ON
Portfolio Management
AT
A Report
From
DECLARATION
Management from J K Business School hare by declare that all information and
facts and figures in this report are original in nature, which is collected from various
Naresh Kumar
PGDBM- II
Sem.
3
ACKNOWLEDGEMENT
( Accounts & Finance), Jindal Stainless Steel Ltd, Hisar who has always inspired
at Jindal Stainless Steel Ltd, Hisar for the conceptual guidance and encouraging
support.
4
INDEX
CONTENT PG.NO.
Declaration...........................................................2
Acknowledgement………………………......….....3
Preface…………………………………….......…...5
Company Profile…………………………......…....6
Objective of the Study…………………….....…..14
Research Methodology………………….....…....16
Suggestion……………………………….....….....75
Bibliography…………………………………........76
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PREFACE
Summer training is one of the most vital and active part for the life of management
students. The basis idea behind this is to give the practical traning to the student and
I did the work as a management trainee at JINDAL STAINLESS Ltd. HISAR at the
research and efforts has been made for successful fulfilment of on the training
report.
6
COMPANY PROFILE
The Group
Jindal Organization, set up in 1970 by the steel visionary Mr. O.P. Jindal, has grown
from an indigenous single-unit steel plant in Hisar, Haryana to the present multi-
billion, multi-national and multi-product steel conglomerate. The organization is still
expanding, integrating, amalgamating and growing.
The group places its commitment to sustainable development, of its people and the
communities in which it operates, at the heart of its strategy and aspires to be a
benchmark for players in the industry the world over.
The Jindal Organization today is a global player. It's relentless quest for excellence
has reaped rich benefits and it is today one of the world’s most admired and
respected groups within the steel fraternity.
Jindal Stainless
Jindal Stainless is in many ways very much like the material it produces. Like
stainless steel the company is versatile in its thought process, strong and
unrelenting in its operations, environment friendly in its manufacturing process,
bright, shining and beautiful in its community support activities. The list of the
properties of stainless steel is endless, just as our values are all encompassing.
Jindal Stainless has always been committed to innovation and progression, research
and development. Our innovations are admired beyond the geographical boundaries
of our country. No wonder we are the strategic partners of global leaders by choice.
Our achievements narrate a story of our determination to succeed and our passion
to win. We will continue to leverage our opportunities in creating excellence that the
world cannot even think about. Today we are the largest integrated stainless steel
producer in India, tomorrow we will rule the world.
7
Jindal Stainless is a ISO: 9001 & ISO: 14001 company is the flagship company of
the Jindal Organization. The company today, has come a long way from a single
factory establishment, started in 1970. As the numero uno it has taken on the task of
making stainless steel a part of everybody's life by taking a 360 degrees approach
from production of raw materials to supply of architecture and lifestyle related
products.
• Steel Making
Major equipment
Process
• Hot Rolling
Finishing (HR Product)
Processing of Hot Rolled Products
• Cold Rolling
Coil Build up line
Skin Pass Mill
Slitting Line
Strip Grinding Line
Shearing Line
Bright Annealing line
• Coin Blanks
Production Process
Cupro-Nickel Complex
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At Hisar, Jindal Stainless has India's only composite stainless steel plant for the
manufacture of Stainless Steel Slabs, Blooms, Hot rolled and Cold Rolled Coils,
60% of which are exported worldwide.
The R&D division at JSL, Hisar plays a pivotal rolein retaining and consolidating
company's leadership role in stainless steel business by continuous up gradation of
quality, process and services, and innovating development strategies to come up
with new products with cost competitiveness. Cross-fertilization of knowledge
between production, quality control and commercial units in order to maintain world
class standard has been the guiding principle of R&D functions.
• Precision Strips
The company produces stainless steel precision strips in various grades.
These strips are produced in narrow 20-Hi mills in the precision cold rolling
unit.
• Blade Steel
The Company is the exclusive producer of stainless steel strips for making
razor and surgical blades in India.
• Coin Blanks
Besides supplying CR Strips to the Government of India, the plant at Hisar
houses a coin blanking line for supply of coin blanks to the Indian Mint and
Mints in the global markets.
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Vizag - India
The Ferro Alloys plant is situated at Jindal Nagar, Kothavasala, Distt. Vizianagaram,
Andhra Pradesh. The installed capacity is 40,000 metric tonnes per annum of high
Carbon Ferro Chrome. Besides supplying to the domestic market, the company also
exports Ferro Chrome to various developed countries. The plant is also equipped
with an ultra modern testing laboratory to ensure world-class quality standards.
Jindal Stainless has acquired Stainless Steel Cold Rolling plant in Indonesia from
Maspion Stainless Steel.
Another first, another feather - Jindal Stainless Limited has taken a leading step
forward to bring convenient, customized, world class, just - in - time service in
stainless steel to doorsteps of its valued customers.
The facilities in Gurgaon (Haryana) include state of the art, high end precision
Slitting, cutting to length, blanking and polishing lines which are supplied by the
leading steel finishing equipment manufacturers, FIMI & IMEAS, Italy.
Art d'inox is the exciting new form of ultimate style. The name translates into 'the art
of stainless steel'. And that's precisely what it is. Works of art in stainless steel. Set
up with the objective of creating exclusive stainless steel lifestyle products, these are
synonymous with quality, beauty and functionality. The professionally qualified in-
house design team is dedicated to exploring the frontiers of design. The product
range is a celebration of both form and function. The range encompasses tableware,
serving ware, gifts, home accessories and office accessories.
Stainless steel is a material par excellence, which now seeks to permeate through
Indian Architecture. The Architectural Division launched by Jindal Stainless Ltd has
taken the initiative to promote Stainless steel products and technology solutions to
cater to the emerging market of Stainless Steel for Architecture, Building and
Construction (ABC) in India. The Architectural Division of Jindal Stainless is capable
of providing a full range of technical support services including design, engineering
work, fabrication of quality material and finishes, and job site supervision by trained
personnel. The division has completed many projects specially that of street
furniture, cafeteria furniture, lighting and signages apart from other architectural
requirements.
Shri OP Jindal, had a vision of a progressive state - a state where men and women
worked shoulder to shoulder towards a happier tomorrow. Jindal Stainless constantly
echoes those thoughts and takes its role as a responsible corporate citizen very
seriously. Giving back to the community at large has been an objective from the very
beginning.
Schools at various levels have been set up to educate the specifiers of the future.
The Vidya Devi Jindal and The Jindal Modern School, at Hisar, is fully child oriented
and ensures ‘holistic development’ of a student’s mental and physical potential.
Adopting villages and thus contributing to the development of a region has also been
part of the overall Jindal plan. Improving of medical facilities is yet another field of
endeavor. NC JIM Care, at Hisar offers the entire range of diagnostic, treatment and
surgical facilities. Immunization drives and free healthcare camps on different
medical aspects are also conducted from time to time.
Eco Friendliness
At our Stainless Steel plants, the challenge faced is to make and process stainless
steel without adversely impacting the environment. Jindal Stainless has a formal
environmental protection program in place since inception. We recognize the
importance of protecting our environment, and that of our children and our
commitment is unwavering in this respect.
Jindal Stainless Ltd. complies with the requirements of the State Pollution Control
Board. Having received the ISO 14001 certification, the company has a full-fledged
environment department that manages the existing facilities for pollution control.
It has a sewage treatment plant for domestic affluent whose treated water is reused
for horticulture purposes as well as in industrial applications. With greater efforts
being made to achieve low long-term maintenance costs, less environmental impact
and greater concern with life cycle costs, the market for stainless steel continues to
improve.
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Vision
“The seed of change is condensed in one single moment that heralds tomorrow’s
hope and way into newer horizons”
Vision-2010
Jindal Stainless (JSL) was established in 1970 and is under the Jindal Group.
Jindal Stainless Ltd. has expanded since its establishment from a steel plant of a
single unit to become a multi-product and multi-national steel company.
Jindal Stainless Company is the biggest producer of stainless steel in the country.
The company has a 40% market share in the stainless steel sector in India. The
company has subsidiary companies which are Jindal Stainless> Steelway and PT
Jindal Stainless.
The total income of the Jindal Stainless amounted to Rs. 8,598.2 million in 2005-
2006 and the next year the figure stood at Rs. 12,014.9 million. The net profit of the
company amounted to Rs. 507.9 million in 2005- 2006 and the next year the amount
increased to Rs. 826 million. Jindal Stainless Company is planning to establish a
stainless steel plant in Orissa with the production capacity of 1.6 million tons per
year. The company will make an investment of around Rs. 56 billion in setting up this
plant.
Jindal Stainless has become the leading company in the stainless steel sector in
India. As it plans to expand in the near future, the company is sure to become one of
the leading stainless steel companies in the world.
14
Jindal Stainless is in many ways very much like the material it produces. Like
stainless steel the company is versatile in its thought process, strong and
unrelenting in its operations, environment friendly in its manufacturing process,
bright, shining
and beautiful in its community support activities. The list of the properties of stainless
steel is endless, just as our values are all encompassing. Jindal Stainless has
always been committed to innovation and progression, research and development.
Our innovations are admired beyond the geographical boundaries of our country. No
wonder we are the strategic partners of global leaders by choice. Our achievements
narrate a story of our determination to succeed and our passion to win. We will
continue to leverage our opportunities in creating excellence that the world cannot
even think about. Today we are the largest integrated stainless steel producer in
India, tomorrow we will rule the world. Jindal Stainless, a $780 million plus ISO:
9002 & ISO: 14001 is the flagship company of the Jindal Organization. The company
today has come a long way from a single factory establishment, started in 1970. As
the numerounoit has taken on the task of making stainless steel a part of
everybody's life by taking a360 degrees approach from production of raw materials
to supply of architecture and lifestyle related products.
Major tasks
1. Developments of high value products to serve niche market.
competitive edge
In addition to the above, R&D division closely interacts with reputed national and
critical investigation.
about the various Investment option through which company can earn more profit by
The executives or the official responsible for the project can make use of the
allocate and spread the available resources, and make changes in projects so as to
portfolio for the proposed new product and to maximize the portfolio value or the
profitability. Further it can also be made use for providing balance, support and the
As the name goes the job of a project portfolio management group is to plan or
devise a strategy with which the portfolio can be managed much similar to any
investor’s managing activities involving various stocks, mutual funds, secured fixed
deposits, and bonds. The main purpose or the aim of any portfolio investment
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will be on the lines of increasing profits or returns with reduced risks and
In the world of Information Technology, project managers can effectively use the
watch over the progress and to direct the progress in the right and desired direction
in case of need. Majority of the investments made in the IT scenario in the last ten
years actually are aimed to determine the nature of returns from the investments
RESEARCH METHODOLOGY
Portfolio Management
Portfolio
diversification. By owning several assets, certain types of risk (in particular specific
risk) can be reduced. The assets in the portfolio could include stocks, bonds,
own investment analysis, whilst a private individual may make use of the services of
services
given the goals of the portfolio owner and changing economic conditions. Selection
purchase them, and what assets to divest. These decisions always involve some
sort
the risk associated with this return (i.e. the standard deviation of the return). Typically
the expected return from portfolios of different asset bundles are compared.
The unique goals and circumstances of the investor must also be considered. Some
• equally-weighted portfolio
• capitalization-weighted portfolio
• price-weighted portfolio
There are many different methods for calculating portfolio returns. A traditional
weighted return calculated over a period such as a month or a quarter assumes that
the rate of return over that period is constant. As portfolio returns actually fluctuate
actual return. These errors happen because of cash flows during the measurement
period. The size of the errors depends on three variables: the size of the cash flows,
the timing of the cash flows within the measurement period, and the volatility of the
portfolio.
A more accurate method for calculating portfolio returns is to use the true time-
weighted method. This entails revaluing the portfolio on every date where a cash
flow takes place (perhaps even every day), and then compounding together the daily
returns.
benchmarked against the S&P 500 index. If the benchmark return over some period
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was 5%, and the portfolio return was 8%, this would leave an active return of 3% to
return that was generated by the investment manager (rather than by the
benchmark).
different investment processes. For example, one simple model explains the active
return in "bottom-up" terms, as the result of stock selection only. On the other hand,
sector attribution explains the active return in terms of both sector bets (for example,
also stock selection within each sector (for example, choosing to hold more of the
Modern portfolio theory (MPT) proposes how rational investors will use
diversification to optimize their portfolios, and how a risky asset should be priced.
The basic concepts of the theory are Markowitz diversification, the efficient frontier,
capital asset pricing model, the alpha and beta coefficients, the Capital Market Line
variable, and consequently has an expected value and a variance. Risk, in this
The model assumes that investors are risk adverse, meaning that given two assets
that offer the same expected return, investors will prefer the less risky one. Thus, an investor
will take on increased risk only if compensated by higher expected returns. Conversely, an
investor who wants higher returns must accept more risk. The exact trade-off will differ by
investor based on individual risk aversion characteristics. The implication is that a rational
investor will not invest in a portfolio if a second portfolio exists with a more favorable risk-
return profile – i.e., if for that level of risk an alternative portfolio exists which has better
expected returns
It is further assumed that investor's risk / reward preference can be described via a
quadratic utility function. The effect of this assumption is that only the expected
return and the volatility (i.e., mean return and standard deviation) matter to the
returns, such as its skew (measures the level of asymmetry in the distribution) or
Note that the theory uses a parameter, volatility, as a proxy for risk, while return is an
expectation on the future. This is in line with the efficient market hypothesis and
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most of the classical findings in finance such as Black and Scholes European Option
Pricing (martingale measure: shortly speaking means that the best forecast for
under the rubric of Post-Modern Portfolio Theory (PMPT), have exposed several
• The theory uses a historical parameter, volatility, as a proxy for risk, while return is an
expectation on the future. (It is noted though that this is in line with the Efficiency
Hypothesis and most of the classical findings in finance such as Black and Scholes
which make use of the martingale measure, i.e. the assumption that the best forecast
• The statement that "the investor is indifferent to other characteristics" seems not to
Investment management
(shares, bonds etc.) and assets (e.g., real estate), to meet specified investment
goals for the benefit of the investors. Investors may be institutions (insurance
companies, pension funds, corporations etc.) or private investors (both directly via
investment contracts and more commonly via collective investment schemes e.g.
mutual funds) .
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The term Asset Management is often used to refer to the investment management
of collective investments, whilst the more generic Fund Management may refer to
industry in its own right responsible for caretaking of trillions of dollars, euro, pounds
and yen. Coming under the remit of financial services many of the world's largest
companies are at least in part investment managers and employ millions of staff
Fund manager (or investment advisor in the U.S.) refers to both a firm that
management' decisions
Industry Scope
employment of professional fund managers, research (of individual assets and asset
reports for clients. The largest financial fund managers are firms that exhibit all the
complexity their size demands. Apart from the people who bring in the money
(marketers) and the people who direct investment (the fund managers), there are
compliance staff (to ensure accord with legislative and regulatory constraints),
internal auditors of various kinds (to examine internal systems and controls),
financial controllers (to account for the institutions' own money and costs), computer
experts, and "back office" employees (to track and record transactions and fund
The 3-P's (Philosophy, Process and People) are often used to describe the reasons
example: (i) Does the manager buy growth or value shares (and why)? (ii) Does he
believe in market timing (and on what evidence)? (iii) Does he rely on external
research or does he employ a team of researchers? It is helpful if any and all of such
• Process refers to the way in which the overall philosophy is implemented. For
example: (i) which universe of assets is explored before particular assets are chosen
as suitable investments? (ii) How does the manager decide what to buy and when?
(iii) How does the manager decide what to sell and when? (iv) Who takes the
decisions and are they taken by committee? (v) What controls are in place to ensure
25
that a rogue fund (one very different from others and from what is intended) cannot
arise?
• People refers to the staff, especially the fund managers. The questions are, Who are
they? How are they selected? How old are they? Who reports to whom? How deep is
the team (and do all the members understand the philosophy and process they are
supposed to be using)? And most important of all, How long has the team been
working together? This last question is vital because whatever performance record
was presented at the outset of the relationship with the client may or may not relate
to (have been produced by) a team that is still in place. If the team has changed
greatly (high staff turnover or changes to the team), then arguably the performance
strategic decision making for the IT environment. This is also one of the
At the heart of the investment management industry are the managers who invest
client's individual needs and risk profile. The advisor then recommends appropriate
investments.
Asset allocation
The different asset classes are stocks, bonds, real-estate and commodities. The
exercise of allocating funds among these assets (and among individual securities
within each asset class) is what investment management firms are paid for. Asset
classes exhibit different market dynamics, and different interaction effects; thus, the
27
allocation of monies among asset classes will have a significant effect on the
performance of the fund. Some research suggests that allocation among asset
classes has more predictive power than the choice of individual holdings in
resides in constructing the asset allocation, and separately the individual holdings,
Long-term returns
and to holding period returns (the returns that accrue on average over different
lengths of investment). For example, over very long holding periods (eg. 10+ years)
in most countries, equities have generated higher returns than bonds, and bonds
have generated higher returns than cash. According to financial theory, this is
because equities are riskier (more volatile) than bonds which are themselves more
Diversification
Against the background of the asset allocation, fund managers consider the degree
of diversification that makes sense for a given client (given its risk preferences) and
construct a list of planned holdings accordingly. The list will indicate what percentage
of the fund should be invested in each particular stock or bond. The theory of
requires management of the correlation between the asset returns and the liability
returns, issues internal to the portfolio (individual holdings volatility), and cross-
Investment Styles
There are a range of different styles of fund management that the institution can
implement. For example, growth, value, market neutral, small capitalisation, indexed,
etc. Each of these approaches has its distinctive features, adherents and, in any
evidence that growth styles (buying rapidly growing earnings) are especially effective
when the companies able to generate such growth are scarce; conversely, when
such growth is plentiful, then there is evidence that value styles tend to outperform
Performance measurement
institutions measure the performance of each fund (and usually for internal purposes
leading performance measurement firms (e.g. Frank Russell in the USA) compile
aggregate industry data, e.g., showing how funds in general performed against given
In a typical case (let us say an equity fund), then the calculation would be made (as
far as the client is concerned) every quarter and would show a percentage change
compared with the prior quarter (e.g., +4.6% total return in US dollars). This figure
would be compared with other similar funds managed within the institution (for
purposes of monitoring internal controls), with performance data for peer group
calculate quartile and decile data and close attention would be paid to the
clients to assess performance over longer periods (e.g., 3 to 5 years) to smooth out
very short term fluctuations in performance and the influence of the business cycle.
This can be difficult however and, industry wide, there is a serious preoccupation
with short-term numbers and the effect on the relationship with clients (and resultant
After-tax measurement represents the benefit to the investor, but investors' tax
regimens that tax realised capital gains (and not unrealised). It is thus possible that
successful active managers (measured before tax) may produce miserable after-tax
results. One possible solution is to report the after-tax position of some standard
taxpayer.
30
In the USA and the UK, two of the world's most sophisticated fund management
benchmarks. For example, an institution believes it has done well if it has generated
a return of 5% when the average manager (usually culled from amongst its peer
alone, but must also integrate other fund elements that would be of interest to
investors, such as the measure of risk taken. Several other aspects are also part of
their objective, i.e. if their return was sufficiently high to reward the risks taken; how
they compare to their peers; and finally whether the portfolio management results
were due to luck or the manager’s skill. The need to answer all these questions has
led to
Modern portfolio theory established the quantitative link that exists between portfolio
risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe
(1964) highlighted the notion of rewarding risk and produced the first performance
returns compared to benchmarks (alphas). The Sharpe ratio is the simplest and best
risk-free rate, compared to the total risk of the portfolio. This measure is said to be
poor choice of benchmark. Meanwhile, it does not allow the separation of the
performance of the market in which the portfolio is invested from that of the
manager. The information ratio is a more general form of the Sharpe ratio in which
Portfolio alpha is obtained by measuring the difference between the return of the
portfolio and that of a benchmark portfolio. This measure appears to be the only
distinguish between normal returns, provided by the fair reward for portfolio
through market timing or stock picking. The first component is related to allocation
and style
investment choices, which may not be under the sole control of the manager, and
the success of the manager’s decisions. Only the latter, measured by alpha, allows
Portfolio normal return may be evaluated using factor models. The first model,
proposed by Jensen (1968), relies on the CAPM and explains portfolio normal
returns with the market index as the only factor. It quickly becomes clear, however,
that one factor is not enough to explain the returns and that other factors have to be
managers’ performance. For example, Fama and French (1993) have highlighted
two important factors that characterize a company's risk in addition to market risk.
These factors are the book-to-market ratio and the company's size as measured by
its market capitalisation. Fama and French therefore proposed a three-factor model
fourth factor to allow the persistence of the returns to be taken into account. Also of
which factors are style indices. This model allows a custom benchmark for each
portfolio to be developed, using the linear combination of style indices that best
alpha.
Education or Certification
their course outlines and some have formulated the title of 'Investment Management'
AACSB and ACBSP which accredit over 560 of the best business school programs,
the Certification of MFP Master Financial Planner Professional from the American
There is no evidence that any particular qualification enhances the most desirable
result in an above average (risk weighted) long-term performance. The industry has
a tradition of seeking out, employing and generously rewarding such people without
funds, insurance companies and mutual funds. Other funds under management
include private wealth and alternative assets such as hedge funds and private equity.
Assets of the global fund management industry increased 15% in 2006 and
nearly doubled from 2002, to reach a record $61.9 trillion. Growth in recent
years has largely been due to rising net flow of investment and strong
34
performance of equity markets. Part of the reason for the increase, in dollar
terms, has also been the decline in the value of the dollar against a number
of currencies.
assets for the purposes of financial accounting, preventive maintenance, and theft
deterrence.
approach to tracking fixed assets utilizes serial numbered Asset Tags, often with bar
codes for easy and accurate reading. Periodically, the owner of the assets can take
businesses small and large. Some Enterprise Resource Planning systems are
Some tracking methods automate the process, such as by using fixed scanners to
assets are defined as any 'permanent' object that a business uses internally
including but not limited to computers, tools, software, or office equipment. While
employees may utilize a specific tool or tools, the asset ultimately belongs to the
keeping track of these assets it would be very easy for a company to lose control of
them.
With advancements in technology, asset tracking software is now available that will
help any size business track valuable assets such as equipment and supplies.
According to a study issued in December, 2005 by the ARC Advisory Group, the
worldwide market for Enterprise Asset Management (EAM) was then at an estimated
$2.2 billion and was expected to grow at about 5.0 percent per year reaching $2.8
billion in 2010.
Asset tracking software allows companies to track what assets it owns, where each
is located, who has it, when it was checked out, when it is due for return, when it is
scheduled for maintenance, and the cost and depreciation of each asset.
The reporting option that is built into most asset tracking solutions provides pre-built
All of this information is captured in one program and can be used on PCs as well as
equipment purchases, and they can more accurately calculate taxes based on
depreciation schedules.
• Office Equipment
• Evidence
• Medical Equipment
• Vehicles
• Files
• Maintenance supplies
• Educational materials
• Software licenses
• Videos
• Tools
stormwater, power supply, flood management, recreational and other assets. In the
past these assets have typically been owned and managed by local or central
government. Investment in these assets is made with the intention that dividends will
prosperity.
Management. The SOS states, in objective and measurable terms, how an asset will
perform, including a suitable minimum condition grade in line with the impact of
asset failure. There are two main objectives of Infrastructure Asset Management
improvements to the standard of service of the asset portfolio through the creation,
acquisition, improvement and disposal of assets. Changes to the SoS are usually
portfolio.
service level customers can expect, and no effective control on the whole-life cost.
With a clearly defined SOS, the asset manager is clear about how success or failure
will be measured, and the customer understands what to expect in return for the
expenditure on the asset system. There are two parts of a well-defined Standard of
managing against a defined SoS, which couples the performance specification with
or the need to determine the outcome or benefit associated with each individual
Asset Management Plans (AMP) are tactical plans for managing an organisation's
Asset Management Plan will cover more than a single asset, taking a system
39
It is in the Asset Management Plan that the standard of service is recorded and
compared against current standard, along with a long-term plan that shows how an
organisation will deliver the defined standard of service for the minimum whole-life
cost.
An Asset portfolio strategy revolves around meeting customer needs in the most
This result of an Asset Portfolio Strategy often involves making strategic changes to
improvement of existing assets. Depending on the drivers for change, this may be to
reduced demand (e.g. disposal or abandonment of roads which are no longer in use)
or where investment policy has changed (e.g. flood defences protecting low-value
affordable for future generations to maintain and operate is not sustainable. Social
.
41
JINDAL STAINLESS STEEL LTD. Can use his Money or grow his money to invest in these
Sectors
But The Company Is Not Listed In Bombay Stock Exchange and National Stock Exchange.
So the company has only a single source to generate the money is to save the money in
For Making Portfolio Of the Company the main part is of Working Capital Management.
Because Company Do not invest in Derivatives market, Mutual Fund and Real Estate
Business.
(shares, bonds etc.) and assets (e.g., real estate), to meet specified investment
goals for the benefit of the investors. Investors may be institutions (insurance
companies, pension funds, corporations etc.) or private investors (both directly via
42
investment contracts and more commonly via collective investment schemes e.g.
mutual funds) .
The term Asset Management is often used to refer to the investment management
of collective investments, whilst the more generic Fund Management may refer to
industry in its own right responsible for caretaking of trillions of dollars, euro, pounds
and yen. Coming under the remit of financial services many of the world's largest
companies are at least in part investment managers and employ millions of staff
Fund manager (or investment advisor in the U.S.) refers to both a firm that
management' decisions
DERIVATIVES
43
The main use of derivatives is to reduce risk for one party. The diverse range of
rates, exchange rates, or indexes (such as a stock market index, consumer price
other derivatives). Their performance can determine both the amount and the timing
of the pay-offs.
One use of derivatives is to be used as a tool to transfer risk by taking the opposite position
in the underlying asset. For example, a wheat farmer and a wheat miller could enter into a
futures contract to exchange cash for wheat in the future. Both parties have reduced a future
risk: for the wheat farmer, the uncertainty of the price, and for the wheat miller, the
availability of wheat.
Broadly speaking there are two distinct groups of derivative contracts, which are
• Over-the-counter (OTC) derivatives are contracts that are traded (and privately
negotiated) directly between two parties, without going through an exchange or other
44
intermediary. Products such as swaps, forward rate agreements, and exotic options
are almost always traded in this way. The OTC derivatives market is huge. According
to the Bank for International Settlements, the total outstanding notional amount is
• Exchange-traded derivatives (ETD) are those derivatives products that are traded
acts as an intermediary to all related transactions, and takes Initial margin from both
(by number of transactions) are the Korea Exchange (which lists KOSPI Index
Futures & Options), Eurex (which lists a wide range of European products such as
interest rate & index products), and CME Group (made up of the 2007 merger of the
Chicago Mercantile Exchange and the Chicago Board of Trade). According to BIS,
the combined turnover in the world's derivatives exchanges totalled USD 344 trillion
during Q4 2005. Some types of derivative instruments also may trade on traditional
convertible preferred may be listed on stock or bond exchanges. Also, warrants (or
"rights") may be listed on equity exchanges. Performance Rights, Cash xPRTs and
various other instruments that essentially consist of a complex set of options bundled
into a simple package are routinely listed on equity exchanges. Like other
Types
date.
• Optionals, which are contracts that give a holder the right to buy or sell an asset at a
Valuation
• Market price, i.e. the price at which traders are willing to buy or sell the contract
For exchange-traded derivatives, market price is usually transparent (often published in real
time by the exchange, based on all the current bids and offers placed on that particular
contract at any one time). Complications can arise with OTC or floor-traded contracts
In particular with OTC contracts, there is no central exchange to collate and disseminate
46
prices. The arbitrage-free price for a derivatives contract is complex, and there are many
mathematics. The stochastic process of the price of the underlying asset is often crucial. A
key equation for the theoretical valuation of options is the Black–Scholes formula, which is
based on the assumption that the cash flows from a European stock option can be
replicated by a continuous buying and selling strategy using only the stock. A simplified
Total world derivatives from 1998-2007 compared to total world wealth in the year
2000
• The use of derivatives can result in large losses due to the use of leverage.
Derivatives allow investors to earn large returns from small movements in the
underlying asset's price. However, investors could lose large amounts if the price of
the underlying moves against them significantly. There have been several instances
Chapter 9 bankruptcy, from which it emerged in June 1995. The county lost
about $1.6 billion through derivatives trading. Orange County was neither
bankrupt nor insolvent at the time; however, because of the strategy the
manner; had they not liquidated they would not have lost any money as their
• The loss of $6.4 billion in the failed fund Amaranth Advisors, which was long
• The loss of $7.2 Billion by Société Générale in January 2008 through mis-use
of futures contracts.
suppose a person wanting a fixed interest rate loan for his business, but finding that
banks only offer variable rates, swaps payments with another business who wants a
variable rate, synthetically creating a fixed rate for the person. However if the second
business goes bankrupt, it can't pay its variable rate and so the first business will
lose its fixed rate and will be paying a variable rate again. If interest rates have
increased, it is possible that the first business may be adversely affected, because it
may not be prepared to pay the higher variable rate. Different types of derivatives
have different levels of risk for this effect. For example, standardized stock options by
law require the party at risk to have a certain amount deposited with the exchange,
49
showing that they can pay for any losses; Banks who help businesses swap variable
for fixed rates on loans may do credit checks on both parties. However in private
agreements between two companies, for example, there may not be benchmarks for
investors. Because derivatives offer the possibility of large rewards, they offer an
knowledge, especially for the small investor, a reason why some financial planners
advise against the use of these instruments. Derivatives are complex instruments
• Derivatives typically have a large notional value. As such, there is the danger that
their use could result in losses that the investor would be unable to compensate for.
The possibility that this could lead to a chain reaction ensuing in an economic crisis,
has been pointed out by legendary investor Warren Buffett in Berkshire Hathaway's
annual report. Buffet stated that he regarded them as ‘financial Weapons of Mass
Destruction.
The problem with derivatives is that they control an increasingly larger notional
amount of assets and this may lead to distortions in the real capital and equities
markets. Investors begin to look at the derivatives markets to make a decision to buy
50
or sell securities and so what was originally meant to be a market to transfer risk now
difficult for the underlying real economy to service its debt obligations and curtailing
real economic activity, which can cause a recession or even depression. In the view
February, 1948, too high a level of debt was one of the primary causes of the 1920s-
• Derivatives facilitate the buying and selling of risk, and thus have a positive
impact on the economic system. Although someone loses money while someone
derivatives should not adversely affect the economic system because it is not zero
sum in utility.
• Former Federal Reserve Board chairman Alan Greenspan commented in 2003 that
he believed that the use of derivatives has softened the impact of the economic
party that creates a single legal obligation covering all included individual contracts.
This means that a bank’s obligation, in the event of the default or insolvency of one
of the parties, would be the net sum of all positive and negative fair values of
• Credit derivative: A contract that transfers credit risk from a protection buyer to a
credit protection seller. Credit derivative products can take many forms, such as
credit default swaps, credit linked notes and total return swaps.
and deposits, swaps, futures, options, caps, floors, collars, forwards and various
combinations thereof.
futures contracts and options) that are transacted on an organized futures exchange.
• Gross negative fair value: The sum of the fair values of contracts where the bank
owes money to its counter-parties, without taking into account netting. This
represents the maximum losses the bank’s counter-parties would incur if the bank
defaults and there is no netting of contracts, and no bank collateral was held by the
counter-parties.
• Gross positive fair value: The sum total of the fair values of contracts where the
bank is owed money by its counter-parties, without taking into account netting. This
represents the maximum losses a bank could incur if all its counter-parties default
and there is no netting of contracts, and the bank holds no counter-party collateral.
52
• High-risk mortgage securities: Securities where the price or expected average life
• Notional amount: The nominal or face amount that is used to calculate payments
made on swaps and other risk management products. This amount generally does
options.
• Total risk-based capital: The sum of tier 1 plus tier 2 capital. Tier 1 capital consists
cumulative dividends, retained earnings, and minority interests in the equity accounts
MUTUAL FUND
53
To protect the interest of the investors, SEBI formulates policies and regulates the
mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues
The Association of Mutual Funds in India (AMFI) reassures the investors in units
of mutual funds that the mutual funds function within the strict regulatory framework.
collects money from many investors and puts it in stocks, bonds, short-term money
market instruments, and/or other securities. The fund manager, also known as
portfolio manager, invests and trades the fund's underlying securities, realizing
capital gains or losses and passing any proceeds to the individual investors.
Currently, the worldwide value of all mutual funds totals more than $26 trillion.
Since 1940, there have been three basic types of investment companies in the
United States: open-end funds, also known in the US as mutual funds; unit
investment trusts (UITs); and closed-end funds. Similar funds also operate in
Canada. However, in the rest of the world, mutual fund is used as a generic term for
Usage
Since the Investment Company Act of 1940, a mutual fund is one of three basic
Mutual funds can invest in many kinds of securities. The most common are cash
instruments, stock, and bonds, but there are hundreds of sub-categories. Stock
funds, for instance, can invest primarily in the shares of a particular industry, such as
technology or utilities. These are known as sector funds. Bond funds can vary
maturity of the bonds (short- or long-term). Both stock and bond funds can invest in
primarily U.S. securities (domestic funds), both U.S. and foreign securities (global
Most mutual funds' investment portfolios are continually adjusted under the
supervision of a professional manager, who forecasts cash flows into and out of the
the fund and chooses those which he or she believes will most closely match the
contract with a management company, which may hire or fire fund managers.
Mutual funds are subject to a special set of regulatory, accounting, and tax rules. In
the U.S., unlike most other types of business entities, they are not taxed on their
56
income as long as they distribute 90% of it to their shareholders and the funds meet
certain diversification requirements in the Internal Revenue Code. Also, the type of
Mutual fund distributions of tax-free municipal bond income are tax-free to the
depending on how the fund earned those distributions. Net losses are not distributed
The net asset value, or NAV, is the current market value of a fund's holdings, less
the fund's liabilities, usually expressed as a per-share amount. For most funds, the
NAV is determined daily, after the close of trading on some specified financial
exchange, but some funds update their NAV multiple times during the trading day.
The public offering price, or POP, is the NAV plus a sales charge. Open-end
funds sell shares at the POP and redeem shares at the NAV, and so a process order
only after the NAV is determined. Closed-end funds (the shares of which are traded
by investors) may trade at a higher or lower price than their NAV; this is known as a
shares, each class will typically have its own NAV, reflecting differences in fees and
Some mutual funds own securities which are not regularly traded on any formal
exchange. These may be shares in very small or bankrupt companies; they may be
57
(such as stock in a non-public company). In the absence of a public market for these
value when computing the NAV. How much of a fund's assets may be invested in
Open-End Fund
The term mutual fund is the common name for what is classified as an open-end
investment company by the SEC. Being open-ended means that, at the end of every
day, the fund issues new shares to investors and buys back shares from investors
and any corporation or trust will be classified by the SEC as an investment company
company if they do not issue undivided interests in specified securities (the defining
investment companies are closed-end funds. Neither UITs nor closed-end funds are
Exchange-traded funds
funds and closed-end funds. ETFs are traded throughout the day on a stock
exchange, just like closed-end funds, but at prices generally approximating the
ETF's net asset value. Most ETFs are index funds and track stock market indexes.
50,000). Most investors purchase and sell shares through brokers in market
kind transactions, ETFs are more efficient than traditional mutual funds (which are
continually buying and selling securities and maintaining liquidity positions) and
Exchange-traded funds are also valuable for foreign investors who are often able to
buy and sell securities traded on a stock market, but who, for regulatory reasons, are
Equity funds
Equity funds, which consist mainly of stock investments, are the most common type
of mutual fund. Equity funds hold 50 percent of all amounts invested in mutual funds
in the United States. Often equity funds focus investments on particular strategies
Capitalization
Fund managers and other investment professionals have varying definitions of mid-
cap, and large-cap ranges. The following ranges are used by Russell Indexes:
companies that have the potential for large capital gains, and value funds, which
concentrate on stocks that are undervalued. Value stocks have historically produced
higher returns; however, financial theory states this is compensation for their greater
risk. Growth funds tend not to pay regular dividends. Income funds tend to be more
investment in bonds, to stay more conservative when it comes to risk, yet aim for
some growth.
60
An index fund maintains investments in companies that are part of major stock (or
bond) indices, such as the S&P 500, while an actively managed fund attempts to
fund manager makes fewer trades, on average, than does an active fund manager.
For this reason, index funds generally have lower trading expenses than actively
managed funds, and typically incur fewer short-term capital gains which must be
passed on to shareholders. Additionally, index funds do not incur expenses to pay for
deciding when to buy, hold or sell individual holdings. Instead, a fairly simple
computer model can identify whatever changes are needed to bring the fund back
Certain empirical evidence seems to illustrate that mutual funds do not beat the
portfolios with similar characteristics. One study found that nearly 1,500 U.S. mutual
funds under-performed the market in approximately half of the years between 1962
and 1992. Moreover, funds that performed well in the past are not able to beat the
61
market again in the future (shown by Jensen, 1968; Grimblatt and Sheridan Titman,
1989).
Bond funds
Bond funds account for 18% of mutual fund assets. Types of bond funds include
term funds, which have a fixed set of time (short-, medium-, or long-term) before
they mature. Municipal bond funds generally have lower returns, but have tax
advantages and lower risk. High-yield bond funds invest in corporate bonds,
including high-yield or junk bonds. With the potential for high yield, these bonds also
Money market funds hold 26% of mutual fund assets in the United States. Money
market funds entail the least risk, as well as lower rates of return. Unlike certificates
of deposit (CDs), money market shares are liquid and redeemable at any time.
Funds of funds
Funds of funds (FoF) are mutual funds which invest in other underlying mutual funds
(i.e., they are funds comprised of other funds). The funds at the underlying level are
typically funds which an investor can invest in individually. A fund of funds will
typically charge a management fee which is smaller than that of a normal fund
because it is considered a fee charged for asset allocation services. The fees
charged at the underlying fund level do not pass through the statement of
operations, but are usually disclosed in the fund's annual report, prospectus, or
62
Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same
The cost associated with investing in an unaffiliated underlying fund is most often
Recently, FoFs have been classified into those that are actively managed (in which
the investment advisor reallocates frequently among the underlying funds in order to
adjust to changing market conditions) and those that are passively managed (the
The design of FoFs is structured in such a way as to provide a ready mix of mutual
funds for investors who are unable to or unwilling to determine their own asset
Investments, Vanguard, and Fidelity have also entered this market to provide
investors with these options and take the "guess work" out of selecting funds. The
allocation mixes usually vary by the time the investor would like to retire: 2020, 2030,
2050, etc. The more distant the target retirement date, the more aggressive the
asset mix.
63
Hedge funds
Hedge funds in the United States are pooled investment funds with loose SEC
regulation and should not be confused with mutual funds. Some hedge fund
managers are required to register with SEC as investment advisers under the
Investment Advisers Act.The Act does not require an adviser to follow or avoid any
fee" of 20% of the hedge fund's profits. There may be a "lock-up" period, during
which an investor cannot cash in shares. A variation of the hedge strategy is the
Mutual funds offer several advantages over investing in individual stocks. For
example, the transaction costs are divided among all the mutual fund shareholders,
which allows for cost-effective diversification. Investors may also benefit by having a
third party (professional fund managers) apply expertise and dedicate time to
manage and research investment options, although there is dispute over whether
professional fund managers can, on average, outperform simple index funds that
mimic public indexes. Whether actively managed or passively indexed, mutual funds
are not immune to risks. They share the same risks associated with the investments
made. If the fund invests primarily in stocks, it is usually subject to the same ups and
Introduction
Capital required for a business can be classified under two main categories i.e.
1. Fixed Capital
2. Working Capital
Every business needs funds for two purposes-for its establishment and to carry out day to
day operation. Long term funds are required to create production facilities through purchase
of fixed assets such as plant and machinery, land building, furniture etc. investment in these
assets represent that part of firm’s capital, which is blocked on a permanent or fixed basis is
Funds are also needed for short-term purpose of raw materials, payment of wages
and other day to day expenses etc. these funds are known as working capital.
Working capital refers to that part of firm’s capital, which is required for financing short
term or current assets such as cash, marketable securities, debtors and inventories.
In the words of Shubin, “working capital is the amount of funds necessary to cover the cost
assets of a company that are changed in ordinary course of business from one form to
into cash.”
Working capital management is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the inter-relationship that exists
between them. The term current assets refers to these assets which in the ordinary course
of business can be, or will be, Converted into Cash within one year without undergoing the
diminution in value and without disrupting the operating of the firm, whereas the current
liabilities are those liabilities which are intended, at there inception, to be paid in the ordinary
course of business, within a year out of current assets or earning of the concern. Thus the
goal of working capital management is to manage the firm’s assets and liabilities in such a
way that a satisfactory level of working capital is maintained. The interaction between
current assets and liabilities in such a way that optimum level of current assets, the trade off
between profitability and risk which is associated with the level of current liabilities and
assets, better financing mix strategies and other short term goals are attained.
1. The term gross working capital, also referred to as working capital, means the total
current assets.
The task of the financial manager in managing working capital efficiency is to ensure
efficiency liquidity in the operation of the enterprise. The basic three measures of a firm’s
overall liquidity are: Current ratios, Acid test ratio, Net working Capital. For the purpose of
working capital management therefore, NWC can be said to measure the liquidity of the firm.
In other words, the goal of working capital management is to manage the current assets and
Working capital is very essential to maintain the smooth running of the business. It is
lifeblood and nerve centre of a business. No business can run successfully with out
2. it also enables a concern to avail each discount on the purchases and hence it
reduces casts
3. Sufficient working capital enables a business to makes prompt payments and helps
4. A concern having adequate working capital enables and high solvency can average
6. A concern can also pay quick and regular dividends to its investors, as there may not
salaries, wages and other day-to-day commitments, which raises the morale of its
employees, increase their efficiency reduces wastages and costs and enhances
estimate of working capital requirements is not an easy task and a large number of factors
have to be considered before starting this exercise. The following factors have to be
1. The length of sales cycle during which inventory is to be kept waiting for sales.
From the total amount blocked in current assets estimated on the basis of first for
items given above, the total current liability i.e. the last two items is deducted. In
The need for the working capital (gross) or current assets cannot be overemphasized.
Given the objective of financial decision making to maximize the shareholder’s wealth, it
is necessary to generate profits. The extent to which profits can be earned will naturally
depend, among other things, open the magnitude of sales. A successful sales program is
necessary for earnings profits by any business enterprise. There is a need of working
capital in firm of current assets to deal with the problem arising out of the lack of
immediate of cash against goods sold. Thus sufficient working capital is necessary to
sustain sales activity. Technically, this is referred to as the operating or cash cycle.
1. Gross Working Capital: In the broad sense, the term working capital refers to the
gross working capital and represents the amount of funds invested in current assets.
Thus, gross working capital is the capital invested in the total current assets of the
enterprise. Current assets are those assets, which in the ordinary course of business
can be converted in to cash with in a short period of normally one accounting year.
1. Cash in Hand
2. Cash at Bank
3. Bills Receivables
4. Sundry Debtors
69
6. Inventories (Stocks)
7. Raw Materials
8. Work in Progress
2. Net working Capital: In a narrow sense, the term working capital refers to the net
working capital. Net working capital is the excess of current assets over current liabilities.
So,
Net working capital may be positive or negative. When the current assets exceed the current
liabilities the working capital is positive and the negative working capital results when the
current liabilities are more than current assets. Current liabilities are those liabilities, which
are intended to be paid in the ordinary course of business with in a short period of normally
one accounting year out of the current assets or the incomes of the business.
70
1. Bills Payable
5. Dividend payable
6. Bank overdraft
Concept: - On the basis of concept Working Capital may be divided into two parts i.e.
A) Gross Working Capital: - G.W.C. is the capital invested in total current assets of the
enterprise.
B) Net Working capital:- N.W.C. is the excess of current assets over current liabilities
so,
effective utilization of fixed facilities and for maintaining the circulation of current
required by the enterprise to carryout its normal business operations. For example-
finished goods and cash balance. This minimum level of current assets is called fixed
business grows the requirements of permanent working capital also increase due to
required to ensure the circulation of current assets from cash to inventories, from
Reserve Working Capital: it is the excess amount over the requirement for regular
working capital, which may be provided for contingencies that may arise at unstated
required to meet the seasonal demands and some special exigencies. Variable
1. Solvency of Business
2. Goodwill
3. Easy Loans
73
4. Cash Discounts
Commitments
1. Indigenous
2. Trade Credit
3. Installment Credit
4. Advances
6. Accrued Expenses
7. Differed Incomes
8. Commercial paper
a) loans
b) Cash Credits
c) Overdrafts
1. Matching Approach: -
The Firm can adopt a financial plan, which matches the expected life of assets with
the expected life of the sources of funds raised to finance assets. Thus a ten year loan
may be raised to finance a plant with an expected life of ten years. The justification for
the exact matching is that, since the purpose of financing is to pay for assets, the source
When the firm follows matching approach (also known as Hedging Approach),
long term Financing will be needed to finance fixed assets and permanent current
assets and short term financing to finance temporary current assets. It is shown in
the diagram:-
2) Conservative Approach:-
A Firm in practice may adopt a conservative approach in financing its currents and fixed
assets. The financing policy of the firm is said to be conservative, when it depends more
on long term funds for financing needs. Under this policy, the firm finances its permanent
assets and also a part of temporary current assets with long term financing. In the
Assets, the idle long term funds can be invested in the tradable securities to conserve
3) Aggressive Approach:-
75
Under this approach the firm finances a part of its permanent current assets with short
term financing. It means under this approach rely more on short term financing.
Short Term Financing may be preferred over Long Term Financing for two reasons:-
2. Flexibility
But Short term financing is more risky than long term financing.
Thus there is conflict between long term and short term financing. Short Term Financing
is less expensive then Long Term Financing, but at the same time Short term Financing
involves greater risk then long Term Financing. The choice between Long Term and
O.P.Jindal Marg,Hisar-125005(Haryana)
- Export 2405.56
Total Expenditure
O.P.Jindal Marg,Hisar-125005(Haryana)
- Export 186675
Total Expenditure
475695
Tax Expense
Public Shareholding
SUGGESTION
Lesser Cost).
80
BIBLIOGRAPHY
V)
81
5. WIKIPEDIA