Project Report on Portfolio Management

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives – Futures - 1 - 1 -

INDUSTRY PROFILE Journey of Indian stock market Indian Stock Markets are one of the oldest in Asia. Its history dates back back to nearly nearly 200 years years ago. ago. The earliest earliest records records of securit security y dealings in India are meager and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. The The 1850 1850's 's witn witnes esse sed d a rapi rapid d deve develo lopm pmen entt

of comm commer erci cial al

enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. Howe Howeve ver, r, at the the end end of the the Amer Americ ican an Civi Civill War, War, in 1865 1865,, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and and tran transa sact ct busi busine ness ss.. In 1887 1887,, they they form formal ally ly esta establ blis ishe hed d in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as "The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was

B.R.C.M. College of Business Administration, Surat


inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

Growth Pattern of the Indian Stock Market

Sr. As on 31st No. December No. of 1 Stock Exchanges No. of 2 Listed Cos. No. of Stock 3 Issues of Listed Cos. Capital of Listed 4 Cos. (Cr. Rs.) Market value of Capital of 5 Listed Cos. (Cr. Rs.) Capital per Listed Cos. 6 (4/2) (Lakh Rs.) Market Value of Capital per 7 Listed Cos. (Lakh Rs.) (5/2) Appreciate d value of Capital 8 per Listed Cos. (Lakh Rs.)

194 6

196 1

197 1

197 5

198 0

1985

1991

1995

7

7

8

8

9

14

20

22

112 5

120 3

159 9

155 2

226 5

4344

6229

8593

150 6

211 1

283 8

323 0

369 7

6174

8967

11784

270

753

181 2

261 4

397 3

9723

32041

59583

971

129 2

267 5

327 3

675 0

25302

11027 9

478121

24

63

113

168

175

224

514

693

86

107

167

211

298

582

1770

5564

358

170

148

126

170

260

344

803



COMPANY PROFILE

Kotak Securities Limited

Kotak Securities Ltd., a subsidiary of Kotak Mahindra Bank Limited, is one of India’s largest private brokerage and distribution house, set up in 1994, by Mr. Uday Kotak; it has equity participation from Goldman Sachs L. I. P. (25%).

Kotak Securities is a corporate member of both the Bombay Stock Exch Exchan ange ge (BSE (BSE)) and and the the Nati Nation onal al Stoc Stock k Exch Exchan ange ge (NSE) (NSE).. Its Its operations include stock broking, distribution of various Investment products products – including including private and secondary secondary placement placement of debt and equity, mutual funds, fixed deposits and the like. Currently Kotak Securities Securities is one of the largest broking houses houses in India with offices in more than fifteen cities. In India as well as a presence in US, Europe Europe and the Middle Middle East East (throu (through gh our associ associate ate compa companie nies s Kotak Kotak Mahin Mahindra dra U.K. U.K. Limite Limited d and and Kotak Kotak Mahind Mahindra ra Intern Internati ationa onall Limited, Kotak Mahindra Inc).

Our core strengths are our expertise in equity research and a wide reta retail il dist distri ribu butio tion n netw networ ork. k. We have have an outs outsta tand nding ing rese resear arch ch divi divisi sion on invo involv lved ed in macr macro o – econ econom omic ic stud studie ies, s, indu indust stry ry and and compan company y speci specific fic equity equity resear research, ch, with with analys analystt speci speciali alizin zing g in particular economic sectors and large cap stocks.

In August 2000, Kotak Securities launched Kotakstreet.com, its e – broking service for retail investors on the net and currently has over 20,000 registered users.



Kotak Securities Limited is one of the larger players in distribution of IPOs - it was ranked number One in 2003-04 as Book Running Lead Manager in public equity offerings by PRIME Database. It has also won the Best Equity House Award from Finance Asia - April 2004.

The Compan Company y has a full-fle full-fledge dged d Resear Research ch divisi division on involv involved ed in macro economic studies, sectoral research and Company specific equity research combined with a strong and well networked sales force which helps deliver current and up-to-date market information and news.

Kota Kotak k Secu Securit ritie ies s Limi Limite ted d is also also a depo deposi sito tory ry part partic icipa ipant nt with with Nati Nation onal al Secu Securi riti ties es Depo Deposi sito tory ry Lim Limited ited (NSD (NSDL) L) and and

Cent Centra rall

Depository Services Limited (CDSL) providing dual benefit services wher wherei ein n the the inve invest stor ors s can can use use the the brok broker erag age e serv servic ices es of the the Company for executing the transactions and the depository services for settling them.

The The Comp Compan any y has has 113 113 bran branch ches es serv servic icing ing arou around nd 1,00 1,00,0 ,000 00 customers, through our own offices and a large franchisee network. It’s It’s has an Online Online presen presence ce throug through h Kotaks Kotakstree treet.c t.com om where where we offer Internet Broking services and also online IPO and Mutual Fund Investments.

Kotak Kotak Securit Securities ies Limite Limited d manag manages es assets assets over over Rs. 1700 1700 crores crores through it’s Portfolio Management Services (PMS) servicing high net worth clients with a large investible surplus through its preferred clie client nt serv servic ices es in the the mass mass afflu affluen entt and and weal wealth th mana manage geme ment nt segments.



OBJECTIVE OF THE STUDY



To provide basic idea of different stock market investment instruments to investor.



To provide knowledge to investor about various type of risk associated with various investment instruments.



To provide investor knowledge about P\E, P\BV and Beta that would help them in selection of script and creation of portfolio.



To help investor in learning about derivative instrument – future for the purpose of speculation and hedging.



METHODOLOGY OF THE PROJECT

Research problem: To identified the Stock Market Investment Avenue and methods to help help inve invest stor or in sele select ction ion of scrip scriptt to crea create te port portfo folio lio.. And And the the meas measur ures es of hedg hedgin ing g the the port portfo folio lio with with the the use use of deri deriva vativ tive e instrument future.

Research design: Research design is exploratory as the basic objective is to identified the stocks and methods to create and protect portfolio.

Data collection:

Primary Primary data

: -

Primary Primary data data are colle collecte cted d by my regula regularly rly

tracking the stock price of various script selected

Secondar Secondary y data :- Secon Secondar dary y data data are collec collected ted from variou various s journals , websites and financial news paper.



LIMITATIONS OF THE PROJECT



The time duration given to complete the report was not sufficient.



The report is basically is made between the horizon of two two month onths s and and the the situ situat atio ion n of marke arkett is very very dynam dynamic ic so the conclusi conclusion on or the return might not reflect the true picture.



ANALYSIS OF INVESTMENT

WHAT IS INVESTMENT? Inve Invest stme ment nt is the the acti activi vity ty,, whic which h is made made with with the the obje object ctiv ive e of earn earnin ing g som some sort sort of posi positi tive ve retu return rns s in the the futu future re.. It is the the commit commitmen mentt of the funds to earn earn future future returns returns and it involv involves es sacr sacrif ific icing ing the the pres presen entt inve invest stme ment nt for for the the futu future re retur return. n. Ever Every y person makes the investment so that the funds he has increases as keeping cash with himself is not going to help as it will not generate any returns and also with the passage of time the time value of the money will come down. As the inflation will rise the purchasing power of the money will come down and this will result that the investor who does does not invest will become more more poor as he will not have any funds whose value have been increased. Thus every person whether he is a businessman or a common man will make the investment with the objective of getting future returns.

TYPES OF INVESTMENT:There are basically three types of investments from which the investors can choose. The three kinds of investment have their own risk and return profile and investor will decide to invest taking into account his own risk appetite. The main types of investments are: -



Economic investments:-

These investments refer to the net addition to the capital stock of the the soci societ ety. y.

The The capi capita tall stoc stock k of the the soci societ ety y refe refers rs to the the

investments made in plant, building, land and machinery which are used used for the the furt furthe herr prod produc ucti tion on of the the good goods. s.

This This type type of

investments are very important for the development of the economy because if the investment are not made in the plant and machinery the industrial production will come down and which will bring down the overall growth of the economy.

Financial Investments:This type of investments refers to the investments made in the marketable securities securities which are of tradable nature. It includes includes the shares, debentures, bonds and units of the mutual funds and any other securities which is covered under the ambit of the Securities Cont Contrac ractt Regu Regulat latio ions ns Act Act defi defini nitio tion n of the the word word secu securit rity. y. The The invest investme ments nts made made in the capita capitall marke markett instru instrumen ments ts are of vital vital import important ant for the count country ry econo economic mic growth growth as the stock stock marke markett index is called as the barometer of the economy.

General Investments:These investments refer to the investments made by the common investor in his own small assets like the television, car, house, moto motorr cycl cycle. e. Thes These e type types s of inve invest stme ment nts s are are term termed ed as the the household investments. Such types of investment are important for the domestic economy of the country. When the demand in the dome domest stic ic econ econom omy y boos boostt the the over over all all prod produc ucti tion ons s and and the the manufacturing in the industrial sectors also goes up and this causes rise in the employment activity and thus boost up the GDP growth



rate of the country. The organizations like the Central Statistical Organization (CSO) regularly takes the study of the investments made made in the the hous househ ehol old d sect sector or whic which h show shows s that that the the leve levell of consumptions in the domestic markets.



CHARACTERISICS CHARACTERISICS OF INVESTMENT

Certain features characterize all investments. The following are the main characteristics features if investments: -

1.Return: All investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of deriving a return. return. The return return may be received in the form of yield plus capital capital appreciation. The difference between the sale price & the purchase price is capital appreciation. The dividend or interest received from the investment is the yield. Different types of investments promise different rates of return. The return from an investment depends upon the nature of investment, the maturity period & a host of other factors.

2.Risk: Risk is inherent in any investment. The risk may relate to loss of capital, delay in repayment of capital, nonpayment of interest, or variab variabili ility ty of return returns. s. While While some some invest investmen ments ts like like govern governme ment nt securities & bank deposits are almost risk less, others are more risky. The risk of an investment depends on the following factors. 0

The lon longer the the mat matu urity rity perio eriod, d, the the lo longer nger is the the ris risk k.

1

The lower the credit worthiness of the borrower, the higher is the risk.

The The risk risk varie varies s with with the the natu nature re of inve invest stme ment nt.. Inve Invest stme ment nts s in ownership securities like equity share carry higher risk compared to investments in debt instrument like debentures & bonds.



3. Safety: The safety of an investment implies the certainty of return of capital without loss of money or time. Safety is another features which an investors desire for his investments. Every investor expects to get back his capital on maturity without loss & without delay.

4. Liquidity: An investment, which is easily saleable, or marketable without loss of money & without loss of time is said to possess liquidity. Some investments like company deposits, bank deposits, P.O. deposits, NSC, NSS etc. are not marketable. Some investment instrument like preference shares & debentures are marketable, but there are no buyers in many cases & hence their liquidity is negligible. Equity shar shares es of comp compan anie ies s list listed ed on stoc stock k exch exchan ange ges s are are easi easily ly marketable through the stock exchanges.

An investor generally prefers liquidity for his investment, safety of his funds, a good return with minimum risk or minimization of risk & maximization of return.



IMPORTANCE

In the the curr curren entt situ situat atio ion, n, inves investm tmen entt is beco become mes s nece necess ssar ary y for for everyone & it is important & useful in the following ways:

1. Retirement planning: Inve Invest stme ment nt deci decisi sion on has has beco become me sign signif ific ican antt as peop people le retir retire e between the ages of 55 & 60. Also, the trend shows longer life expectancy. The earning from employment should, therefore, be calculated in such a manner that a portion should be put away as a savings. Savings by themselves do not increase wealth; these must be inve invest sted ed in such such a way way that that the the princ princip ipal al & incom income e will will be adequate for a greater number of retirement years. Increase in working population, proper planning for life span & longevity have ensured the need for balanced investments.

2. Increasing rates of taxation: Taxation is one of the crucial factors in any country, which introduce an elem elemen entt of comp compul ulsi sion on,, in a pers person on’s ’s savi saving ng.. In the the form form inve invest stme ment nts, s, ther there e are are vario various us form forms s of savi saving ng outle outlets ts in our our coun country try,, whic which h help help in brin bringi ging ng down down the the tax tax leve levell by offe offeri ring ng deductions in personal income. For examples: 0

Unit linked insurance plan,

1

Life insurance,

2

National saving certificates,

3

Development bonds,

4

Post of office ice cu cumulative ive de deposit sc schemes et etc.



3. Rates of interest: It is also an important aspect for sound investment plan. It varies between investment & another. This may vary between risky & safe invest investme ment, nt, they they may may also also differ differ due differ different ent benefit benefits s scheme schemes s offere offered d by the invest investmen ments. ts. These These aspect aspects s must must be consid considere ered d before actually investing. The investor has to include in his portfolio several kinds of investments stability of interest is as important as receiving high rate of interest.

4. Inflation: Since the last decade, now a day’s inflation becomes a continuous proble problem. m. In these these years years of rising rising prices, prices, sever several al proble problems ms are associated coupled with a falling standard of living. Before funds are are inve invest sted ed,, eros erosio ion n of the the reso resour urce ce will will have have to be care carefu full lly y considered in order to make the right choice of investments. The investor will try & search outlets, which gives him a high rate of return in form of interest to cover any decrease due to inflation. He will will als also have have to judg judge e whet whethe herr the the inte intere rest st or retu return rn will will be continuous or there is a likelihood of irregularity. Coupled with high rate of interest, he will have to find an outlet, which will ensure safety of principal. Beside high rate of interest & safety of principal an investor also has to always bear in mind the taxation angle, the interest earned through investment should not unduly increase his taxation burden otherwise; the benefit derived from interest will be compensated by an increase in taxation.



5. Income: For increasing increasing in employme employment nt opportunit opportunities ies in India., India., investmen investmentt decisions have assumed importance. After independence with the stage of development in the country a number of organization & services came into being.

For example: The Indian administrative services, Banking recruitment services, Expansion in private corporate sector, Public sector enterprises, Establishing of financial institutions, tourism, hotels, and education.

More avenues for investment have led to the ability & willingness of working people to save & invest their funds.

6. Investment channels: The growth & development of country leading to greater economic activity has led to the introduction of a vast array of investment outlays. Apart from putting aside saving in savings banks where interest is low, investor have the choice of a variety of instruments. The question to reason out is which is the most suitable channel? Which media will give a balanced growth & stability of return? The investor in his choice of investment will give a balanced growth & stability of return? The investor in his choice of investment will have try & achieve a proper mix between high rates of return to reap the benefits of both. both.

For example: 0

Fixed deposit in corporate sector

1

Unit trust schemes.



INVESTMENTS AVENUES:There are various investments avenues provided by a country to its people depending upon the development of the country itself. The developed countries like the USA and the Japan provide variety of investments as compared to our country. In India before the post liberalization era there were limited investments avenues available to the people in which they could invest. With the opening up of the economy the number of investments avenues have also increased and the quality of the investments have also improved due to the use use of the the prof profes essi sion onal al acti activi vity ty of the the play player ers s invo involv lved ed in this this segment. Today investment is no longer a process of trial and error and it has become a systematized process, which involves the use of the professional investment solution provider to play a greater role in the investment process.

Earlie Earlierr the invest investmen ments ts were were made made without without any analys analysis is as the complexity involved the investment process were not there and also there was no availability of variety of instruments. But today as the number of investment options have increased and with the variety of investments options available the investor has to take decision according to his own risk and return analysis.

An investor has a wide array of Investment Avenue. They are as under:



Investment

Equity

Fixed Income

Deposits

Mutual Fund

Tax Sheltered

Life Insurance

Real Estate

Precious

Financial Derivatives



EQUITY SHARES: -

Types of Equity Instruments: 

Ordinary Shares

Ordinary shareholders are the owners of a company, and each share entitles the holder to ownership privileges such as dividends declared by the company and voting rights at meetings. Losses as well as profits profits are shared shared by the equity equity sharehol shareholders. ders. Without Without any guaranteed income or security, equity shares are a risk investment, investment, bringing with them the potential for capital appreciation in return for the addi additi tion onal al risk that the investor investor underta undertakes kes in comparis comparison on to debt debt instruments with guaranteed income. 

Preference Shares

Unlike equity shares, preference shares entitle the holder to dividends at fixed fixed rates rates subjec subjectt to availab availabilit ility y of profits profits after tax. If prefere preference nce shares shares are cumulat cumulative, ive, unpaid unpaid dividen dividends ds for years years of inadequ inadequate ate prof profit its s are paid paid in subs subsequ equent ent years years.. Prefer Preferenc ence e shares shares do not not entitle entitle the holder to ownershi ownership p privileg privileges es such as voting voting rights rights at meetings. 

Equity Warrants

These are long term rights that offer holders the right to purchase equity shares in a company at a fixed price (usually higher than the current market price) within a specified period. Warrants are in the nature of options on stocks.



Classification in terms of Market Capitalisation Market capitalisation is equivalent to the current value of a company i.e. current current marke markett price price per share times times the number number of outstan outstanding ding shar shares es..

Ther There e

are are

Larg Large e

Capi Capita talilisa sati tion on

comp compan anie ies, s,

MidMid-Ca Cap p

compan companies ies and Small-Ca Small-Cap p companie companies. s. Different Different schemes schemes of a fund may define their fund objective as a preference for Large for Large or Mid or Small-Cap companies' shares. Large Cap shares are more liquid and hence easily tradable. Mid or Small Cap shares may be thought of as having having greater greater growth growth potentia potential. l. The stock stock marke markets ts genera generally lly have different indices available to track these different classes of shares.

Classification in terms of Anticipated Earnings In terms of the anticipated earnings earnings of the companies, shares are generally classified on the basis of their market price in relation to one of the following measures: *

Pric Price/ e/Ea Earn rnin ings gs Rat Ratio io is the price of a share divided by the earnings per share, and indicates what the investors are willing to pay for the company's earning potential. Young and/or fast growing comp compan anies ies usua usually lly have have high high P/E ratio ratios. s. Estab Establis lishe hed d compani companies es in mature mature industries industries may have lower P/E ratios. The P/E analysis analysis is sometim sometimes es supplem supplemente ented d with ratios such such as Market Price to Book Value and Market Price to Cash Flow per share.

•

Dividend Yield for a stock is the ratio of dividend paid per share to curr curren entt mark market et pric price. e. Low Low P/E stoc stocks ks usua usuall lly y have have high high divid dividen end d yield yields. s. In India India,, at leas leastt in the the past past,, inve invest stors ors have have indicated a prefere preference nce for the high dividen dividend d paying paying shares. shares. What What matters to fund managers is the potential dividend yields based on earnings prospects.



Based on companies' anticipated earnings and in the light of the investment management experience the world over, stocks are classified in the following groups: Cyclical Stocks are shares of companies whose earnings are

•

corr correl elat ated ed with with the the stat state e of the the econ econom omy. y. Thei Theirr earn earnin ings gs (and (and therefore, therefore, their share prices) tend to go up during upward economic economic cycle cycles s and and vice versa. Cement Cement or Aluminium Aluminium producers producers fall into this this cate catego gory ry,, just just as an exam exampl ple. e. Thes These e compa ompan nies ies may command relatively lower P/E ratios, and have higher dividend payouts.

•

Growth Stocks are shares of companies whose earnings are expected to increase at rates that exceed normal market market levels. They tend to reinvest earnings and usually have high P/E ratios and low dividend yields yields.. Softwa Software re or inform informati ation on techno technolo logy gy company shares are an example of this type. Fund managers try to identify the sectors or companies that have a high growth potential.

•

Value Stocks are shares of companies in mature industries and and are are expe expect cted ed to yiel yield d low low grow growth th in earn arnings ings.. These hese companies may, however, have assets whose values have not been recognised by investors in general. Fund managers try to identify such currently under-valued stocks that in their opinion can yield superior returns later. A cement company with a lot of real real esta estate te and and a compa ompany ny with with good good bran brand d name names s are are examples of potential value shares.



FIXED INCOME SECURITIES Many Many instru instrume ments nts give give regula regularr income income.. Debt Debt instrum instruments ents may be secu secure red d by the assets assets of the borrowers borrowers as genera generally lly in case case of Corporate Debentures, or be unsecured as is the case with Indian Financial Institution Bonds. A debt security is issued by a borrower and is often known by the issuer category, category , thus t hus giving us Governm Government ent Securiti Securities es and Corpo Corporate rate Securities or FI bonds. Debt instruments instruments are also distinguished by their t heir maturity profile. Thus, instruments issued with short-term maturities, typically typically under one year, are classified as Money Market Securities. Securities. Instruments Instruments carrying longer than one-year maturities are genera generally lly called Debt Securities. Most Most debt debt secu securit ritie ies s are are inte intere rest st-b -bea eari ring ng.. Howe Howeve ver, r, ther there e are are securities that are discounted securities or zero-coupon bonds that do not pay regular interest at intervals but are bought at a discount to their face value. A large part of the interest-bearing securities are genera generally lly Fixed IncomeIncome-pay paying ing,, while while there there are also securities that pay interest on a Floating Rate basis.

A Review of the Indian Debt Market The The Whol Wholes esal ale e Debt Debt Mark Market et segm segmen entt deal deals s in fixe fixed d inco income me securities and is fast gaining ground in an environment that has largely focused on equities. The Whole Wholesal sale e Debt Debt Market Market (WDM) (WDM) segme segment nt of the Exchan Exchange ge commenced operations on June 30, 1994. This provided the first form formal al scre screen en-b -bas ased ed trad tradin ing g faci facilit lity y for for the the debt debt mark market et in the the country.



This This segm segmen entt prov provid ides es trad tradin ing g faci facili litie ties s for for a varie variety ty of debt debt instrumen instruments ts including including Governme Government nt Securities Securities,, Treasury Treasury Bills and Bonds issued by Public Sector Undertakings/ Corporates/ Banks like Floating Rate Bonds, Zero Coupon Bonds, Commercial Papers, Certificate of Deposits, Corporate Debentures, State Government loans, SLR and Non-SLR Bonds issued by Financial Institutions, Units Units of Mutual Mutual Funds Funds and Securit Securitize ized d debt debt by banks, banks, financ financial ial institutions, corporate bodies, trusts and others. Large investors and a high average trade value characterize this segment. Till recently, the market was purely an informal market with with most most of the trades trades direct directly ly negotia negotiated ted and struck struck betwee between n various participants. The commencement of this segment by NSE has brought about transparency and efficiency to the debt market, along with effective monitoring and surveillance to the market.



Business Growth in WDM Segment

Market Number Net Traded Average Average Year Capitalisation of Value Daily Value Trade Size (Rs.crores) Trades (Rs.crores) (Rs.crores) (Rs.crores) 20052006

1,553,448

60,159

458,434.94

1,833.74

7.62

20042005

1,461,734 124,308

887,293.66

3,028.31

7.14

20032004

1,215,864 189,518 1,316,096.24

4,476.52

6.94

20022003

864,481 167,778 1,068,701.54

3,598.32

6.37

20012002

756,794 144,851

947,191.22

3,277.48

6.54

20002001

580,835

64,470

428,581.51

1,482.98

6.65

19992000

494,033

46,987

304,216.24

1,034.75

6.47

19981999

411,470

16,092

105,469.13

364.95

6.55

19971998

343,191

16,821

111,263.28

377.16

6.61

19961997

292,772

7,804

42,277.59

145.28

5.42

19951996

207,783

2,991

11,867.68

40.78

3.97

19941995

158,181

1,021

6,781.15

30.41

6.64

Instruments in the Indian Debt Market 

Certificate of Deposit



Certificates of Deposit (CD) are issued by scheduled commercial bank banks s excl exclud udin ing g regi region onal al rura rurall bank banks. s. Thes These e are are unse unsecu cure red d negotiable promissory notes. Bank CDs have a maturity period of 91 days days to one year year,, whil while e thos those e issu issued ed by FIs FIs have have matu maturi riti ties es between one and three years. 

Commercial Paper

Commer Commercia ciall paper paper (CP) is a short short term, term, unsecur unsecured ed instrum instrument ent issued by corporate corporate bodies (public & priva private) te) to meet meet short short-te -term rm working capital requirements. Maturity varies between 3 months and 1 year year.. This This inst instru rume ment nt can can be issu issued ed to indi indivi vidu dual als, s, bank banks, s, companies companies and other corporate bodies registered registered or incorporated incorporat ed in in India. CPs can be issued to NRIs on non-repatriable and nontransferable basis. 

Corporate Debentures

The debentures are usually issued by manufacturing companies with phys physica icall asse assets ts,, as secu secure red d instru instrume ment nts, s, in the form of certificate certificates s They are assigned a credit rating by rating agencies. Trading in debentures is generally based on the current yield and market values are based based on yield-t yield-to-m o-matu aturity rity.. All publicly publicly issued issued debentures are listed on exchanges.





Floating Rate Bonds (FRB)

Thes These e are are short short to medi medium um term term inter interes estt beari bearing ng inst instrum rumen ents ts issued issued by financia financiall interme intermedia diaries ries and corp corpor orat ates es.. The The typi typica call maturity of these bonds is 3 to 5 years. FRBs issued by financial inst instit itut utio ions ns are are gene genera rally lly unse unsecu cure red d while while thos those e from from priv privat ate e corporates are secured. The FRBs are pegged to different reference rates such as T-bills or bank deposit rates. The FRBs issued by the Government of India are in the form of Stock Certificates or issued by credit to SGL accounts maintained by the RBI. 

Government Securities

These are medium to long term interest-bearing obligations issued through the RBI by the Government of India and state governments. The RBI decides the cut-off coupon on the basis of bids received during auctions. There are issues where the rate is pre-specified and the investor only bids for the quantity. In most cases the coupon is paid semi-annually with bullet redemption features. 

Treasury Bills

T-bill T-bills s are are short short-te -term rm oblig obligati ations ons issued issued throu through gh the the RBI RBI by the Government of India at a discount. The RBI issues T-bills for different tenures: now 91 -days and 364-days. These treasury bills are issued thro throug ugh h an auction auction proced procedure. ure. The yield yield is determ determined ined on the basis of bids tendered and accepted. 

Bank/FI Bonds

Most of the institutional bonds are in the form of promissory notes transfer transferable able by endorse endorsemen mentt and delive delivery. ry. These These are negoti negotiab able le cert certif ific icat ates es,, issu issued ed by the the Fina Financ ncia iall Inst Instit itut utio ions ns such such as the the IDBI/ICICI/ IDBI/ICICI/ IFCI or by commercial commercial banks. banks. These instruments instruments have



been issued both as regular income bonds and as discounted longterm instruments (deep discount bonds). 

Public Sector Undertakings (PSU) Bonds

PSU Bonds are medium and long term obligations issued by public sect sector or comp compan anies ies in whic which h the the gove govern rnme ment nt shar share e hold holdin ing g is generally greater

than

51%.

Some

PSU

bonds

carry tax

exemptions. The minimum maturity is 5 years for taxable bonds and 7 years for tax-free bonds. PSU bonds are generally not guaranteed by the the gove govern rnm ment ent and are are in the the form form of prom promis isso sory ry note notes s transferable by endorsement and delivery. PSU bonds in electronic form (demat) are eligible for repo transactions.

MUTUAL FUND SCHEMES An investor can participant in various schemes floated by mutual fund fund instea instead d of buying buying equity equity share shares. s. In mutua mutuall funds funds invest invest in equity equity shares shares & fixed fixed income income securit securities ies.. There There are three three broad broad types of mutual fund schemes. 

Growth schemes



Income schemes



Balanced schemes



DEPOSITS

It is just like fixed income securities earn a fixed return. However, unli unlike ke

fixe fixed d

inco income me secu securi riti ties es,,

depo deposi sits ts are are

nego negoti tiab able le

or

transferable. The important types of deposits in India are: 

Bank deposits



Company deposits



Postal deposits.

TAX-SHELTERED SAVING SCHEMES It provides benefits to those who participate in them. The most important tax sheltered saving schemes in India is: 

Employee provident fund scheme



Public provident fund schemes



National saving certificate

LIFE INSURANCE In a broad sense, life insurance may be viewed as an investment. Insurance premiums represent the sacrifice & the assured sum the benefit. In India, the important types of insurance polices are: 

Endowment assurance policy



Money back policy



Whole life policy



Premium back term assurance policy



REAL ESTATE For For the the bilk bilk of the the inve invest stor ors s the the most most impo import rtan antt asse assett in thei their r portfolio is a residential house. In addition to a residential house, the more affluent investors are likely to be interested in the following types of real estate: 

Agricultural land



Semi-urban land

PRECIOUS OBJECTS PRECIOUS OBJECTS: It is highly valuable in monetary terms but generally they are small in size. The important precious objects are: 

Gold & silver



Precious stones



Art objects

FINANCIAL DERIVATIVES

FINANCIAL DERIVATIVES: -

A financial financial derivative derivative is an instrument instrument whose whose value is derived derived from the value of underlying asset. It may be viewed as a side bet on the asset. The most import financial derivatives from the point of view of investors are: 

Options



Futures.



RISK – RETURN OF VARIOUS INVESTMENT AVENUES Ever Every y inve invest stme ment nt is char charac acte teriz rized ed by retu return rn & risk. risk. Inve Invest stor ors s intuit intuitive ively ly unders understan tand d the concep conceptt of risk. risk. A person person making making an investment expects to get some return from the investment in the future. But, as future is uncertain, so is the future expected return. It is this uncertainty associated with the returns from an investment that introduces risk into an investment. Risk arises where there is a possib possibili ility ty of variat variation ion betwee between n expect expectati ation on and realiza realizatio tion n with with regard to an investment.

Meaning of Risk Risk Risk & unce uncert rtai aint nty y are are an inte integr grat ate e part part of an inve invest stme ment nt decision. Technically ‘risk’ can be define as situation where the possible consequences of the decision that is to be taken are are know known. n. ‘Unc ‘Uncer erta tain inty ty’’ is gene genera rall lly y defi define ned d to appl apply y to situ situat atio ions ns wh wher ere e

the the

prob probab abil iliti ities es cann cannot ot be esti estima mate ted. d.

However, risk & uncertainty are used interchangeably.



Types of risks

1. Systematic risk: Syst System emat atic ic risk risk is non non dive divers rsif ifia iabl ble e & is asso associ ciat ated ed with with the the securities market as well as the economic, sociological, political, & legal consideratio considerations ns of prices of all securities securities in the economy. economy. The affect of these factors is to put pressure on all securities in such a way that the prices of all stocks will more in the same direction. Example: During a boom period prices of all securities will rise & indicate that the economy is moving towards prosperity. Market risk, interest rate risk & purchasing power risk are grouped under systematic risk.

RISKS

SYSTAMATIC UNSYSTAMATIC



Market Risk

Business Risk



Interest Rate Risk

Financial Risk



Purchasing power Risk



1. Systematic Risk

(A) Market risk

Market risk is referred to as stock variability due to changes in investor’s attitudes & expectations. The investor reaction towards tangible and intangible events is the chief cause affecting ‘market risk’.

(B) Interest rate risk

Ther There e are are four four type types s of move moveme ment nts s in pric prices es of stoc stocks ks in the the markets. These may termed as (1) long term, (2) cyclical (bull and bear markets), (3) intermediate or within the cycle, and (4) short term term.. The The price prices s of all all secu securi ritie ties s rise rise or fall fall depe depend nding ing on the the change in interest rates. The longer the maturity period of a security the higher the yield on an investment & lower the fluctuations in prices.

( C) C) Purchasing Power risk

Purcha Purchasin sing g power power risk risk is also also known known as inflati inflation on risk. risk. This This risk risk aris arises es out out of chan change ge in the the pric prices es of good goods s & serv servic ices es and and technically it covers both inflation and deflation periods. During the last two decades it has been seen that inflationary pressures have been continuously affecting the Indian economy. Therefore, in India purchasing power risk is associated with inflation and rising prices in the economy.



2. Unsystematic Risk: -

The importance of unsystematic risk arises out of the uncertainty surrounding of particular firm or industry due to factors like labour strike strike,, consum consumer er prefer preferenc ences es and manag managem ement ent polici policies. es. These These uncertainties directly affect the financing and operating enviourment of the firm. Unsystematic risks can owing to these considerations be said to complement the systematic risk forces.

(A) Business risk

Every corporate organization has its own objectives and goals and aims at a particular gross profit & operating income & also accepts to provide a certain level of dividend income to its shareholders. It also also hope hopes s to plou plough gh back back some some prof profit its. s. Once Once it iden identi tifie fies s its its oper operat ating ing leve levell of earn earnin ings gs,, the the degr degree ee of vari variat atio ion n from from this this operating level would measure business risk.

Example:If operating income is expected to be 15% in a year, business risk will be low if the operating income varies between 14% and 16%. If the operating income were as low as 10% or as high as 18% it would be said that the business risk is high.

(B) Financial Risk: -

Financial risk in a company is associated with the method through which it plans its financial structure. If the capital structure of a company tends to make earning unstable, the company may fail financially. How a company raises funds to finance its needs and growth will have an impact on its future earnings and consequently on the stability of earnings. Debt financing provides a low cost source of funds to a company, at the same time providing financial



leverage for the common stock holders. As long as the earnings of the the comp compan any y are are high higher er than than the the cost cost of borr borrow owed ed fund funds, s, the the earning per share of common stock is increased. Unfortunately, a large amount of debt financing also increases the variability of the returns of the common stock holder & thus increases their risk. It is found found that that variat variation ion in return returns s for share sharehol holder ders s in levere levered d firms firms (borrowed funds company) is higher than in unlevered firms. The variance in returns is the financial risk.



Risk Return Of Various Investment Alternatives Managem ent Decision

Market Investment

Risk

Business Interest

H M M L L L L L O O O O O

Growth stock Speculative common stock Blue chips Convertible referred stock Convertible debentures Corporate bonds Government bonds Short-term bonds Money market funds Life insurance Commercial banks Unit trusts Saving a/c Cash

Power

Risk

Risk

H

H

L

L

H

H

L

L

M

M

L

L

M

M

L

L

M

M

L

L

L

L

H

H

L

L

H

H

L

L

L

H

L

L

L

H

L

L

L

H

L

L

L

H

L L L

L L L

L L L

M-H H H

Required H

Purchasing

Risk

So, there are so many investment options & the different option have different benefits & limitations in the sense risk associated with with it. it. So it is diff diffic icul ultt for for them them to chos chose e opti option on,, whic which h give give maximum return at minimum risk.

PORTFOLIO Meaning of portfolio:-



Portfolio A

combination

of

securities

with

diff ifferen rent

risk

&

return

characteristics will constitute the portfolio of the investor. Thus, a portfolio is the combination of various assets and/or instruments of investments. The combination may have different features of risk & return, separate from those of the components. The portfolio is also built up out of the wealth or income of the investor over a period of time, with a view to suit his risk and return preference to that of the portfolio that he holds. The portfolio analysis of the risk and return characteristics of individual securities in the portfolio and changes that may take place in combination with other securities due to interaction among themselves and impact of each one of them on others.

An investor considering investments in securities is faced with the problem of choosing from among a large number of securities. His choice depends upon the risk and return characteristics of individual secu securi riti ties es.. He woul would d atte attem mpt to choo choose se the the most most desi desira rabl ble e securities and like to allocate is funds over this group of securities. Again he is faced with the problem of deciding which securities to hold and how much to invest in each. The investor faces an infinite number of possible portfolios or groups of securities. The risk and return return charac character terist istics ics of portfo portfolio lio differ differ from from those those of indivi individua duall securities combining to form a portfolio. The investor tries to choose the the optim optimal al port portfo folio lio taki taking ng in to cons consid ider erat atio ion n the the risk risk retu return rn characteristics of all possible portfolios.

As the economy and the financial environment keep changing the risk risk retu return rn char charac acte teris ristic tics s of indiv individu idual al secu securi riti ties es as well well as portfolios also change. This calls for periodical review and revision of investment portfolios of investors. An investor invests his funds in a portfolio expecting to get a good return consistent with the risk



that he has to bear. The return realized from the portfolio has to be measured and the performance of the portfolio has to be evaluated.

It is evident that rational investment activity involves creation of an inve invest stme ment nt port portfo folio lio.. Port Portfo folio lio mana manage geme ment nt comp compri rise ses s all all the the proc proces esse ses s invo involv lved ed in the the crea creati tion on and and main mainte tena nanc nce e of an investment portfolio. It deals specifically with the security analysis, portfolio analysis, portfolio selection, portfolio revision and portfolio eval evalua uati tion on..

Port Portfo foli lio o

manag anagem emen entt

makes akes

use use

of

anal analyt ytic ical al

techniques of analysis and conceptual theories regarding rational allocation of funds. Portfolio management is a complex process which tries to make investment activity more rewarding and less risky.



PORTFOLIO DESIGN

Before designing a portfolio one will have to know the intention of the investor or the returns that the investor is expecting from his investment. This will help in adjusting the amount of risk. This becomes an important point from the point of view of the portfolio designer because if the investor will be ready to take more risk at the same time he will also get more returns. This can be more appropriately understood from the figure drawn below.

R 1

Expected Returns

R 2

Risk less Investment M1

M2 Risk

From the above figure we can see that when the investor is ready to take risk of M 1, he is likely to get expected return of R1, and if the investor is taking the risk of M2, he will be getting more returns i.e. R2. So we can conclude that risk and returns are directly rela relate ted d with with each each othe other. r. As one one incr increa ease ses s the the othe otherr will will also also incr increa ease se in same same of diff differ eren entt prop propor orti tion on and and same same if one one decreases the other will also decrease.



From the above discussion we can conclude that the investors can be of the following three types:

1. Invest Investors ors willin willing g to take take minimum minimum risk and and at the same time time are also expecting minimum returns.

2. Invest Investors ors willin willing g to take modera moderate te risk and and at the same time time are also expecting moderate returns.

3. Invest Investors ors willin willing g to take maxim maximum um risk risk and at the same same time are also expecting maximum returns.



PORTFOLIO – AGE RELATIONSHIP

Your age will help you determine what a good mix is / portfolio is Age below 30

Portfolio 80% in stocks or mutual funds 10% in cash 10% in fixed income 70% in stocks or mutual funds 10% in cash 20% in fixed income 60% in stocks or mutual funds 10% in cash 30% in fixed income 50% in stocks or mutual funds 10% in cash 40% in fixed income 40% in stocks or mutual funds 10% in cash 50% in fixed income

30 t0 40

40 to 50

50 to 60

above 60

These aren't hard and fast allocations, just guidelines to get you thinking about how your portfolio should look. Your risk profile will give you more equities or more fixed income depending on your aggressive or conservative bias. However, it's important to always have some equities in your portfolio (or equity funds) no matter what your age. If inflation roars back, this will be the portion of your invest investme ments nts that that protec protects ts you from the damage damage,, not your your fixed fixed income. Also, the fixed income of your portfolio should be diversified. If you buy bonds and debentures directly or if you invest in FDs, then make sure you have at least five different maturities to spread out the interest rate risk.



Dive Divers rsify ifying ing in equi equiti ties es and and bond bonds s mean means s more more than than buyi buying ng a number of positions. Each position needs to be scrutinized as to how it fits into the stocks or bonds that already are in your portfolio, and how they might be affected by the same event such as higher interest rates, lower fuel prices, etc. Put your portfolio together like a puzzle, adding a piece at a time, each one a little different from the the othe otherr but but achi achiev evin ing g a unif unifor orm m whol whole e once once the the port portfo foli lio o is complete.

Types of portfolio for study: In portfolio Design, we are considering only two types of portfolio. They are as follow: 1. Rand Random om Por Portf tfol olio io 2. Sect Sector or Por Portf tfol olio io

1. Rand Random om por portfo tfoli lio o Random portfolio consists of the scripts that are randomly selected by the investor by its own knowledge and preference of the stocks. Here there is no analysis is done of the script, they are selected on the the tips tips and and buts buts rece receiv ived ed by the the inve invest stor ors s from from the the exte extern rnal al sources.

Features of random portfolio

•

There is no method used for selection of the script in the portfolio.

•

Selection is based on the individual criteria for the scripts.

•

The investment is made for higher return in short term.


Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives – Futures - 41 - 41 •

Gene enerall rally y in Indi India a most ost of the the portfo rtfoli lio o are are sele selec cted ted according to this random methods as no investor himself in that much analysis of the script.

Advantages of random portfolio

•

Easier to keep a track on the market as not much time wasted in the analysis.

•

This portfolio portfolio seems to have perform perform better in short term as script are generally which are performing better at that time.

•

Tips are available every where for the investor to pouch.

•

It is the experience of the individual that can fetch him good return.

Disadvantages of random portfolio

•

There is every chance that you may select a script that has a very bad background in the market.

•

Not every time the tips pay off for you. You need to have strong reason to select that script.

•

Such portfolios are not able to sustain when there is a crisis in the market.

•

There is a very high risk and return involve in such portfolio.



2. Sector specific portfolio Sector Sector speci specific fic portfo portfolio lio includ includes es securit securities ies of those those compa companie nies s which are in the same business. Sector portfolios are very useful when there is a particular sector which is doing very good and has a bright future a head. Sector portfolio has the securities of those companies that engage in same kind of business. e.g. In late 1990’s sector that was providing the highest return was information technology. Investors who have invested their money in these securities had earned very high return.

Features of sector portfolio

•

Script form the same group of companies that are in to the similar type of business.

•

Maximum exposure to the industry/sector. So any news or event has the direct effect on the portfolio.

•

Risk Risk rega regard rdin ing g the the port portfo folio lio incr increa ease ses s as it is expo expose se to sector specific ups and downs.

•

Useful investment tools for speculator and short-sellers.

•

It is better suited for the sectors which have been providing good revenue in the near past.

Advantages of sector portfolio

•

It is better suited to investors who are willing to take risk.

•

It provides better short term return then other portfolios.

•

It is easy to keep a watch on one sector rather than many. You can have a good command over the things happening.

•

Limited exposure to other sectors keeps the portfolio safe from the performance of other sectors in the economy.



Disadvantages of sector portfolio

•

It is a highly risky portfolio as risk associated with the sector directly affects the performance of the portfolio.

•

These types of portfolios are not suited for long-term investor as risk taken for the return can be too high.

There is always the possibly many scripts in the sector may not be giving that much good attractive return as others. They may eat the profits from other scripts.



Book value is based on historical costs, not current values, but can provide an important measure of the relative value of a company over time. Book value can be figured as assets assets minus liabilities, liabilities, or assets minus liabilities and intangible items such as goodwill; either way, the figure that results is the company's net book value. This is contrasted contrasted with its market capitalization, capitalization, or total share price value, which is calculated by multiplying the outstanding shares by their current market price. You can also compare a company's market value to its book value on a per-share basis. Divide book value by the number of shares outstanding to get book value per share and compare the result result to the current current stock price to help determine determine if the company's company's stock is fairly valued. Most stocks trade above book value because investors believe that the company will grow and the value of its shares will, too. When book value per share is higher than the current share price, a company's stock may be undervalued and a bargain to investors. In case of our sensex as we can see that it is currently trading at a P/B ratio of 4.41 this shows shows the average average P/B ratio prevailing prevailing in the market. So any script trading below the P/B of 4.41 can said to be under under valued if we keep the the BSE SENSEX SENSEX as bench bench mark. But it would be advisable for an investor to also look at the sector leaders P/B ratio to know what is the common industry P/B and based on that he can decide about whether to invest in the company or not. As such such there is no guara guarante ntee e that low P/B P/B would able able to give better return but this stocks are considered to be undervalued so one can think that this companies are undervalued so chances of appreciation are very high in case of low P/B scrip. Such companies having low P/B ratio can be considered as value stock and one can thin about investing in those companies.



The P/E ratio as a guide to investment decisions Earnings per share alone mean absolutely nothing. In order to get a sense of how expensive or cheap a stock is, you have to look at earnings relative to the stock price and hence employ the P/E ratio. The P/E ratio takes the stock price and divides it by the last four quarters' worth of earnings. If AB ltd is currently trading at Rs. 20 a share with Rs. 4 of earnings per share (EPS), it would have a P/E of 5. Big increase in earnings is an important factor for share value appr apprec ecia iati tion on.. When When a stoc stock' k's s P-E P-E rati ratio o is high high,, the the majo majorit rity y of investors consider it as pricey or overvalued. Stocks with low P-E's are typically considered a good value. However, studies done and past market experience have proved that the higher the P/E, the better the stock.

First, one can obtain some idea of a reasonable price to pay for the stock by comparing its present P/E to its past levels of P/E ratio. One can learn what is a high and what is a low P/E for the individual company. One can compare the P/E ratio of the company with that of the market giving a relative measure. One can also use the average P/E ratio over time to help judge the reasonableness of the present levels of prices. All this suggests that as an investor one has to attempt to purchase a stock close to what is judged as a reasonable P/E ratio based on the comparisons made. One must also realize that we must pay a higher price for a quality company with quality management and attractive earnings potential.

In the case if we look at the benchmark of BSE sensex on 1 st of December it is trading at a P/E of 24.49. So if we just keep the benchmark P/E in mind then we can say that any stock which is trading bellow the P/E of 24.49 is available cheaply. But for an investor it is also advisable to look at the industry P/E as it is more important because just looking at the above position we can see



that SBI is trading at a very low P/E of around 8 but if you if you see that in banking sector that to public sector banks the normal industry P/E is 8 all most all banks are trading around 8 or bellow the P/E of 8.

So always it is advisable to look at what is the P/E of industry in which we want to invest to get the better idea, because if we take the example of IT industry there almost you will find companies arou around nd P/E of 30. 30. so if any any IT comp compan any y havi having ng of P/E P/E woul would d considered to be a cheap option for the investor to invest in to. So the investor should also look at the industry average P/E. The new investor can know about the industry P/E or any other companies P/E in any financial magazine or from the internet also if he does not not know know how how to calc calcul ulat ate e the the P/E P/E or is not not havi having ng the the data data available with them.

The formula for calculating the P/E ratio is

P/E = Current Market Price Earning Per Share



RANDOM PORTFOLIO Random portfolio consists of the scripts that are randomly selected by the investor by its own knowledge and preference of the stocks. Here there is no analysis is done of the script, they are selected on the the tips tips and and buts buts rece receiv ived ed by the the inve invest stor ors s from from the the exte extern rnal al sources. We are considering BETA factor to factor to design our Random our Random Portfolio. Portfolio.

Beta Factor “Bet “Beta” a” indi indica cate tes s the the prop propor ortio tion n of the the yiel yield d of a portfolio to the yield of the entire market (as indicated by some index). If there is an increase in the yield of the market, the yield of the individual portfolio may also go up. If the index goes up by 1.5% and the yield of your portfolio goes up by 0.9%, the beta is 0.9/1.5 i.e 0.6. in other words, beta indicates that for every 1 % increase in the market yield, the yield of the portfolio goes up by 0.6%. High beta shares do move higher than the market when the market rises and the yield of the fund declines more than the yield of the market when the market falls. In the Indian context a beta of 1.2% is considered very bullish. You can be indifferent to market swings if you know your stocks well. Or you can put your portfolio into neutral or bias for the upside if you're bullish or a little for the downside if you're bearish. One way to do that is to have a mix of stocks that have certain betas in your portfolio. When investors are bullish on the market, they like to have high beta stocks in their portfolios because if they're right, then their stoc tocks go up fas faster ter tha than the the market rket in gener enera al, and the their performance is better than the market. If investors are bearish on the market, then they use the low beta or negative beta stocks because their portfolios will go down less than the market and their performance will be better than the general market. And if they want to be neutral, they can then make sure that they have stocks with a



beta of 1 or develop a portfolio that has stocks with betas greater than 1 and less than 1 so that they have the whole portfolio with an average beta of 1. A beta for a stock is derived from historical data. This means it has no predictive value for the future, but it does show that if the stock continues to have the same price patterns relative to the market in general as it has in the past, you've got a way of knowing how your portfolio will perform in relation to the market. And with a portfolio with an average beta of 1, you can create your own index fund since you'll move more or less in i n tandem with the market.



Interpretation of Beta When B = 1 means that the scrip has same volatility as compared to Index. Suitable for moderate investor.

When B>1 means that scrip is more volatile as compared to market suitable for aggressive investors.

When B<1 then scrip is less volatile as compared to market and suitable for defensive investors.

Beta Beta of scri scrips ps play plays s vita vitall role role in scri scrip p sele select ctio ion n in Port Portfo foli lio o manag managem ement ent.. Portfo Po rtfolio lio can be create created d in many many ways ways as sector sector Portf olio wise, diversified in various sector, beta wise scrip portfolio.

SO BASED ON THIS BETA NOW WE WILL PREPARE THREE PORTFOLIO TO MATCH THE RISK TAKING CAPACITY OF AN INVESTOR

THAT IS PORTFOLIO

AGGRESSIVE

MODERATE

DEFENSIVE



DEFENSIVE PORTFOLIO

SR NO. SCRIPT

BETA PRICE ON 2-01-2006

Wi

1

ACC

0.72

530.45

9.68

2

CIPLA

0.78

440.00

10.48

3

DR REDDY

0.69

963.00

9.27

4

GRASIM

0.76

1375.3

10.22

5

HDFC BANK

0.76

713.45

10.22

6

I TC

0.81

140.10

10.89

7

RANBUXY

0.69

444.35

9.27

8

HERO HONDA

0.8

846.10

10.75

9

HDFC

0.82

1191.3

11.02

10

GLAXO

0.61

1111.6

8.20

Total Portfolio Investment

Total Portfolio Beta

= 10,00,000 Rs.

= Wi * BETA

=6.97 +8.18+6.40+7.76+7.76 +8.82+6.40+8.60+9.04+5.00 = 74.93 ~ 75



RETURN ON INDIVIDUAL SCRIPTS 1ST MONTH SR NO. SCRIPT 1 2 3 4 5 6 7 8 9 10

BETA 2-01-2006

ACC CIPLA DR REDDY GRASIM HDFC BANK ITC RANBUXY HERO HONDA HDFC GLAXO

0.72 0.78 0.69 0.76 0.76 0.81 0.69 0.80 0.82 0.61

530.45 440.00 963.00 1375.30 713.45 140.10 444.35 846.10 1191.30 1111.60

31-0106 574.20 442.25 1121.25 1454.25 762.45 154.80 399.40 857.20 1339.70 1282.80

RETURN IN % 8.25 0.51 16.43 5.74 6.87 10.49 -10.12 1.31 12.46 15.40

2ND MONTH SR NO. SCRIPT 1 2 3 4 5 6 7 8 9 10

BETA 2-01-06

ACC CIPLA DR REDDY GRASIM HDFC BANK ITC RANBUXY HERO HONDA HDFC GLAXO

0.72 0.78 0.69 0.76 0.76 0.81 0.69 0.80 0.82 0.61

530.45 440.00 963.00 1375.30 713.45 140.10 444.35 846.10 1191.30 1111.60

28-02-06 626.30 552.15 1306.10 1742.60 737.15 172.45 429.50 889.30 1365.65 1315.55


RETURN IN % 18.07 25.49 35.63 26.71 3.32 23.09 -3.34 5.11 14.64 18.35


RETURN IN DEFENSIVE PORT FOLIO

TOTAL PORTFOLIO INVESTMENT

= 10,00,000

VALUE OF PORTFOLIO AS ON 28-02-2006

= 1166628.41

TOTAL RETURN ON PORTFOLIO = 1166628.41 - 1000000 =

166628.41

TOTAL RETURN RETURN IN % TERM = 16.66 %



MODRATE PORTFOLIO

SR NO. SCRIPT


Wi

1

BHARTI

0.99

340.05

10.73

2

GUJARAT AMBUJA

0.86

79.30

9.32

3

BAJAJ AUTO

0.85

450.05

9.21

4

HLL

0.88

195.10

9.53

5

HINDALCO

1.00

146.20

10.83

6

LT

0.86

1825.65

9.32

7

MTNL

0.89

142.15

9.64

8

ZEE

0.90

157.90

9.75

1.00

1389.90

10.83

1.00

472.00

10.83

BHEL 9 10

PNB



= 10,00,000/- Rs.

= Wi * BETA = 10.62 + 8.01+7.83+8.39+10.83+ 8.01+8.58+8.78+10.83+10.83

= 92.72 ~ 93



RETURN ON INDIVIDUAL SCRIPTS 1ST MONTH SR NO. SCRIPT 1 2 3 4 5 6 7 8 9 10

BETA 2-01-2006

BHARTI GUJARAT AMBUJA BAJAJ AUTO HLL HINDALCO LT MTNL ZEE BHEL PNB

ND

2

SR NO. SCRIPT 1 2 3 4 5 6 7 8 9 10

BHARTI GUJARAT AMBUJA BAJAJ AUTO HLL HINDALCO LT MTNL ZEE BHEL PNB

0.99 0.86 0.85 0.88 1.00 0.86 0.89 0.90 1.00 1.00

340.05 79.30 450.05 195.10 146.20 1825.65 142.15 157.90 1389.90 472.00

31-0106 357.25 88.55 513.25 195.25 164.80 2172.10 141.70 164.70 1795.60 465.35

RETURN IN % 5.06% 11.66% 14.04% 0.08% 12.72% 18.98% -0.32% 4.31% 29.19% -1.41%

MONTH

BETA

2-012006

0.99 0.86 0.85 0.88 1.00 0.86 0.89 0.90 1.00 1.00

340.05 79.30 450.05 195.10 146.20 1825.65 142.15 157.90 1389.90 472.00


28-02RETURN 06 IN % 361.05 6.18% 88.30 11.35% 550.10 22.23% 243.70 24.91% 153.35 4.89% 2396.95 31.29% 142.65 0.35% 196.60 24.51% 2027.00 45.84% 442.10 -6.33%


RETURN IN MODRATE PORT FOLIO


= 10,00,000/- Rs..


= 1162912.70/1162912.70/- Rs.

TOTAL RETURN ON PORTFOLIO = 1162912.70 Rs. - 1000000 Rs. = 162912.70 Rs.




AGGRESSIVE PORTFOLIO

SR NO. SCRIPT


Wi

1

ICICI BANK LTD

1.09

597.00

9.64

2

INFOSYS

1.07

2979.35

9.46

3

ONGC

1.02

1191.65

9.02

4

RELIANCE

1.05

441.05

9.28

5

SATYAM

1.23

731.55

10.88

6

SBIN

1.09

904.90

9.64

7

TATA POWER

1.11

434.20

9.81

8

TATA MOTER

1.19

639.55

10.52

9

TATA STEEL

1.13

379.00

9.99

10

WIPRO

1.33

461.70

11.76



= 10,00,000/- Rs.

= Wi * BETA =10.50+10.12+9.20+9.75+13.38+

10.50+10.89+12.52+11.29+15.64 = 113.80 ~ 114



RETURN ON INDIVIDUAL SCRIPTS 1ST MONTH

SR NO. SCRIPT 1 2 3 4 5 6 7 8 9 10

31-0106

BETA 2-01-2006

ICICI BANK LTD INFOSYS ONGC RELIANCE SATYAM SBIN TATA POWER TATA MOTER TATA STEEL WIPRO

1.09 1.07 1.02 1.05 1.23 1.09 1.11 1.19 1.13 1.33

597.00 2979.35 1191.65 441.05 731.55 904.90 434.20 639.55 379.00 461.70

609.25 2880.30 1237.30 480.15 746.75 886.35 471.80 708.45 404.45 529.70

RETURN IN % 2.05 -3.32 3.83 8.87 2.08 -2.05 8.66 10.77 6.72 14.73

2ND MONTH

SR NO. SCRIPT 1 2 3 4 5 6 7 8 9 10

BETA 2-01-2006

ICICI BANK LTD INFOSYS ONGC RELIANCE SATYAM SBIN TATA POWER TATA MOTER TATA STEEL WIPRO

1.09 1.07 1.02 1.05 1.23 1.09 1.11 1.19 1.13 1.33

597.00 2979.35 1191.65 441.05 731.55 904.90 434.20 639.55 379.00 461.70

28-0206

RETURN IN % 615.25 3.06 2828.95 -5.05 1136.40 -4.64 500.55 13.49 769.65 5.21 877.50 -3.03 511.20 17.73 816.20 27.62 431.00 13.72 520.45 12.72



RETURN IN AGGRESSIVE PORT FOLIO


= 10,00,000/- Rs.


=10,84,397.28/- Rs.

TOTAL RETURN ON PORTFOLIO = 1084397.28 Rs - 1000000Rs 1000000Rs = 84397.28 Rs.




Interpretation of Random Portfolio

•

As in the theoretical way we have scene that the Beta shows the movement or change in the price of script vis-à-vis index. And a Beta >1 is more riskier and hence should give more return as compared to the script having Beta < 1. as the person is taking more risk then he should get more return. But But in our our case case we have have scen scene e that that Mode Modera rate te port portfo foli lio o having Beta < 1 has given more return as compared to Aggressive Portfolio.

•

So we can easily say that the investment in equity market is subj subjec ectt to mark market et risk risk and and any any one one havi having ng long long-t -ter erm m investment horizon should only enter into equity market. This analysis that has been carried out was only for a period of two month there are chances that in the long run aggressive portfolio would outperform the other portfolio



DERIVATIVES Derivatives is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex or commodity or any other asset. For example, wheat farmer may wish to sell their harvest at a future date to elim elimin inat ate e the the risk risk of a chan change ge in pric prices es by the the date date.. Such Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the ‘underlying”.

In the Indian Indian contex contextt the Securit Securities ies Contra Contracts cts (Regul (Regulati ation) on) Act. Act. 1956 (SC(R)A) defines “derivative” to include –

1. A secur ecurit ity y deri derive ved d from from a debt debts s inst instru rume ment nt,, shar share, e, loan loan whether secured or unsecured, risk instrument or contract for differences or any other form of security.

2. A contrac contract, t, which which derives derives its value value from from the prices, prices, or index index of price, of underlying securities.

The derivatives are securities under the (SC(R)A) and hence the tradin trading g of deriva derivativ tives es is govern governed ed by the regula regulator tory y framew framework ork under the (SC(R)A).



TYPES OF DERIV DER IVA ATIVES

The most commonly used types of derivatives are as follows:

o

Forw Fo rwar ards ds : A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price.

o

Futu Fu ture res s: A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future future at a certai certain n price. price. Future Future contra contracts cts are specia speciall types of forward contract in the sense that the former are standardized exchange-traded contracts.

o

Opti Op tion ons s: Options are of two types – call and put. Calls give the buyer the right but not the obligation to buy a gives quantity of the underlying asset, at a given price on or before a given future date. Plus give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.



INTRODUCTION TO FUTURE Future markets were designed to solve the problems that exist in forward markets. A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain certain price. price. But unlike forward forward contracts contracts,, the future contracts contracts are standa standardi rdized zed and exchan exchange ge traded traded.. To facilit facilitate ate liquid liquidity ity in the future contracts, the exchange specifies certain standard features of the contract. It is a standardized contract with standard underlying inst instrum rumen ent, t, a stan standa dard rd quan quanti tity ty and and qual quality ity of the the unde underl rlyi ying ng inst instru rum ment ent that that can can be deli delive vere red, d, (or (or whic which h can can be used used for for refe refere renc nce e purpo purpose se in settl settlem emen ent) t) and and a stan standa dard rd time time of such such settle settlemen ment. t. A future future contra contract ct may be offset offset prior prior to maturi maturity ty by entering entering into an equal and opposite opposite transaction. transaction. More than 99% of future transactions ate offset this way.

The standardized items in a future contract are: •

Quantity of the underlying.

•

Quality of the underlying.

•

The date and the month of delivery.

•

The units of price quotation and minimum price change.

•

Location of settlement.

FEATURES OF A FUTURE CONTRACT •

Future contracts are organized / standardized contracts, which are traded on the exchanges.

•

These contracts, being standardized and traded on the exchanges are very liquid in nature.

•

In futures market, clearing corporation/ house provides the settlement guarantee.



DISTINCTION BETWEEN FUTURE AND FORWARD CONTRACTS:

Future Future contrac contracts ts are often often confu confused sed with with future future contra contracts cts.. The confus confusion ion is primar primarily ily becaus because e both both serve serve essent essential ially ly the same same economic functions of allocating risk in the presence of future price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity.

Features

Forward Contract Future Contract

Operational

Not

traded

on Traded on exchange

Mechanism

exchange

Contract

Differs from trade to Contracts

Specifications

trade.

are

standardized contracts.

Counterparty Risk

Exists

Exists, but assumed by

Clearing

Corporation/ house. Liquidation Profile

Poor

Liquidity

cont contra ract cts s

as Very high Liquidity as

are are tailo tailor r contracts

maid contracts.

are

standardized contracts.

Price Discovery

Poor; as as ma markets ar are Better; as fragmented fragmented.

markets are brought to the common platform.

FUTURE TERMINOLOGY



•

Spot Price: The price at which an asset trades in the spot market.

•

Future Price: The price at which the future contracts trades in the market.

•

Contract Cycle: The period over which a contract trades. The index futures contracts on the NSE have one-month, two-months and three-months expiry cycle, which expire on the last Thursday of the month. Thus a January expiration contract would expire on the last Thursday of January and a February expiration contract would cease trading on the last Thur Thursd sday ay of Febr Februa uary ry.. On the the Frid Friday ay foll follow owing ing the the last last Thursday, a new contract having a three-month expiry would be introduced for trading.

•

Expiry Date: It is the date specified in the future contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist.

•

Contract Size: The amount of asset that has to be delivered under one contract. For instance, the contract size on NSE’s futures market is 200 Nifties.

•

Basis: Basis is usually defined as the spot price minus the future price. There will be a different basis for each delivery month for each contract. In a normal market, basis will be negative. This reflects that futures prices normally exceed spot prices.

•

Cost of Carry: The relationship between futures prices and spot prices can be summarized in terms of what is known as



the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset.

•

Initial Margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin.

•

Marking-to-Market: In the future market, at the end of each trading day, the margin account is adjusted to reflect the investor’s gain or loss depending upon the futures closing price. This is called marking-to-market.

•

Maintenance Margin: Margin: This is somewhat lower than the initial margin. This is set to ensure that that the balance in the margin acco accoun untt neve neverr beco become mes s nega negati tive ve.. If the the bala balanc nce e in the the margin account falls below the maintenance margin, investor receives a margin call and is expected to top up the margin account to the initial level before trading commences on the next day.



DIFFERENCE BETWEEN FUTURES AND OPTIONS

At a practical level, the option buyer faces an interesting situation. He pays for the option in full at the time it is purchased. After this, he only has an upside. There is no possibility of the options position generating any further losses to him (other than the funds already paid for option). This is different from futures, which is free to enter into, but can generate very large losses. This characteristic makes option options s attrac attractiv tive e to many many occasi occasiona onall marke markett partic participa ipants nts,, who cannot put in the time to closely monitor their future options.

Buying put option means that you are buying insurance. To buy a put option on Nifty is to buy insurance which reimburses the full extent extent to which Nifty drops below the strike price of the put option. option. This is attractive to many people, and to mutual funds creating “guaranteed return products”. The Nifty index fund industry will find it very useful to make a bundle of a Nifty index fund and a Nifty put option to create a new kind of a Nifty index fund, which gives the investor protection against extreme drops in Nifty.

Selling put option is selling insurance, so anyone who feels like earning revenues by selling insurance can set himself up to do so on the index option market.

More generally, generally, option option offer “nonlinear “nonlinear payoffs” payoffs” whereas whereas futures futures only have “linear payoffs”. By combining futures and options, a wide variety of innovative and useful payoff structures can be created.



PAYOFF FOR DERIVATIVES CONTRACT Payoff is likely profit/loss that would accrue to a market participant with change in the price of the underlying asset. This is generally depicted in the form of payoff diagrams, which show the price of the underlying asset on the X-axis and the profit/losses on the Y-axis. Payoff for Futures: Future contracts have linear payoffs. It means that the losses as well as profits for the buyer and the seller of a future contract are unlimi unlimited ted.. These These linear linear payoff payoffs s are fascin fascinati ating ng as they they can be combin combined ed with with option options s and the underl underlyin ying g to genera generate te variou various s complex payoffs.

•

Payoff for buyer for futures: Long Futures

The payoff for a person who buys a futures contract is similar to the payoff for a person who holds an asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case of a speculator who buys a two-month Nifty index futures contract when the Nifty stands at 1220. The underlying asset in this case is the Nifty portfolio. When the index moves down it starts making losses. Profit

1220 0 Nifty Loss



•

Payoff for seller of futures: Short futures The payoff for a person who sells a futures contracts is similar to the payoff for a person who shorts an asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case of a speculator who sells a two-month Nifty index futures contract when the Nifty stands at 1220. The underlying asset in this case is the Nifty portfolio. When the index moves down, the short future position starts making profits, and when the index moves up, it starts making losses.

Profit

1220 0

Nifty

Loss



USING INDEX FUTURES There is always risk involved when we trade in a stock market. The risk cannot be eradicated fully but can be minimized up to some exte extent nt.. Follo Followi wing ng are are the the type types s of risk risks s that that can can be mini minimi mize zed d through futures: •

Basic objective of introduction of futures is to manage the price risk.

•

Index futures are used to manage the systemic risk, vested in the investment in securities.

Basically there are eight basic modes of trading on the index futures market;

Hedging H1 Long stock, short Nifty futures H2 Short stock, long nifty futures H3 Have portfolio, short Nifty futures H4 Have funds, long Nifty futures

Hedge Terminology:

Long hedge- When you hedge by going long in futures market. •

Short hedge - When you hedge by going short in futures market.

•

Cross hedge - When a futures contract is not available on an asset, you hedge your position in cash market on this asset by going long or short on the futures for another asset whos whose e pric prices es are are clos closel ely y asso associ ciat ated ed with with that that of your your underlying.



Hedge Hedge Contra Contract ct Month Month-- Matu Maturit rity y mont month h of the the cont contra ract ct through which hedge is accomplished.

•

Hedge Ratio - Number of future contracts required to hedge the position.

Speculation Speculation is all about taking position in the futures market without having the underlying. Speculators operate in the market with motive to make money. They take: 

Naked positions - Position in any future contract.



Sprea Spread d posi positio tions ns - Oppo Opposi site te posi positio tions ns in two two futu future re contracts. This is a conservative speculative strategy.

Speculators bring liquidity to the system, provide insurance to the hedgers and facilitate the price discovery in the market. 

S1 Bullish index, long Nifty futures



S2 Bearish index, short Nifty futures



HEDGING

H1: long stock, short Nifty futures A pers person on who who feel feels s that that the the stoc stocks ks will will be intr intrin insi sica cally lly unde under r evaluated or the profits and the quality of the company will make it more worth as compared to the market will always like to take a long position on the cash market. While doing so he will have to face the following kinds of risks:

1. His under understa standi nding ng can be wrong, wrong, and the compa company ny is really really not worth more than the market prices. 2. The entire entire marke markett moves moves against against him and genera generate te losses losses even though the underlying idea was correct.

The second outcome happens all time. A person may buy Reliance at Rs.190 thinking hat it would announce good results and the stock price would rise. A few days later, Nifty drops, so he makes losses, even if his understanding of Reliance was correct.

There is a peculiar problem here. Every buy position on a stock is simultaneously a buy position on Nifty. This is because a, LONG RELIAN RELIANCE CE positio position n genera generally lly gains gains if Nifty Nifty rises rises and genera generally lly losses if Nifty drops. In this sense, a LONG RELIANCE position is not a focused play on the valuation of Reliance. It carries a LONG NIFTY NIFTY positio position n along along with with it, as incide incidenta ntall bagga baggage. ge. The stock stock picker may be thinking that he wants to be LONG RELIANCE but a long long posi positi tion on on Relia Relianc nce e effe effect ctiv ivel ely y forc forces es him him to be LONG LONG RELIANCE + LONG NIFTY.



If we think think that that WIPRO WIPRO is under under evalu evaluate ated, d, the position position LONG WIPRO is not purely about WIPRO; it is also partly about Nifty. Every trader who has a LONG WIPRO position is forced to be an index speculator, even though he may not have no interest in the index.



Those who are bullish about the index should just buy Nifty futures; the need not trade individual stocks.



Thos Those e who who are are bull bullis ish h abou aboutt WIPR WIPRO O do wron wrong g by carrying along a long position on Nifty as well.

There is a simple way out. Every time we adopt a long position on a stock, we should sell some amount of Nifty futures. This will help in offs offset etti ting ng the the hidd hidden en Nifty Nifty expo exposu sure re that that is ever every y long long-s -sto tock ck position. Once this is done, we will have a position which will be purely purely about the perfor performan mance ce of the stock. stock. The position position LONG LONG WIPRO + SHORT NIFTY is a pure play on the value of WIPRO, without any risk from fluctuation of the market index. When this will be done the stockpicker has “hedged away” his index exposure. The basic point point of this this hedgin hedging g strate strategy gy is that that the stockp stockpick icker er proceeds with his core skill, i.e. picking stocks, at the cost of lower risk.

NOTE: hedging does not remove losses. The best that can be achieved by using hedging is the removal of unwanted exposure, i.e. unnecessary risk. The hedged position will make less profit than the un-hedged position, half the time. One should not enter into a hedging strategy hoping profit for sure; all that can come out of hedging is reduced risk.



H2: Short stock, long Nifty futures If a person feels that the stock is over evaluated or the profits and the quality of the company made it worth a lot less as compared to what the market thinks, he can take a short position on the cash market. This will give rise to two types of risks:

1. His under understa standi nding ng can be wrong, wrong, and the compa company ny is really really worth more than the market price. 2. The entire entire market market moves moves against against him and genera generates tes losses losses even though the underlying idea was correct.

The second outcome happens all time. A person may sell Reliance at Rs.190 thinking that Reliance would announce poor result and the stock price would fall. And if after few days if the Nifty rises, he will incur loss, even if the intrinsic understanding of Reliance was correct.

There is a peculiar problem here. Every sell position on a stock is simultaneously a sell position on Nifty. This is because a SHORT RELIANCE position generally gains if Nifty falls and generally loses if Nifty rises. In this sense, a SHORT RELIANCE position is not a focuse focused d play play on the valuation valuation of Relian Reliance. ce. It carrie carries s a SHORT SHORT NIFTY position along with it, as incidental baggage. The stockpicker may be thinking he wants to be SHORT RELIANCE, but a short position on Reliance on the market effectively forces him to be SHORT RELIANCE + SHORT NIFTY.



Even if we think that WIPRO is overvalued, the position SHORT WIPRO is not purely about WIPRO; it is also about the Nifty. Every trader who has a SHORT WIPRO position is forced to be an index speculator, even though he may not have any interest i nterest in the index.



Those who are bearish about the index should just sell Nifty futures; the need not trade individual stocks.



Thos Those e who who are are bear bearis ish h abou aboutt WIPR WIPRO O do wron wrong g by carrying along a short position on Nifty as well.

There is a simple way out. Every time we adopt a short position on a stock, we should buy some amount of Nifty futures. This will help in offset offsettin ting g the hidde hidden n Nifty Nifty exposu exposure re that that is every every short short-st -stock ock position. Once this is done, we will have a position, which will be purely about the performance of the stock. The position SHORT WIPRO + LONG NIFTY is a pure play on the value of WIPRO, without any risk from fluctuation of the market index. When this will be done the stockpicker has “hedged away” his index exposure. The basic point point of this this hedgin hedging g strate strategy gy is that that the stockp stockpick icker er proceeds with his core skill, i.e. picking stocks, at the cost of lower risk.



H3: Have Portfolio, short Nifty futures Some of us might have experienced experienced the feeling feeling of owing an equity equity portfolio, and then one day, we become uncomfortable about the overall stock market. Sometimes we have a view that the stock prices will fall in the near future. At other times, we may see that the market is in for a few days or weeks of massive volatility, and we do not have an appetite for this kind of volatility. The best example of this volatility is the union budget. Market positions become volatile for for one one week week befo before re and and two two week weeks s afte afterr the the budg budget et.. Many Many investors want to eradicate this three weeks volatility.

This becomes a peculiar problem if we are thinking of selling the shar shares es in the the near near futu future re,, for for exam exampl ple, e, in orde orderr to fina financ nce e a purchase a house. This planning can go wrong if by the time we sell shares, Nifty has dropped sharply. Ther There e are are two two main main alte altern rnat ativ ives es,, when when one one face faces s this this type type of problem:

1. Sell Sell shar shares es imme immedi diat atel ely. y. This This sent sentim imen entt gene genera rate tes s “pan “panic ic selling” which is rarely optimal for the investor. 2. Do nothi nothing ng,, i.e. i.e. suffer suffer the pain pain of vola volati tilit lity. y. This This lead leads s to politi political cal pressu pressure re for govern governme ment nt to “do someth something ing”” when when stock prices fall.

Here in this case, with the index futures market, a third and a remarkable alternative becomes available:

3. Remo Remove ve your your expo exposu sure re to inde index x fluc fluctu tuat atio ions ns temp tempor orar aril ily y using index futures. This will allow rapid response to market conditions, without “panic selling” of shares. It will allow an investor to be in control of his risk, instead of doing nothing and suffering the risk.



The The idea idea here here is that that ever every y port portfo folio lio cont contai ains ns a hidd hidden en inde index x exposure. This statement is true for all portfolios, whether a portfolio is composed of index stock or not. In the case of portfolios, most of the portfolio risk is accounted for by index fluctuations. Hence a position LONG PORTFOLIO + SHORT NIFTY can often become one-tenth as risky as the LONG PORTFOLIO position.

Is suppose we have a portfolio of Rs.1 billion, which is having a beta of 1.25. Then a complete hedge is obtained by selling Rs.1.25 million of Nifty futures.



H4: Have funds, buy Nifty futures

A person may be in a situation where he is having funds, which needed to be invested in equity, or he may be expecting to get funds in future to be invested in equity. The following can be the occurrences in the above conditions:



A closed-end fund, which just finished its initial public offering, has cash, which is not yet invested.



If a person is planning to sell some of his shares. The land deal is slow and will take time to complete. It takes several weeks from the date that it becomes sure that the funds will come to the date that the funds are actually are in hands.



An open-ended fund has just sold fresh units and has received funds.

To get oneself invested in equity sounds quite easy but it involves the following problems:

1. A pers person on may need need time time to resear research ch stock stocks, s, and care carefu fully lly pick stocks that are expected to do well. This process of rese resear arch ch take takes s time. time. For For that that time time the the inve invest stor or is part partly ly invested in cash and partly invested in stocks. During this time, he is exposed to the risk of missing out if the overall market index goes up. 2. A person person may have have made made up his mind mind on what what portfolio portfolio he seeks to buy, but going to the market and placing the market order order would would gener generate ate large large ‘impac ‘impactt cost’. cost’. The execut execution ion would be improved substantially if he could instead place a lim limit orde orders rs and and grad gradua uall lly y accu accumu mula late te the the port portfo foli lio o at



favorable prices. This takes time, and during this time, he is exposed to the risk of missing out if the Nifty goes up. 3. In some some cases, cases, such such as land land sale above, above, the the person person may not not simply have cash to immediately buy the shares, hence he is forces to wait even if he feels that Nifty is unusually cheap. He is exposed to the risk of missing out if Nifty ri ses.

The three alternatives that are available with an investor are as follows: 

The investor would obtain the desired equity exposure by buying index futures, immediately. A person who expects to obtain Rs.5 million by selling land would immediately enter into a position LONG NIFTY worth Rs.5 million. Simila Similarly rly a closeclose-end end fund, fund, which which has just just finish finished ed its init initia iall publ public ic offe offeri ring ng and and has has cash cash,, whic which h is not not yet yet invested, can immediately enter into a LONG NIFTY to the extent it wants to be invested into equity. The index futures market is likely to be more liquid than individual stocks so it is possible to take extremely large position at a low impact cost.



Later, the investor / close-end fund can gradually acquire stocks stocks.. As and when shares shares are obtain obtained, ed, one one would would scale down the LONG NIFTY position correspondingly. No matte matterr how slowly slowly the stocks stocks are purchas purchased, ed, this this strategy would fully capture a rise in Nifty, so there is no risk of missing out on a broad rise in the stock market while this process is taking place. Hence, this strategy allows the investor to take more care and spend more time time in choo choosi sing ng stoc stocks ks and and plac placin ing g aggr aggres essi sive ve limi limitt orders.



SPECULATION

S1: Bullish index, long Nifty futures We may sometimes think that the market index is going to rise and we can make profits by adopting a position on the index. After a good budget, or good corporate results, or the onset of the stable government, many people may feel that the index would go up. Now a days people have the following two strategies to get benefit from an upward movement in the index:

1. Buy Buy selec selecte ted d liqui liquid d secu securi riti ties es,, whic which h move move with with the the inde index, x, and sell them at a later date. 2. Buy the the entire entire index index portfolio portfolio and and then then sell itit at a later later date. date.

The first alternative is widely used. A lot of the trading volume on the liquid stock is based on using these liquid stocks as an index proxy. However, these positions run the risk of making losses owing to company. The second alternative is cumbersome and expensive in terms of the transaction cost involved in it.

Taking a position on the index is effortless using the index futures market. By using the index futures an investor can “buy “ or “sell” the entire index by trading on one singe security. Once a person is LONG NIFTY using the futures market, he gains if the index rises and losses if the index falls.



S2: Bearish index, short Nifty futures

We may sometimes think that the market is going to fall and we can make profit by adopting a position on the index. After a bad budget, or bad corporate results, or the onset of a coalition government, many people feel that the index would go down. So to get the benefit from the downward movement in the index we are having the following two choices:

1. Sell Sell sele select cted ed liqu liquid id secu securit ritie ies, s, whic which h move move with with the the inde index, x, and buy them at a later date. 2. Sell the the entire entire index index portfolio portfolio and and then then buy it at a later later date. date.

The first alternative is widely used. A lot of the trading volume on liquid stock is based on using these positions run the risk of making losses owing to company. The The seco second nd alte altern rnat ativ ive e is hard hard to impl implem emen ent. t. This This strat strateg egy y is cumbersome and also expensive in terms of the transaction cost involved.

Taking a position on the index is effortless using the index futures market. By using the index futures an investor can “buy “ or “sell” the entire index by trading on one singe security. Once a person is SHORT NIFTY using the futures market, he gains if the index falls and losses if the index rises.

Now after learning about the futures what we can do is that as we are having our three portfolios we would see how we could hedge our position using the futures contract. As we know that Hedging



does not always make money. The best way that can be achieved usin using g

hedgi edging ng is the the

rem remova oval

of unwant wante ed

exp exposu osure, re,

i.e. i.e.

unnecessary risk. The hedged position will make less profit than the unhedged position. One should not enter into a hedging strategy hoping to make excess profits for sure; all that can come out of hedging is reduced risk. So one should go for hedging only if the movement of market makes him uncomfortable.

Here we are having a portfolio of script so to hedge our position we would have to know what is the portfolio BETA The Portfolio BETA = Wi * Beta

Where, Wi = the weightage of scrip in the portfolio Beta =

% Change in Scrip Return

% Change in Market Return

The BETA of a scrip can be easily found out from the website of National Stock Exchange and also from the website of Bombay stock exchange

Here for the purpose of hedging we will have to short nifty futures as we are having the portfolio and the future contracts may not be available for all the scrip. But as we have seen earlier that all scrip have hidden exposure to nifty. So we will short the nifty future contract for the purpose of hedging our portfolio. The current nifty lot size is 200. Now for the purpose of hedging the portfolio we will have to decide about the number of lots of Nifty that the investor will have to sell in order to hedge his position. To find out that figure we will have to do the following calculations: -



DEFENSIVE PORTFOLIO Amount of Nifty to be short = Investment * Portfolio Beta The current Nifty level = 1000000 * 0.75 2813.7 = 266.55

As the nifty that are required to be short comes out to be 266.55 but as we know that the nifty is available in the lot size of 300 so this will give our portfolio a partial hedge as we are unable to short the exact nifty figure that we have calculated. During this two month the nifty has moved to 3064.4 this shows that nifty has increased by 250.70 in % terms nifty has gone up by 8.91 %

Now as we have short position of one nifty contract we would require to pay the buyer of contract 250.70*300 =75,210Rs.

If we take in to account the profit that we now earn is 1,66,628 – 75210= 91418/- Rs.

So we can easily see that the hedging as reduced our profit we were earning 1,66,628 with hedging it has reduced to 75210. talking in % terms we can say that we were earning 16.66% but due to hedging the profit comes down to 9.14%

PROFIT ( Rs. )

PROFIT ( % )

WITHOUT HEDGING

1,66,628

16.66 %

WITH HEDGING

91,418

9.14 %



MODERATE PORTFOLIO

Amount of Nifty to be short = Investment * Portfolio Portfolio Beta The current Nifty level = 162612.70* 0.93 2813.7 = 53.74 ~ 54

As the nifty that are required to be short comes out to be 54 but as we know that the nifty is available in the lot size of 100 so this will give our portfolio a partial hedge as we are unable to short the exact nifty figure that we have calculated. During 2 month the nifty has moved moved to 3064.4 this shows that nifty has increased by 250.70 in % terms nifty has gone up by 8.91 %

Now as we have short position of one nifty contract we would require to pay the buyer of contract 250.70*100 =25,070 Rs.

If we take in to account the profit that we now earn Is 1,40,350– 25,070= 1,15,280Rs.

So we can easily see that the hedging as reduced our profit we were earning 1,40,350 Rs. with hedging it has reduced to 25070. talking in % terms we can say that we were earning 16.29% but due to hedging the profit comes down to 11.53%

PROFIT ( Rs. )

PROFIT ( % )

WITHOUT HEDGING

1,40,350

16.29 %

WITH HEDGING

1,15,280

11.53 %



AGGRESSIVE PORTFOLIO Amount of Nifty to be short = Investment * Portfolio Portfolio Beta The current Nifty level = 10,00,000 *1.14 2813.7 = 405.16

As the nifty that are required to be short comes out to be 405.16 but as we know that the nifty is available in the lot size of 400 so this will give our portfolio a partial hedge as we are unable to short the exact nifty figure that we have calculated. During this two month the nifty has moved to 3064.4 this shows that nifty has increased by 250.70 in % terms nifty has gone up by 8.91 % Now as we have short position of one nifty contract we would require to pay the buyer of contract 250.70*400 =1,00,280Rs.

If we take in to account the profit that we now earn is 84,397 – 1,00,280

= ( 15,883) Rs.

So we can easily see that the hedging as reduced our profit we were earning 84,397with 84,397with hedging it has reduced to (15,883). talking in % terms we can say that we were earning 8.44% but due to hedging the profit comes down to ( 1.58 )%

PROFIT ( Rs. )

PROFIT ( % )

WITHOUT HEDGING

84,397

8.44 %

WITH HEDGING

( 15,883)

(1.58 ) %



SECTOR PORTFOLIO Sector Sector speci specific fic portfo portfolio lio includ includes es securit securities ies of those those compa companie nies s which are in the same business. Sector portfolios are very useful when there is a particular sector which is doing very good and has a bright future a head. Sector portfolio has the securities of those companies that engage in same kind of business.

e.g. e.g. In late 1990’s sector that was providing the highest return was information technology. Investors who have invested their money in these securities had earned very high return.

We are considering Telecom Sector as Sector as our Sector our Sector Portfolio.



Industry analysis Telecom sector Obje Objecti ctive ves s and and targ targets ets of the the New New Tele Telecom com Poli Policy cy 1999 The objectives of the NTP 1999 are as under: •

Access to telecommunications is of utmost importance for achievement of t

•

he coun country try's 's soci social al and and econ econom omic ic goal goals. s. Avai Availa labi bili lity ty of affordable and effective communications for the citizens is at the core of the vision and goal of the telecom policy.

•

Stri Strive ve to prov provid ide e a bala balanc nce e betw betwee een n the the prov provis isio ion n of universal service to all uncovered areas, including the rural areas, and the provision of high-level services capable of meeting the needs of the country's economy;

•

Encourage Encourage developm development ent of telecomm telecommunica unication tion facilities facilities in remote, hilly and tribal areas of the country;

•

Cre Create ate

a

modern dern

and

effi effici cien entt

tele telec comm ommunic unica ation tions s

infras infrastru tructu cture re taking taking into into accoun accountt the conve converge rgence nce of IT, media, telecom and consumer electronics and thereby propel India into becoming an IT superpower; •

Conv Conver ertt PCO' PCO's, s, wher wherev ever er just justif ifie ied, d, into into Publ Public ic Tele Telein info fo centre centres s havin having g multim multimedi edia a capabi capabilit lity y like like ISDN ISDN servic services, es, remo remote te data databa base se acce access ss,,

gove govern rnme ment nt and and comm commun unit ity y

information systems etc. •

Transform in a time bound manner, the telecommunications sector to a greater competitive environment in both urban and and rura rurall area areas s prov provid idin ing g equa equall oppo opportu rtunit nitie ies s and and leve levell playing field for all players;



Strengthen research and development efforts in the country and provide an impetus to build world-class manufacturing capabilities.

•

Achieve

efficie icien ncy

and

tran ransparency

in

spectrum rum

management. •

Protect defence and security interests of the country.

Service Provider 1 BSNL All India 2 MTNL 3 Bharti Telesonic Ltd Tamil Nadu,

Area of Operation (Except Delhi & Mumbai) Delhi & Mumbai AP, AP, MP, MP, Delhi Delhi,, Hary Haryan ana, a, Chennai, Karnataka,

Kerala, Gujarat, Punjab, Maharashtra, Mumbai, UP(E), including Uttaranchal, West Bengal and Kolkata 4 Tata Teleservices (Maharashtra) Ltd 5 Tata Teleservices Ltd

Maharastra, Mumbai AP, TN, Chennai, Karnataka, Gujarat,

Delhi, Bihar, Orissa, Rajasthan, Punjab, Haryana, Himachal Pradesh, Kerala, Madhya Pradesh, U.P. (E), U.P (W) including Uttaranchal, West Bengal 6 HFCL Infotel Ltd 7 Shyam Telelink Ltd 8 Reliance Infocomm.Ltd. Gujarat, Haryana, HP,

and Kolkata Punjab Rajasthan AP, Bihar,

Delhi,

Karnataka, Kerala, MP, Maharashtra, Mumbai, Orissa, Punjab, Rajasthan, Tamil Nadu, Chennai, UP(E), West Bengal, Kolkata



Subscribers Base The Mobile Mobile (GSM (GSM and CDMA) Industry Industry has reached reached the 65.07 million subscribers mark (GSM 50.86 million & CDMA 14.21 million) for the quarter ending 30th September 2005.

Addition in Subscribers Base

The subsc subscribe riber’s r’s base base stood stood at 65.07 65.07 millio million n as agains againstt 57.37 57.37 mill millio ion n for for the the quar quarte terr endin ending g 30.9 30.9.2 .200 005. 5. Arou Around nd 7.70 7.70 mill millio ion n subscribers were added in this quarter.

Growth Rate

The growth rate for this quarter is 13.42% (13.16% in GSM and 14.37% in CDMA) as against 9.86% (9.44% in GSM and 12.43% in CDMA) for the quarter ending June 2005. M/s Bharti remains the largest mobile operator followed by M/s Reliance and M/s BSNL.

Company wise Market Share: a) The Subscriber Base of different Mobile operators is given in Table 2.1. The top five Mobile operators on the basis of market share are as under: Cell Cellul ular ar Gr Grou oup p Subs Subscr crib iber ers s

Mar Market ket Shar Share e

Technology Used Bharti

14.07

21.62

GSM

Relian iance

12.99

19.96

GSM

&

12.38

19.03

GSM

&

Hutchison

9.71

14.92

GSM

IDEA

5.94

9.13

GSM

CDMA BSNL CDMA



Change in Market Structure

M/s Bharti, M/s Reliance and BSNL/MTNL has licenses to offer mobile services in all 23 service area. The largest mobile operator, M/s M/s Bhar Bharti ti is offe offeri ring ng serv servic ices es in all all the the 23 serv servic ice e area areas. s. M/s M/s Reliance is presently offering services in all service areas except J&K circle. BSNL is also offering services in all its 21 circles ( Except Delhi & Mumbai). M/s Tata Teleservices is offering services in all its licensed 20 service areas. M/s Tata Teleservices does not have license to offer access services in J&K, Assam & North East. Market share of all company Subscriber Base Bharat Sanchar Nigam Ltd. Mahanagar Telephone Nigam Ltd. Sify Ltd. Videsh Sanchar Nigam Ltd. Reliance Communications Infrastructure Ltd. Data Infosys others Bharti Televentures Ltd.(Bharti Infotel)


37% 20% 14% 8% 5% 4% 3%


Company analysis Telecom sector

1. Bharti Tele-Ventures Ltd.

Company at glance Industry: - Telecommunications 52 Week High: - 377.00 52 Week Low: - 195.80 Volume: - 59847 Face Value: - 10.00 P/E Ratio: - 57.24 EPS: - 6.29

Three Months chart The bellow given chart shows the performance of the script in the bse for last three months. It shows the volatility of the stock for the months of November, December and January.



FINANCIAL PERFORMANCE For the year

Mar-02

Mar-03

Mar-04

Mar-05

Operating Income

62.97

71.35

62.98

8,142.44

Net Profit

62.97

0.22

0.37

1,210.67

Net Worth

4,816.27

4,819.75

4,823.55

4,134.07

No. of Shares (in crore)

185.34

185.34

185.34

185.34

Adjusted EPS (Rs)

0

0

0

6.29

Book value per Share (Rs)

25.99

26.01

26.03

24.12

Dvdnd per Share (Rs)

0

0

0

0

Net Profit Margin (%)

0.19

0.58

0.58

14.83

74.86

668.08

233.91

0.51

0

0

0.1

0.98

Current Ratio Lt Debt Equity



2. Tata Telecom Ltd. Company at glance Industry: 52 Week High: 52 Week Low: P/E Ratio: EPS: Volume: Face Value:

Telecom 531.00 289.00 30.15 13.73 878 10.00




FINANCIAL PERFOMANCE For the year Operating Income Net Profit Net Worth No. of Shares (in crore)

02-Mar 228.2 15.68 70.52 1.42

03-Mar 285.5 18.56 85.06 1.42

04-Mar 394.5 32.67 110.5 1.42

05-Mar 323.8 24.92 128.1 1.42

Adjusted EPS (Rs)

12.13

13.06

23.29

13.73

Book value per Share (Rs) Dvdnd per Share(Rs)

65.44

75.66

93.55

105.9

2

2.5

4.5

4.5

Net Profit Margin (%)

6.06

5.78

8.24

7.65

Current Ratio

1.97

1.88

1.76

1.55

Lt Debt Equity

0.04

0.03

0.02

0.01



3. Videsh Sanchar Nigam Ltd.

Industry: 52 Week High: 52 Week Low: P/E Ratio: EPS: Volume: Face Value:

Telecom 444.60 161.00 31.18 12.21 2365926 10.00




FIANCIAL PERFOMANCE For the year

02-Mar

03-Mar

04-Mar

05-Mar

Operating Income Net Profit

6,508.09 1,407.42

4,538.55 780.07

3,163.54 377.66

3,303.04 756.37

Net Worth 4,834.54 No. of Shares (in 28.5 crore) Adjusted EPS (Rs) 46.05

5,341.32 28.5

4,961.00 28.5

5,522.06 28.5

29.62

13.12

12.21

Book value per Share 176.98 (Rs) Dvdnd per Share(Rs) 87.5 Net Profit Margin (%) 20.08

194.75

181.3

200.98

8.5 16.12

4.5 11.24

6 22.19

Current Ratio Lt Debt Equity

2.67 0

1.59 0

1.84 0

2.45 0



4. Mahana Mahanagar gar Tele Teleph phone one Niga Nigam m Ltd. Ltd. Industry: 52 Week High: 52 Week Low: P/E Ratio: EPS: Volume: Face Value:

Telecom 154.50 108.00 10.79 12.86 76690 10.00




FIANCIAL PERFOMANCE For the year Operating Income

02-Mar 6,145.07

03-Mar 5,807.26

04-Mar 6,370.40

05-Mar 5,593.25

Net Profit

1,300.68

877.16

1,234.60

948.43

Net Worth No. of Shares crore)

7,795.60

8,250.63

8,947.49

9,492.66

63

63

63

63

20.3

14.05

18.24

12.86

150.75

163.93

173.71

4.5

4.5

4.5

(in

Adjusted EPS (Rs)

Book value per Share 141.9 (Rs) Dvdnd per Share(Rs) 4.5 Net Profit Margin (%)

20.56

14.61

18.79

16.1

Current Ratio

1.67

1.27

1.29

1.29

Lt Debt Equity

0.29

0

0

0



RATIO ANLYSIS PER SHARE RATIO Reported Cash EPS Ratio

Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Average

Bharti Tele Tata tele VSNL MTNL 0.4 13.49 63.05 36.93 0.04 14.75 53.96 33.61 0.04 16.63 32.53 27.69 0.03 31.22 19.29 28.23 12.9 24.27 35.11 24.39 13.41 100.36 203.94 150.85 2.682 20.072 40.788 30.17

Operatig Profit Per Share


Bharti Tele Tata tele VSNL MTNL 2.96 -1.62 68.78 41.26 0.07 4.44 57.63 39.11 0.2 2.93 41.42 31.14 0.14 46.74 18.62 31.62 16.17 30.98 27.85 22.31 19.54 83.47 214.3 165.44 3.908 16.694 42.86 33.088

Book Value per Share





Net Operating Income Per Share



Free Reserve per Share



Per Share Rati Reported Cash EPS Ratio

25 0

e t a 20 0 R 15 0 e g 10 0 a r e 50 v 0 A

Operatig Profit Per Share Book Value per Sha Bharti T a t a t e l e VS NL NL Tele Compan

MT N L

Net Operating Inco Per Share Free Reserve per Share



Profitability Ratio Operatig Margin in %


Bharti Tele Tata tele VSNL MTNL 56.48 -1.16 26.86 44.19 23.45 2.76 25.23 40.09 54.13 1.46 26.01 33.78 43.21 16.86 16.77 31.27 36.81 13.61 24.03 25.13 214.08 33.53 118.9 174.46 42.816 6.706 23.78 34.892

Gross Profit margin in %


Bharti Tele Tata tele VSNL MTNL 50.29 -3.88 25.27 31.61 18.33 0.75 23.23 26.8 49.08 -0.32 22.77 18.85 37.06 13.88 11.33 22.73 24.29 10.33 16.64 14.62 179.05 20.76 99.24 114.61 35.81 4.152 19.848 22.922

Net Profit Margin in %


Bharti Tele Tata 0.66 0.19 0.3 0.58 14.83 16.56 3.312

tele VSNL MTNL 5.87 21.8 25.8 6.06 16.12 20.56 5.78 16.12 14.61 8.24 11.24 18.79 7.65 22.19 16.1 33.6 87.47 95.86 6.72 17.494 19.172



Return on long term fund in %



Profitability Ratio n r 50 u t e 40 R 30 e 20 g a 10 r e 0 v A

Operatig Margin in % Gross Profit margin in % Bharti Tele

Tata VS VSN NL MTN MTNL tele Company

Net Profit Margin in % Return on long term fund in %



Portfolio in Telecom Sector

Average re return Portfolio Wi 143.87 79663.1 7.96631 415.04 229814 22.9814 722.26 399927 39.9927 524.81 290596 29.0596 1805.98 1000000 100

Bharti Tele Tata Tele VSNL MTNL

Total Portfolio = 10,00,000 Rs.

Price as on particular date Company Bharti Tele TTML VSNL MTNL

02-01-06 340.05 27.8 381.15 142.15

28-02-06 361.05 24.75 364.95 142.65

Total Return on investment = Total return – total investment = 963730.3 – 1000000 = -36269.7

Bharti Tele TTML VSNL MTNL

6.175562417 -10.97122302 -4.250295159 0.351741119

Total return on investment ( in %) = - 3.62 %



Interpretation of Sector Portfolio •

As we can see that that sector sector speci specific fic portfolio portfolio has has perform perform negatively during the period of the report. That is due to the fact that there is a systematic risk involve with the portfolio as lack of diversification. If we look at the performance of the Sensex during this period than we will find that Sensex has perform better than the sector portfolio. It is mainly doe to dive divers rsifi ifica catio tion n of risk risk as Sens Sensex ex has has the the 30 scri script pt from from diff differ eren entt sect sector ors, s, so any any ups ups and and down downs s in a sect sector or’s ’s performance will not effect the overall Sensex that badly that in the case of sector portfolio.

•

We can see in the plotted graph that all the four script in the sector portfolio are following a same kind of trend in the given one month of the study. It is due to the fact that they all belong to the same sector and they all face same systematic risk as other in the sector. So the performance of the scripts rightly rightly indica indicates tes the need need of divers diversific ificati ation on to remove remove the systematic risk from the portfolio. As its gets highly risky inve invest stme ment nt,, such such port portfo foli lio o are are very very rare rarely ly been been used used by individual in the general scenario.



FINDING OF THE REPORT Findings of the report gives the fruit of the all the analysis done on the resear research ch of measu measurin ring g and compa comparin ring g perfor performa mance nce of the portfolio with the market portfolio.

Random portfolio

•

After understanding the various concepts about what are the investments option and what are the risks associated with the various investment avenues. And also about how one can use Derivative to be specific Future for the purpose of Hedging and Speculation.

•

But it is advisable to use the direct equity investment only if the investors have adequate knowledge about selection of stocks. There task does not ends with the selection of script but but they they are are also also requ requir ired ed to pay pay clos close e atte attent ntio ion n to the the various happening in the economy that have direct or indirect effect on stock market as we have learn that the price of the script is affected by two factor, one is company specific news and the other other is econom economy y specif specific ic news news so any investor investor investing in the equity directly has to keep the close track of the economy as well as the company in which they invest to look out for any new development that take place

•

As in the theoretical way we have scene that the Beta shows the movement or change in the price of script vis-à-vis index. And a Beta >1 is more riskier and hence should give more return as compared to the script having Beta < 1. as the person is taking more risk then he should get more return.



But But in our our case case we have have scen scene e that that Mode Modera rate te port portfo foli lio o having Beta < 1 has given more return as compared to Aggressive Portfolio.

•

So we can easily say that the investment in equity market is subj subjec ectt to mark market et risk risk and and any any one one havi having ng long long-t -ter erm m investment horizon should only enter into equity market. This analysis that has been carried out was only for a period of two month there are chances that in the long run aggressive portfolio would outperform the other portfolio.

•

And we have also scene the Derivative- Future how one can use use it for for the the purp purpos ose e of spec specul ulat atio ion n and and hedg hedgin ing. g. But But hedg hedgin ing g is only only for for the the remo remova vall of unne unnece cess ssar ary y risk risk or exposure one should not go for hedging for earning excess return.

•

So if one does not have enough knowledge, expertise & analytical capabilities then one should avoid going for direct equity investment as the chances of loss increases. And the other very important aspect is the regular monitoring of the portfolio and reviewing is also an important aspect that one needs to pay close attention to.



Sector portfolio •

Sector portfolio has given negative return in the month of the study as there is systemic risk as very high in the sector portfo portfolio lio becaus because e of non divers diversific ificatio ation. n. This This portfo portfolio lio has given -3.62% returns on the one month performance so it is advisable for the investor not to go for such a high risky investment options.

•

All All the the indi indivi vidu dual al scri script pts s and and the the port portfo folio lio show showin ing g very very steady chart, there is very little movement in the performance chart.

•

There is a very high Beta of majority of the scripts in the portfolio edging more than 2 in most of the script. Only one script having a Beta under 1 but it is too low to give a good return on the investment. Because of that the overall portfolio Beta is also sizing more than 2.

•

In the sector portfolio the volatility of the majority of script is under 10. That’s shows less risk with the portfolio and also less fluctuation means less chance of return.



RECOMMENDATION

From the above given findings and the conclusions of the study done by me, here are the list of recommendations that comes out of the study.

•

Form the study it is also proven that even in short run sector portfolio is highly risky option for investment. Here in the stud study y it is prov provid idin ing g nega negati tive ve retu return rn.. That That show shows s that that investors who want to have safe return must think twice before selecting sector portfolio for a long term investment.

•

Though random portfolio is having scripts with highest return and volatility, but for a long term prospect is becomes hard to fetch good return out of it as it is hard to take use of high volatility.

•

There There is a requir requirem ement ent for freque frequent nt portfo portfolio lio check checking ing to maintain the higher return and to make use of high volatility.



Bibliography Books 1. Deriva Derivativ tives es Mod Module ule of of NSE – ( NCFM NCFM ) 2. Securities Securities analysis analysis and Portfolio Portfolio Manage Management ment -B.K. Bhalla

Web – Bibliography 1. www.kotaksecurities.com 2. www.nseindia.com 3. www.bseindia.com 4. www.derivativesindia.com 5. www.moneycontrol.com 6. www.icicidirect.com

Others 1. Magazines -

Business World

2. News News Pape apers -

Econ Econo omic Times imes of Indi India a

-

Times of In India



Annexure Balance Sheet of BHARTI TELE VENTURE

05/03(12)

04/03(12)

03/03(12)

02/03(12)

01/03(12)

1,853.37

1,853.37

106.24

0.00

0.00

46.31 1,515.69

CAPITAL & LIABILITIES Owners' Fund

Equity Share Capital Share Application Money Reserves & Surplus Other Liabilities & Provisions Total

1,853.37 2.72

1,853.37 0.00

2,675.38

2,971.49

2,971.12

2,970.90

4,570.79

15.77

5.00

40.61

9,102.26

4,840.63

4,829.49

4,864.88

0.34

22.52

13.30

1,467.79

1,899.67

794.47

41.82 1,710.06

ASSETS

Cash & Balances with RBI Investments Fixed Assets Gross Block Less: Revaluation Reserve Less: Accumulated Depreciation Net Block Capital Workin-progress Other Assets Miscellaneous Expenses not written off Total Contingent liabilities Book Value of Unqouted Investment Market Value

384.14

0.13

931.90

1,762.67

13,240.63

31.84

2.13

0.00

3,475.64 9,762.86 994.46

28.02

24.73

0.00

0.00

0.00

17.29

13.79

10.51

14.56

16.83

17.51

0.10

30.62

0.00

0.00

7.40 17.33 4.36

2,348.99

3,688.36

3,341.31

3,040.22

893.90

58.35

1.30

4.74

7.99

0.00

14,480.70

5,467.12

4,831.01

4,987.91

3,017.26

4,874.99

4,085.39

2,695.06

34.89

460.83

1,434.63

382.95

590.00

415.52

472.71

334.24

38.79

473.21


1,723.36

155.32


of Qouted Investment

Balance sheet of TATA TELE

05/03

04/03

03/03

02/03

01/03


Equity Share Capital Reserves & Surplus Other Liabilities & Provisions Total

14.23 2,675.38 216.00

14.23

14.23

14.23

2,971.49

2,971.12

2,970.90

167.34

113.68

91.48

14.23 1,515.69

77.04 366.75

300.48

221.38

184.63

32.42

19.39

133.64

ASSETS

Cash & Balances with RBI Investments Fixed Assets Gross Block Less: Accumulated Depreciation Net Block Capital Workin-progress Other Assets Miscellaneous Expenses not written off Total Contingent liabilities Book Value of Unqouted Investment Market Value of Qouted Investment

101.57

87.17

9.09

0.09

66.93 41.90

65.62 36.04

21.65 0.09 61.53 28.33

0.05 57.87 27.80

0.11 57.21 25.82

25.03

29.58 0.12

33.20

333.91 0.00

294.88 0.00

213.41 0.00

180.56 0.00

470.32 18.46

411.84

279.33 3.08

230.06 3.28

9.09

0.09

0.09

0.05

0.00

0.00

0.00

0.00

0.72

9.64

0.12

30.06 0.00

31.39 0.00 173.87 0.72

227.74 15.47 0.00

0.12

Balance sheet of VSNL B.R.C.M. College of Business Administration, Surat


05/03(12)

04/03(12)

03/03(12)

02/03(12)

01/03(12)



285.00 5,443.05 1,978.87

285.00

285.00

285.00

4,882.18

5,265.42

4,758.98

1,976.65

1,708.24

2,062.85

285.00 6,303.74

3,480.52 7,706.92

7,143.83

7,258.66

7,106.83

10,069.26

ASSETS

Cash & Balances with RBI Investments Gross Block Less: Accumulated Depreciation Net Block Capital Workin-progress Other Assets Miscellaneous Expenses not written off Total Contingent liabilities Book Value of Unqouted Investment Market Value of Qouted Investment

2,358.59 1,409 ,409.1 .12 2

1,0 1,046.7 46.71 1

1,200.58

2,089.14 655.87 Fixed Assets 2,348.54 3,290.23 590.81 1,015.19

3,182.68 835.65

2,534.94 4,840.07 366.29 2,835.29 862.12

110.65 2,658.79 742.99

2,347.03

1,757.73 216.63

2,275.03

3,646.14 0.00

3,143.31 0.00

4,567.52 0.00

5,044.12 0.00

9,116.04

8,253.52

9,971.24 1,829.85

10,216.9 1 1,810.53

513.17

2,280.87

2,422.66

1,973.17

114.23

298.39

1,200.58

2,032.91

599.59

366.29

0.00

99.77

68.24

97.35

1,915.80 497.19 7,545.63 0.72

14,909.34 366.60 110.65

0.00

Balance sheet of MTNL 05/03(12)

04/03(12)

03/03(12)



02/03(12)

01/03(12)



630.00

630.00

630.00

630.00

10,313.8 3 11,797.7 5

9,697.63

8,866.97

8,309.64

11,083.6 5

10,087.9 1

8,024.41

22,741.5 8

21,411.2 8

221.38

184.63

1,815.39

2,444.65

630.00 7,718.15

5,658.39 133.64

ASSETS

Cash & Balances with RBI Investments Fixed Assets Gross Block Less: Accumulated Depreciation Net Block Capital Workin-progress Other Assets Miscellaneous Expenses not written off Total Contingent liabilities Book Value of Unqouted Investment Market Value of Qouted Investment

2,517.40 397.47 14,252.2 5 7,783.62

2,553.07

2,482.83

380.69

371.01

102.68

13,562.9 3 7,352.65

12,665.2 1 7,148.03

11,732.2 2 6,420.43

0.00 10,680.95

5,653.07 6,468.63

6,210.28 508.25

5,517.17 918.74

797.81

815.50

14,312.0 5 0.00

12,777.9 6 0.00

13,370.7 7 0.00

11,044.15

25,258.9 8 6,477.15

23,964.3 4

21,400.2 7 3,965.93

22,027.7 1 3,922.25

9.09

0.09

0.09

0.05

0.00

0.00

0.00

0.00

651.51 815.50 0.00

4,853.10

5,311.80

5,027.89

0.72

19,370.37 15.47 0.00

0.12



NIFTY VALUES S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49

Security Symbol ABB ACC BAJAJAUTO BHARTI BHEL BPCL CIPLA DABUR DRREDDY GAIL GLAXO GRASIM GUJAMBCEM HCLTECH HDFC HDFCBANK HEROHONDA HINDALCO HINDLEVER HINDPETRO ICICIBANK INFOSYSTCH IPCL ITC JETAIRWAYS LT MARUTI M&M MTNL NATIONALUM ONGC ORIENTBANK PNB RANBAXY REL RELIANCE SAIL SATYAMCOMP SBIN SCI SUNPHARMA TATACHEM TATAPOWER TATATEA TATAMOTORS TCS TATASTEEL VSNL WIPRO

Equity 423,816,750 1,851,909,460 1,011,835,100 18,933,749,010 2,447,600,000 3,000,000,000 599,740,466 573,302,784 383,034,985 8,456,516,000 847,030,170 916,736,360 2,705,593,000 644,351,768 2,494,075,020 3,127,855,080 399,375,000 1,159,684,963 2,201,243,793 3,393,300,000 8,896,209,860 1,372,625,815 2,482,256,220 3,755,157,950 863,340,110 273,798,272 1,444,550,300 2,360,812,020 6,300,000,000 6,443,096,280 14,259,339,920 2,505,397,000 3,153,025,000 1,862,370,965 2,019,042,510 13,935,080,410 41,304,005,450 646,924,048 5,262,988,780 2,823,024,300 927,578,150 2,151,026,510 1,978,978,640 562,198,570 3,767,922,890 480,114,809 5,534,728,560 2,850,000,000 2,841,478,198

Weightage % 0.75% 0.81% 1.84% 4.77% 3.46% 0.91% 1.15% 0.44% 0.70% 1.61% 0.78% 1.11% 0.83% 1.37% 2.37% 1.61% 1.24% 1.24% 3.74% 0.77% 3.82% 5.41% 0.40% 4.52% 0.59% 2.29% 1.66% 0.97% 0.63% 1.25% 11.30% 0.42% 0.97% 1.12% 0.87% 6.89% 1.84% 1.74% 3.22% 0.30% 1.01% 0.36% 0.71% 0.36% 2.14% 5.69% 1.66% 0.73% 5.16%


Beta 0.71 0.78 0.82 0.98 1.09 0.69 0.83 0.98 0.7 1.05 0.7 0.86 0.97 1.15 0.84 0.79 0.81 1.16 0.89 0.81 1.16 1.03 1.16 0.86 0.75 0.94 1.14 0.95 1.04 1.27 1.03 0.96 1.23 0.82 1.09 1.06 1.44 1.26 1.19 0.79 0.47 0.81 1.27 0.78 1.29 1.03 1.23 1.65 1.26

R2 0.15 0.27 0.21 0.25 0.32 0.14 0.17 0.19 0.13 0.35 0.16 0.27 0.26 0.3 0.18 0.19 0.17 0.39 0.21 0.24 0.29 0.39 0.36 0.23 0.16 0.22 0.34 0.29 0.24 0.32 0.37 0.23 0.36 0.13 0.34 0.43 0.32 0.39 0.48 0.21 0.08 0.19 0.43 0.24 0.38 0.34 0.42 0.31 0.41

Volatility % 1.6 1.62 2.19 1.29 1.79 1.77 3.43 1.62 3.21 1.27 2.06 2.35 1.53 1.16 2.07 1.8 1.93 1.87 2.77 1.67 2.35 1.38 1.78 2.07 2.47 3.18 1.77 1.87 2.8 3.45 1.81 1.44 1.73 3.01 1.31 1.2 3.03 1.55 1.27 1.82 1.92 1.44 1.72 2.68 2.32 1.15 1.71 1.72 1.5


50

ZEETELE

412,505,012

0.51%

1.05

0.16

2.86

NIFTY JUNIOR

S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46

Security Symbol ANDHRABANK APOLLOTYRE ASHOKLEY ASIANPAINT AUROPHARMA AVENTIS BANKBARODA BANKINDIA BEL BHARATFORG BIOCON BONGAIREFN CADILAHC CANBK CHENNPETRO CMC COCHINREFN CORPBANK CUMMINSIND GESHIPPING CONCOR I-FLEX IBP IDBI IFCI INGERRAND IOB JPASSOCIAT KOTAKBANK LICHSGFIN LUPIN MOSERBAER MPHASISBFL NICOLASPIR NIRMA PATNI PFIZER POLARIS PUNJABTRAC RAYMOND SIEMENS STER SYNDIBANK TTML TVSMOTOR UNIONBANK

Equity 4,850,000,000 383,379,770 1,189,294,200 962,789,280 266,350,000 230,306,220 3,670,000,000 4,874,002,000 800,000,000 441,018,830 500,000,000 1,998,179,000 314,034,270 4,100,000,000 1,489,432,000 151,500,000 1,384,697,800 1,434,400,000 396,000,000 1,903,424,050 649,913,970 380,429,100 221,473,690 7,236,162,580 6,386,757,620 315,680,000 5,448,000,000 1,855,970,840 3,092,166,250 849,326,000 401,411,340 1,115,129,440 1,606,343,030 418,035,212 793,824,840 275,596,798 298,414,400 490,710,810 607,557,000 613,808,530 331,384,030 556,549,450 5,219,682,820 15,205,344,350 237,543,557 4,601,179,000

Weightage % 1.73% 0.47% 1.86% 2.63% 1.21% 1.71% 3.34% 2.67% 3.59% 3.75% 1.98% 0.56% 1.37% 4.79% 1.36% 0.31% 0.99% 1.97% 1.82% 1.91% 3.83% 3.30% 0.50% 2.47% 0.29% 0.49% 2.25% 3.36% 2.89% 0.69% 1.53% 1.00% 1.14% 2.02% 1.58% 2.63% 1.23% 0.44% 0.58% 1.09% 6.11% 6.02% 1.99% 1.53% 1.16% 2.29%


Beta 1.17 0.62 1.24 0.4 0.94 0.65 1.55 1.81 1.01 1.19 0.56 0.98 0.44 1.37 1.08 0.5 0.76 1 0.91 0.86 0.41 0.83 0.62 1.4 1.55 0.72 1.15 1.23 1 1.02 0.75 0.92 0.94 0.94 0.81 0.97 0.5 1.44 0.67 0.8 0.76 1.27 1.26 1.19 1.1 1.23

R2 0.25 0.13 0.3 0.08 0.13 0.15 0.39 0.34 0.26 0.34 0.12 0.25 0.08 0.31 0.23 0.07 0.18 0.18 0.15 0.15 0.05 0.17 0.15 0.27 0.22 0.08 0.2 0.18 0.13 0.24 0.13 0.18 0.21 0.18 0.16 0.24 0.07 0.25 0.15 0.18 0.14 0.27 0.24 0.27 0.21 0.27

Volatility % 2.04 1.55 2.88 2.09 2.01 2.42 1.94 3.98 2.49 2.72 1.44 0.97 1.45 3.95 1.33 1.17 2.03 1.85 3.74 2.14 2.54 1.53 2.1 1.9 4.78 2.92 2.47 2.58 2.49 1.9 2.55 2.67 0.95 1.56 2.45 2.03 2.42 2.3 1.5 1.7 1.39 2.75 2.92 1.14 1.61 1.78


47 48 49 50

UTIBANK VIJAYABANK INGVYSYABK WOCKPHARMA

2,786,241,460 4,335,178,000 905,644,160 546,903,005

3.72% 1.01% 0.55% 2.29%


0.83 1.2 0.94 1.02

0.12 0.29 0.2 0.24

2.4 1.74 1.35 2.04

Project Report on Portfolio Management

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