was a time when portfolio management was an exotic term, an elite practice
beyond the reach of ordinary people, in India. The scenario has changed drastically.
Portfolio management is now a familiar term and is widely practiced in India. The
theories and concepts relating to portfolio management now find their way to the minds
of investors in India.

In the beginning of the nineties, India embarked on a programme of economic

liberalization and globalization. This reform process has made the Indian capital markets
active. The Indian stock markets are steadily moving towards higher efficiency, with
rapid computerization, increasing market transparency, better infrastructure, better
customer service, closer integration and higher volumes. The markets are dominated by
large institutional investors with their diversified portfolios. A large number of mutual
funds have been set up in the country since 1987. With this development, investment in
securities has gained considerable momentum.

Along with the spread of securities investment among ordinary investors, the acceptance
of quantitative techniques by the investment community changed the investment
scenario in India. Professional portfolio management, backed by Summary of
Conclusions & Suggestions competent research, began to be practiced by mutual funds,
investment consultants and big brokers. The Securities and Exchange Board of India
(SEBI), the stock market regulatory body in India, is supervising the whole process with
a view to making portfolio management a responsible professional service to be
rendered by experts in the field.

The trend towards liberalization and globalization of the economy has promoted free
flow of capital across international borders. Portfolios now include not only domestic
securities but also foreign securities. Diversification has become international. In this
context, financial investments cannot be conceived of without portfolio management.
Thus, to achieve efficiency in investment and to minimize the risk, study of Portfolio
management is vital.
Morgan Stanley‘s Dictionary of Financial Terms offers the following explanation: If
you own more than one security, you have an investment portfolio. You build the
portfolio by buying additional stocks, bonds, mutual funds, or other investments. Your
goal is to increase the portfolio’s value by selecting investments that you believe will go
up in price.

According to modern portfolio theory, you can reduce your investment risk by creating
a diversified portfolio that includes enough different types, or classes, of securities so
that at least some of them may produce strong returns in any economic climate.

Accordingly, this explanation contains a number of important ideas: 1. A portfolio

contains many investment vehicles. 2. Owning a portfolio involves making choices –
that is, deciding what additional stocks, bonds, or other financial instruments to buy;
when to buy; what and when to sell; and so forth. Making such decisions is a form of
management.
3. The management of a portfolio is goal-driven. For an investment portfolio, the
specific goal is to increase the value. 4. Managing a portfolio involves inherent risks.
Thus, the art of selecting the right investment policy for the individuals in terms of
minimum risk and maximum return is called as portfolio management.

Portfolio management refers to managing an individual‘s investments in the form of

bonds, shares, cash, mutual funds etc. so that he earns the maximum profits within the
stipulated time frame. Portfolio management refers to managing money of an individual
under the expert guidance of portfolio managers.
 In a layman‘s language, the art of managing individual‘s investment is called as
portfolio management. The phrase “To each, his own” describes the main subject of the
thesis “Portfolio Management” i.e. Portfolio Management is one of the very few
subjects in the world that is relative to each individual.

One important lesson to remember is that human behavior in the marketplace remains
constant. Investment decisions should be the product of a rational trade-off between risk
and return, but unfortunately, they generally reflect an emotional response to fear and
anxiety. Most investors tend to expect prevailing trends to continue and fail to
accommodate change adequately. Too many investors seem to have forgotten the
cardinal rule that there is no free lunch in the marketplace.

Thus, this memorandum contains some practical suggestions directed to the

management of one‘s own portfolio. It’s what you learn after you know it all that
counts. – Earl Weaver Personal portfolio management is not a competitive sport. It is,
instead, an important individualized effort to achieve some predetermined financial goal
balancing one‘s risk-tolerance level with the desire to enhance capital wealth. Good
investment management practices are complex and time consuming, requiring
discipline, patience, and consistency of application. Too many investors fail to follow
some simple, time-tested tenets that improve the odds of achieving success and, at the
same time, reduce the anxiety naturally associated with an uncertain undertaking.

Following advices are recommended to build desired investor‘s portfolio: 1. A fool and
his money are soon parted: Investment capital becomes a perishable commodity if not
handled properly. One should be serious and attentive about his financial affairs by
taking an active, intensive interest. If you don‘t, why should anyone else?

2. There is no free lunch: Risk and return are interrelated. One should set reasonable
objectives using history as guide. All returns relate to inflation. Better to be than sorry.
Never give up, never in. Most investors underestimate the stress of a high – risk
portfolio on the way down.

3. Don’t put all your eggs in one basket: Diversity - Asset allocation determines the rate
of return. Stocks beat bonds over time.
4. Never overreach for yield: Remember, leverage works both ways. More money has
been lost searching the yield than at the point of a gun.

5. Spend interest , never principal: If at all possible, take out less than comes in. Then,
a portfolio grows in value and last forever. The other way around, it can diminished
quite rapidly.

6. You cannot eat relative performance: Measure results on a total return, portfolio basis
against your one‘s own objectives, not someone else‘s.

7. Don’t be afraid to take a loss: Mistakes are part of the game. The cost price of a
security is a matter of historical insignificance, of interest only to the IRS. Averaging
down, which is different from dollar cost averaging, means the first decision was a
mistake. It is a technique used to avoid admitting a mistake or to recover a loss against
the odds. When in doubt, get out. The first loss is not only the best but is also usually the
smallest.

8. Watch out for fads: Hula hoops and bowling alleys (among others) didn‘t last. There
are no permanent shortages (or oversupply). Every trend creates its own countervailing
force. Expect the unexpected.

9. Act: Make decisions. No amount of information can remove all uncertainty. Have
confidence in your moves. Better to be approximately right than precisely wrong.

10. Take the long view: Don‘t panic under short-term transitory developments. Stick to
your plan. Prevent emotion from overtaking reason. Market timing generally doesn‘t
work. Recognize the rhythm of events.

11. Remember the value of common sense: No system works all the time. History is a
guide, not a template.
Keeping this purpose in view, the major emphasis was thrown on the following points
in the thesis:  To understand the concept of portfolio management and the role of the
Asset Management Companies in capturing maximum share of investor‘s markets.  To
carry out analysis of the expected stock returns of various fund schemes prevailing in
the market.  To understand the problems faced by fund houses in managing the funds.
 To analyze the benefits of Portfolio Management services to the investors and fund
houses.  To know whether investor‘s home is biased or not while selecting the Asset
Management companies to invest into?  To find out major fund management players
in India and to study their consciousness towards investors.  To study the influence of
liberalization and globalization of the economy on the flow of capital and their
management thereof.  To study risk-returns mechanism and how it can be fruitfully
achieved through portfolio management.  To examine growth trail of mutual funds in
India and their impact on the common investor.  To study the scope for improvement
in quality of portfolio management provided by various Asset Management Companies
(AMC‘s).

5.5 SUGGESTIONS

Today, the financial market is increasingly complex and managing one‘s own portfolio
will take up a lot of time and effort. There are situations when we don‘t have time or
knowledge to explore the best investment alternatives in the market. This is a common
problem faced by many wannabe investors. At this juncture, portfolio management
services can help investor get out of this dilemma. So investor can simply assign his
investments to portfolio management services who will report to him regularly on his
portfolio performance. Thus, investor will not feel lost in this complex world of
investments and the experts will do their job. Thus, PMS provides the following: PMS
gives investors access to an institutional process of money management. Provides a
customized solution by matching the unique circumstances and objectives of each
investor. Wealth creation based on disciplined investment process is the crux of PMS.
Effective diversification helps reduce portfolio volatility and enhances riskadjusted
returns over long term. PMS gives investor direct ownership of the individual securities
in the portfolio.
Summary of Conclusions & Suggestions
Setting SMART Financial Goals- ―An investor without GOAL is like a traveler
without a destination.‖ But setting goals is not an easy task, it is a continuous ongoing
process. Make SMART GOALS: S – Specific or Significant M – Measurable or
Meaningful A – Attainable or Action–Oriented R – Relevant or Rewarding T – Time-
bound or Trackable Setting Financial Goals: Financial Goals are set first and then a road
map is created to achieve them.

But again the basic question – how do I set my financial goals?

Setting Smart Financial Goals Any goal, financial or otherwise will become a Smart
Goal when you following features are added to it: 1. Smart Financial Goals are
SPECIFIC: Being ―Rich‖ is a goal but not a smart goal. If I put it like this that I wish
to plan for my retirement, so that I am financially independent – it becomes more
specific. The statement specifies ―richness‖ and the time by when you want to achieve
the goal. But again this is not a smart goal. Something is missing.

2. Smart Financial Goals are MEASURABLE: Besides being specific one should also
be able to assign a number to the goal. Instead of saying ―financially independent‖ it
should define the money in number terms. When you wish to assign a cost to future
expense, you need to guess or calculate the numbers taking a few realistic assumptions
like inflation and interest rates. These assumptions can also vary. For example the
inflation rate on Education can be much higher in comparison of buying car. So it is an
expert‘s job. But when you assign numbers a goal becomes measurable and comparable
also. So for the
Summary of Conclusions & Suggestions 260
above example if we say (in present value) – I wish to buy a new car of Rs 10 Lakh and
a house worth RS 60 Lakhs in Goa.

3. Smart Financial Goals are ACHIEVABLE & ATTAINABLE: Only decorating the
goal with number is not a smart work. A goal needs to be thoughtful and has to be seen
in the light of practicality as well. We have to see if this is attainable or not. It should
not be an out of reach dream that one starts to work upon and expect magic to help.
Again an expert advice is required here and he can help you to understand its reality.
Also sometimes a non-achievable may be adjusted and can be made achievable. So we
need to sit and give a deep thinking and even ask for expert help. Again for the above
example – can a person earning Rs 30000/- per month having 2 kids to support and
monthly expense of Rs 20000/- achieve the above mentioned goals? What if he has not
started saving till today? Or what if he is bound to get some inherited money? So under
all these circumstances, which are unique for all individual, we need to check the
attainability criteria of a goal to make it a smart goal.

4. Smart Financial Goals are REALISTIC & RELEVANT: Goals should be realistic –
you can‘t say I will build my retirement goals by investing in last 5 years of my job or I
will invest Rs 500 per month to achieve my retirement corpus of 3 crores.

5. Smart Financial Goals are TIMELY or TIME-BOUND: This is last step of setting
smart financial goals but very important. There should be some time limit attached to
every goal. For example: I want to buy a car in 5 years or I want to buy a house in 2030.

Prioritizing Smart Financial Goals Life is a not like a play script. It does not dwell on
one theme or issue. It is full of phases, events and happenings. In financial life one has
to invest today for things he would require in a very short span like annual premiums or
kids hostel fees and for the expense that would be have long span like kid‘s marriage or
retirement. Thus goals need to be put or priority list. Once these are recorded on time
frame they can be classified as immediate goals, mid-term goals and long term goals.

Financial Goals Examples: Short Term Financial Goals: Making a contingency fund or
emergency fund for family. Saving for school admission of kids. Saving for a
purchase in near term like a domestic appliance or for treatment of a recently diagnosed
ailment. Saving for life insurance premiums. Investments for tax planning.

Medium Term Financial Goals: Retiring a loan or debt. Planning for a foreign trip or a
vacation. Saving for college or pre college expenses for your kid. Saving for starting a
family in coming years. Planning for a new or change of vehicle. Saving for
home/property investment.

Long Term Financial Goals: Building retirement corpus. (both, expenses and medical
included) Saving for providing inheritance. Saving for daughter‘s marriage etc.
Planning a home for post-retirement life or a farm house.
While setting SMART financial goals, one should try answering these questions: Have
you decided you financial goals? Have you checked are these goals Smart? Have you
prioritize and taken action to your financial goals?

If ―NO‖ is the answer to any of these questions, it‘s time to prepare Financial Goals
outline & start making smart goals.

5.6 MANAGERIAL CONCLUSIONS

 Majority of the respondents of the study were males. Out of all the individual
taken for the study most of them were under graduate and the least were post
graduate .

 It was concluded from the study that majority of the individuals had 2 earning
members in the family.

 It was evident from the study that majority of the salaried individual invest only
30% out of their savings.

 Moreover out of all the investment avenues available in the market for the
investment, fixed deposit followed by insurance policies, mutual funds. Shares
and gold or silver was found to be most popular among all the individuals.

 About 40.8% all individuals preferred to invest in government sectors over

foreign or public sectors.
.
 Out of all the sources available in the market the most popular among all the
respondents and the most useful source of information was found to be internet.
Internet is not only popular among the respondents but also helps while making
an investment to all of them.
 As the objectives are most important while making an investment and the most
common objective among the individuals while making an investment is long
term growth followed by income and capital preservation.

 It could also be concluded from the study that 53.8% of all individuals prefer
medium term investments followed by long term investment avenues available in
the market.

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APPENDICES
 QUESTIONAIRE

The survey is being conducted for academic purpose only. You are requested to
kindly fill the questionnaire below. I assure you that the data generated shall be
kept confidential.

Investors Perception Towards Portfolio Management

(questionaire)
* Required

Name *

Your answer

Sex *
 Male
 Female
 Prefer not to say

Marital Status *
 Married
 Unmarried

Educational Background *
 Under-Graduate
 Graduate
 Post-Graduate

Occupation *
 Student
 Salaried
 Professional
 Business


No of earning members *
 1
 2
 & above


Select the various investments in your portfolio *

 Shares

 Debentures/Bonds

 Mutual Funds
 Fixed Deposits

 Insurance Polices

 Real Estate

 Gold /Silver

 Others

Required

In which sector do you prefer to invest your money? *

 Private sector
 Government sector
 Public sector
 Foreign sector

What is your investment objective? *

 Income and Capital Preservation
  Long Term Growth
 Short Term Growth
Other:


What is the main purpose behind investment? *

 Wealth Creation
 Tax Saving
 Earn Returns
 Future Expenses

Which factor do you consider before investing? *

 Low Risk
 High Return
 Maturity Period
 Safety of Principal

How often do you monitor your investment? *

 Daily
 Monthly
 Occasionally

What percentage of your income do you invest? *

 0-15%
 15-30%
 30-50%

What is the time period you prefer to invest? *

 Short Term (0-1 yrs)
 Medium Term (1-5 yrs)
 Long Term ( >5 yrs)

Do you have a formal budget for family expenditure? *

 Yes
 No
What is your source of Investment Advice? *

 Newspaper & books

 Advisors

 Internet

 Certified Financial Planners

 Family or Friends

 News Channels