Anda di halaman 1dari 92

1.

INTRODUCTION

A financial investment, contrary to a real investment which involves tangible


assets such as land or factories, is an allocation of money with contracts whose values are
supposed to increase over time. Therefore, a security is a contract to receive prospective
benefits under stated conditions like stocks or bonds.

The two main attributes that distinguish securities are time and risk. Usually, the
interest rate or rate of return is defined as the gain or loss of the investment divided by the
initial value of the investment. An investment always contains some sort of risk.
Therefore, the higher an investor considers the risk of a security, the higher the rate of
return or premium the investor demands.

The financial assets can be divided into two categories i.e., traditional and
alternative investments. The main traditional assets are cash, fixed-income securities, and
stocks. For short-term borrowing, governments and corporations issue securities with a
year or less to maturity. This market, where governments and corporations manage their
short-term cash needs, is called money market. Two important money market interest
rates are the London Interbank Offered Rate (LIBOR) and the interest rate on Treasury
Bills.

The long-term borrowing needs of corporations and governments are met by


issuing bonds. A bond contract provides periodic coupon payments and redemption value
at maturity to the bondholder. Bonds are either traded over-the-counter or in secondary
bond markets.

Stocks are issued by corporations, which convey rights to the owner. The stock
owners elect the board of directors and have claims on the earnings of the company. The
stock holders are compensated with cash dividends, whose amount is determined by the
board of directors.

Page | 1
Public trading of stocks (shares) is regulated by the government. The process of arranging
the public sale of stocks of a private firm is called initial public offering (IPO). In this
context, privately held stocks are referred to as private equity.

Real estate investments are also usually found in institutional portfolios, either
direct or indirect via investment trusts. Since the end of the Bretton-Woods agreement for
fixed exchange rates in 1973, foreign exchange or derivatives on foreign exchange rates
are also found in portfolios. This is usually the case for international investors who want
to hedge against currency risks. As alternative investments we consider hedge funds,
managed futures, private equity, physical assets (e.g. commodities), and securitized
products (e.g. mortgages).

Page | 2
2.LITERATURE REVIEW
2.1PORTFOLIO MANAGEMENT

Portfolio Management is the professional management of various securities


(shares, bonds etc) assets (e.g. real estate), to meet specified investment goals for the
benefit of the investors. Investors may be institutions (insurance companies, pension
funds, corporations etc.) or private investors (both directly via investment contracts and
more commonly via collective investment schemes e.g. mutual funds)

The term asset management is often used to refer to the investment management
of collective investments, whilst the more generic fund management may refer to all
forms of institutional investment as well as investment management for private investors.
Investment managers who specialize in advisory or discretionary management on behalf
of (normally wealthy) private investors may often refer to their services as wealth
management or portfolio management often within the context of so-called "private
banking".

The provision of 'investment management services' includes elements of financial


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

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

If we own more than one security, we have an investment portfolio. We can build
the portfolio by buying additional stocks, bonds, mutual funds, or other investments. Our
goal is to increase the portfolio's value by selecting investments that will go up in price.

Page | 3
According to modern portfolio theory, we can reduce your investment risk
by creating a diversified portfolio that includes enough different types, or classes, of
securities so that at least some of them may produce strong returns in any economic
climate.

• A portfolio contains many investment vehicles.


• Owning a portfolio involves making choices -- that is, deciding what additional
stocks, bonds, or other financial instruments to buy; when to buy; what and when
to sell; and so forth. Making such decisions is a form of management.

The management of a portfolio is goal-driven. For an investment portfolio, the


specific goal is to increase the value.

2.1.1 WHY PORTFOLIO MANAGEMENT?

The simple fact is that the expected returns from the individual investment
securities carries degree of risk. So this leads most of the investors to the notion of
holding more than one security at a time, in an attempt to spread risks by not putting all
their eggs into one basket.

Diversification of one’s holding is intended to reduce risk in an economy in which


every asset’s returns are subjective to some degree of uncertainty. Even the value of cash
suffers from the roads of inflation. Most investors hope that if they hold several assets,
even if one goes bad, the other will provide protection from an external loss. Therefore
the best diversification comes through holding large numbers of securities scattered
across the industry.

2.1.2 BENEFITS OF THE PORTFOLIO MANAGEMENT PROGRAM:

• Customized investment management

• Personalized client service

• Diversification

• Resources of an industry leader addressing your individual needs

Page | 4
• Unified fee structure

2.2RISK MANAGEMENT AND MEASURES

An understanding of risk is required before the topics of risk management and risk
measures can be addressed. The main problem is that there is no universal definition of
risk and neither are there generally accepted definitions for risk in specific environments.
There is a close relation between risk and uncertainty.

Risk is the exposure to some uncertain future event. The probabilities of the
different outcomes of this future event are assumed to be known or estimable.

A certain system only contains the risks of the uncertain events it is exposed to. In
a financial context, these uncertain events are often called risk factors. The key for every
successful investment strategy is a sound risk management. The two main components of
financial risk management are the modeling of the assets and the definition of the risk
measure. Once these two elements are defined, risk management becomes a formal,
logical process.

Risk management is the identification, assessment, and prioritization of risks


followed by coordinated and economical application of resources to minimize, monitor,
and control the probability and/or impact of unfortunate events. Risks can come from
uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents,
natural causes and disasters as well as deliberate attacks from an adversary.

Investments offer a balance between risk and potential return. The risk is a chance
that an investor would lose the money which he has invested on the securities.
Understanding risk is critical to being informed investors, markets can go up or down,
and one can make or lose money in any investment.

Risk arises because the decision maker will not be able to make perfect forecasts.
Forecasts cannot be made with perfection or certainty, since the future events which they

Page | 5
depend are uncertain. The balance between the risk and return varies from one investment
to the other. The risk attached with each security is inflation risk, currency risk, liquidity
risk, political risk etc.

Higher Risks = Higher Yields

Depending on the portfolio management approach, equity portfolios face two


general types of risk (each of which can have several subcategories): active risk and
tracking risk.

Active risk relates to the performance of the selected securities relative to the
benchmark portfolio. Portfolio stocks performing worse than the average stock in the
index would be a form of active risk.

Tracking risk results when the benchmark portfolio has substantially different
return patterns. The chosen benchmark should generally perform similarly to the
managed portfolio. If a portfolio is consistently up when the benchmark is down it may
be because the chosen benchmark does not represent the management style. The portfolio
would be said to have a large tracking error relative to the benchmark, and therefore may
mean that the manager is not investing in the types of securities he or she was hired to
manage.

Page | 6
2.3 TYPES OF RISK

There are two basic types of risks:

2.3.1 SYSTEMATIC RISK

Systematic risk influences a large number of assets. A significant political


event, for example, could affect several of the assets in your portfolio. It is
virtually impossible to protect yourself against this type of risk.

2.3.2UNSYSTEMATIC RISK

Unsystematic risk is sometimes referred to as "specific risk". This kind of


risk affects a very small number of assets. An example is news that affects a specific
stock such as a sudden strike by employees. Diversification is the only way to protect
oneself from unsystematic risk.

There are other types of risk. They are the following:

2.3.3 CREDIT/DEFAULT RISK

Credit risk is the risk that a company or individual will be unable to pay
the contractual interest or principal on its debt obligations. This type of risk is of
particular concern to investors who hold bonds in their portfolios. Government
bonds, especially those issued by the federal government, have the least amount
of default risk and the lowest returns, while corporate bonds tend to have the
highest amount of default risk but also higher interest rates.

Page | 7
2.3.4 COUNTRY RISK

Country risk refers to the risk that a country won't be able to honor its
financial commitments. When a country defaults on its obligations, this can harm
the performance of all other financial instruments in that country as well as other
countries it has relations with. Country risk applies to stocks, bonds, mutual
funds, options and futures that are issued within a particular country. This type of
risk is most often seen in emerging markets or countries that have a severe deficit.

2.3.5 FOREIGN EXCHANGE RISK

When investing in foreign countries you must consider the fact that
currency exchange rates can change the price of the asset as well. Foreign-
exchange risk applies to all financial instruments that are in a currency other than
the domestic currency.

2.3.6 INTEREST RATE RISK

Interest rate risk is the risk that an investment's value will change as a
result of a change in interest rates. This risk affects the value of bonds more
directly than stocks. The uncertainty associated with the effects of changes in
market interest rates. There are two types of interest rate risk identified; price risk
and reinvestment rate risk. The price risk is sometimes referred to as maturity risk
since the greater the maturity of an investment, the greater the change in price for
a given change in interest rates. Both types of interest rate risks are important in
investments, corporate financial planning, and banking.

Page | 8
2.3.7 REINVESTMENT RATE RISK

The uncertainty associated with the impact that changing interest rates
have on available rates of return when reinvesting cash flows received from an
earlier investment. It is a direct or positive relationship.

2.3.8 LIQUIDITY RISK

The uncertainty associated with the ability to sell an asset on short notice
without loss of value. A highly liquid asset can be sold for fair value on short
notice. This is because there are many interested buyers and sellers in the market.
An illiquid asset is hard to sell because there few interested buyers. This type of
risk is important in some project investment decisions but is discussed extensively
in Investment courses.

2.3.9 POLITICAL RISK

Political risk represents the financial risk that a country's government will
suddenly change its policies. This is a major reason why developing countries
lack foreign investment.

2.3.10 MARKET RISK

Also referred to as volatility, market risk is the the day-to-day fluctuations


in a stock's price. Market risk applies mainly to stocks and options. As a whole,
stocks tend to perform well during a bull market and poorly during a bear market -
volatility is not so much a cause but an effect of certain market forces. Volatility
is a measure of risk because it refers to the behavior, or "temperament", of your
investment rather than the reason for this behavior. Because market movement is
the reason why people can make money from stocks, volatility is essential for

Page | 9
returns, and the more unstable the investment the more chance there is that it will
experience a dramatic change in either direction.

2.3.11 PRICE RISK

The uncertainty associated with potential changes in the price of an asset


caused by changes in interest rate levels and rates of return in the economy. This
risk occurs because changes in interest rates affect changes in discount rates
which, in turn, affect the present value of future cash flows. The relationship is an
inverse relationship. If interest rates (and discount rates) rise, prices fall. The
reverse is also true.

Since interest rates directly affect discount rates and present values of future cash
flows represent underlying economic value, we have the following relationships.

2.3.12 INFLATION RISK (PURCHASING POWER RISK)

The loss of purchasing power is due to the effects of inflation. When


inflation is present, the currency loses its value due to the rising price level in the
economy. The higher the inflation rate, the faster the money loses its value.

2.3.13 BUSINESS RISK

The uncertainty associated with a business firm's operating environment


and reflected in the variability of earnings before interest and taxes (EBIT). Since
this earnings measure has not had financing expenses removed, it reflects the risk
associated with business operations rather than methods of debt financing.

Page | 10
2.4 DETERMINING THE RISK RETURN TRADE-OFF

Page | 11
This states that the higher the risk of a particular investment, the higher the
possible return. But, many investors do not understand how to determine the level of risk
their individual portfolios should bear. This is a general concept underlying anything by
which a return can be expected. The higher the risk, the more you should receive for
holding the investment and the lower the risk, the less you should receive.

Fig.1 Risk Return Trade-Off

Low levels of uncertainty (low risk) are associated with low potential returns.
High levels of uncertainty (high risk) are associated with high potential returns.
The risk/return tradeoff is the balance between the desire for the lowest possible risk and
the highest possible return. This is demonstrated graphically in the chart below. A higher
standard deviation means a higher risk and higher possible return.

Fig.2 Risk Return Trade-Off

Page | 12
A common misconception is that higher risk equals greater return. The risk/return
tradeoff tells us that the higher risk gives us the possibility of higher returns. There are no
guarantees. Just as risk means higher potential returns, it also means higher potential
losses.

3. THEORIES OF INVESTMENT
3.1 MODERN PORTFOLIO THEORY

In the early 1960s, the investment community talked about risk, but there was no
specific measure for the term. To build a portfolio model, however, investors had to
quantify their risk variable. The basic portfolio model was developed by Harry
Markowitz, who derived the expected rate of return for a portfolio of assets and an
expected risk measure. Markowitz showed that the variance of the rate of return was a
meaningful measure of portfolio risk under a reasonable set of assumptions, and he

Page | 13
derived the formula for computing the variance of a portfolio. This portfolio variance
formula indicated the importance of diversifying your investments to reduce the total risk
of a portfolio but also showed how to effectively diversify. The Markowitz model is
based on several assumptions regarding investor behavior:

1. Investors consider each investment alternative as being represented by a probability


distribution of expected returns over some holding period.
2. Investors maximize one-period expected utility, and their utility curves demonstrate
diminishing marginal utility of wealth.
3. Investors estimate the risk of the portfolio on the basis of the variability of expected
returns.
4. Investors base decisions solely on expected return and risk, so their utility curves are a
function of expected return and the expected variance (or standard deviation) of returns
only.
5. For a given risk level, investors prefer higher returns to lower returns. Similarly, for a
given level of expected return, investors prefer less risk to more risk.

Under these assumptions, a single asset or portfolio of assets is considered to be


efficient if no other asset or portfolio of assets offers higher expected return with the
same (or lower) risk, or lower risk with the same (or higher) expected return.

One of the best-known measures of risk is the variance, or standard deviation of


expected returns. It is a statistical measure of the dispersion of returns around the
expected value whereby larger variance or standard deviation indicates greater dispersion.
The idea is that the more disperse the expected returns, the greater the uncertainty of
future returns.

Another measure of risk is the range of returns. It is assumed that a larger range of
expected returns, from the lowest to the highest return, means greater uncertainty and risk
regarding future expected returns.

Page | 14
Modern portfolio theory 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 and the Securities Market
Line.

MPT models an asset's return as a random variable, and models a portfolio as a


weighted combination of assets so that the return of a portfolio is the weighted
combination of the assets' returns. Moreover, a portfolio's return is a random variable, and
consequently has an expected value and a variance. Risk, in this model, is the standard
deviation of return.

The model assumes that investors are risk averse, 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.

Every possible asset combination can be plotted in risk-return space, and the
collection of all such possible portfolios defines a region in this space. The line along the
upper edge of this region is known as the efficient frontier ("the Markowitz frontier").
Combinations along this line represent portfolios (explicitly excluding the risk-free
alternative) for which there is lowest risk for a given level of return. Conversely, for a
given amount of risk, the portfolio lying on the efficient frontier represents the
combination offering the best possible return.

Page | 15
Fig.3 Modern Portfolio Theory

It is still the most popular single-period financial optimization although its


deficiencies are widely documented. The single period optimization lacks many
important properties which are encountered in real-world investment processes. First of
all, it does not account for transaction costs. Second, the possibility of altering the
portfolio at different times in the future is not taken into account. In a single period
optimization problem, the investment decisions are inherently static.

3.2 CAPITAL ASSET PRICING MODEL


The capital asset pricing model (CAPM) is used to determine a theoretically
appropriate required rate of return of an asset, if that asset is to be added to an already
well-diversified portfolio, given that asset's non-diversifiable risk. The model takes into
account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or
market risk), often represented by the quantity beta (β) in the financial industry, as well as
the expected return of the market and the expected return of a theoretical risk-free asset.

Page | 16
The model was introduced by Jack Treynor, William Sharpe , John Lintner and
Jan Mossin independently, building on the earlier work of Harry Markowitz on
diversification and modern portfolio theory.

The CAPM is a model for pricing an individual security or a portfolio. For


individual securities, we make use of the security market line (SML) and its relation to
expected return and systematic risk (beta) to show how the market must price individual
securities in relation to their security risk class. The SML enables us to calculate the
reward-to-risk ratio for any security in relation to that of the overall market. Therefore,
when the expected rate of return for any security is deflated by its beta coefficient, the
reward-to-risk ratio for any individual security in the market is equal to the market
reward-to-risk ratio

Fig.4 CAPM Model

Once the expected return is calculated using CAPM, the future cash flows of the
asset can be discounted to their present value using this rate , to establish the correct price
for the asset.

3.2.1 ASSUMPTIONS OF CAPM

All Investors:

Page | 17
1. Aim to maximize economic utility.
2. Are rational and risk-averse.
3. Are price takers, i.e., they cannot influence prices.
4. Can lend and borrow unlimited under the risk free rate of interest.
5. Trade without transaction or taxation costs.
6. Deal with securities that are all highly divisible into small parcels.
7. Assume all information is at the same time available to all investors.

3.2.2 SHORTCOMINGS OF CAPM

• The model assumes that asset returns are (jointly) normally distributed random
variables.
• The model assumes that the variance of returns is an adequate measurement of
risk.
• The model assumes that all investors have access to the same information and
agree about the risk and expected return of all assets
• The model assumes that the probability beliefs of investors match the true
distribution of returns.
• The model does not appear to adequately explain the variation in stock returns.
Empirical studies show that low beta stocks may offer higher returns than the
model would predict.
• The model assumes that given a certain expected return investors will prefer
lower risk (lower variance) to higher risk and conversely given a certain level of
risk will prefer higher returns to lower ones
• The model assumes that there are no taxes or transaction costs,
• The market portfolio consists of all assets in all markets, where each asset is
weighted by its market capitalization. This assumes no preference between
markets and assets for individual investors, and that investors choose assets solely
as a function of their risk-return profile
• The market portfolio should in theory include all types of assets that are held by
anyone as an investment (including works of art, real estate, human capital.

Page | 18
3.3 BETA

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in


comparison to the market as a whole. Beta is used in the capital asset pricing model
(CAPM), a model that calculates the expected return of an asset based on its beta and
expected market returns. Also known as "beta coefficient".

Page | 19
Beta is calculated using regression analysis, and you can think of beta as the
tendency of a security's returns to respond to swings in the market. A beta of 1 indicates
that the security's price will move with the market. A beta of less than 1 means that the
security will be less volatile than the market. A beta of greater than 1 indicates that the
security's price will be more volatile than the market. For example, if a stock's beta is 1.2,
it's theoretically 20% more volatile than the market.

Many utilities stocks have a beta of less than 1. Conversely, most high-tech stocks
have a beta of greater than 1, offering the possibility of a higher rate of return, but also
posing more risk.

Correlations are evident between companies within the same industry, or even
within the same asset class (such as equities). This correlated risk, measured by Beta,
creates almost all of the risk in a diversified portfolio.

The beta coefficient is a key parameter in the capital asset pricing model (CAPM).
It measures the part of the asset's statistical variance that cannot be mitigated by the
diversification provided by the portfolio of many risky assets, because it is correlated
with the return of the other assets that are in the portfolio. Beta can be estimated for
individual companies using regression analysis against a stock market index.

By definition, the market itself has an underlying beta of 1.0, and individual
stocks are ranked according to how much they deviate from the macro market. A stock
that swings more than the market (i.e. more volatile) over time has a beta whose absolute
value is above 1.0. If a stock moves less than the market, the absolute value of the stock's
beta is less than 1.0.

Higher-beta stocks mean greater volatility and are therefore considered to be


riskier, but are in turn supposed to provide a potential for higher returns; low-beta stocks
pose less risk but also lower returns. In the same way a stock's beta shows its relation to
market shifts, it also is used as an indicator for required returns on investment (ROI). If
the market with a beta of 1 has an expected return increase of 8%, a stock with a beta of
1.5 should increase return by 12%. Also, if the beta of a stock is less than 1, such as 0.5,

Page | 20
the stock will move at a rate of half of the market. For example, if the market increases
by 10% the stock itself will increase only 5% and vice versa.

To estimate beta, one needs a list of returns for the asset and returns for the index;
these returns can be daily, weekly or any period. Then one uses standard formulas from
linear regression.

3.4 PORTFOLIO CONSTRUCTION

In today's financial marketplace, a well-maintained portfolio is vital to any


investor's success. As an individual investor, you need to know how to determine an asset
allocation that best conforms to your personal investment goals and strategies. In other
words, your portfolio should meet your future needs for capital and give you peace of

Page | 21
mind. Investors can construct portfolios aligned to their goals and investment strategies
by following a systematic approach. Here we go over some essential steps for taking such
an approach.

3.4.1 STEP 1: DETERMINING THE APPROPRIATE ASSET ALLOCATION

Ascertaining your individual financial situation and investment goals is the first
task in constructing a portfolio. Important items to consider are age, how much time you
have to grow your investments, as well as amount of capital to invest and future capital
needs. A single college graduate just beginning his or her career and a 55-year-old
married person expecting to help pay for a child's college education and plans to retire
soon will have very different investment strategies.

A second factor to take into account is your personality and risk tolerance.
Everyone would like to reap high returns year after year, but if you are unable to sleep at
night when your investments take a short-term drop, chances are the high returns from
those kinds of assets are not worth the stress.

Clarifying the current situation and future needs for capital, as well as the risk
tolerance, will determine how our investments should be allocated among different asset
classes. The possibility of greater returns comes at the expense of greater risk of losses (a
principle known as the risk/return tradeoff).For example, the young person who won't
have to depend on his or her investments for income can afford to take greater risks in the
quest for high returns. On the other hand, the person nearing retirement needs to focus on
protecting his or her assets and drawing income from these assets in a tax-efficient
manner.

3.4.2 STEP 2: ACHIEVING THE PORTFOLIO DESIGNED IN STEP 1

Once we have determined the right asset allocation, you simply need to divide
your capital between the appropriate asset classes.

Page | 22
We can further break down the different asset classes into subclasses, which also
have different risks and potential returns. For example, an investor might divide the
equity portion between different sectors and market caps, and between domestic and
foreign stock. The bond portion might be allocated between those that are short term and
long term, government versus corporate debt and so forth.

There are several ways you can go about choosing the assets and securities to fulfill our
asset allocation strategy:

1. STOCK PICKING

Choose stocks that satisfy the level of risk to carry in the equity portion of the
portfolio - sector, market cap and stock type are factors to consider. Analyze the
companies using stock screeners to shortlist potential picks, than carry out more
in-depth analyses on each potential purchase to determine its opportunities and
risks going forward. This is the most work-intensive means of adding securities to
the portfolio, and requires regular monitor price changes in the holdings and stay
current on company and industry news.

2. BOND PICKING

When choosing bonds, there are several factors to consider including the
coupon, maturity, the bond type and rating, as well as the general interest rate
environment.

3. MUTUAL FUNDS

Mutual funds are available for a wide range of asset classes and allow us
to hold stocks and bonds that are professionally researched and picked by fund
managers. Of course, fund managers charge a fee for their services, which will
detract from our returns. Index funds present another choice; they tend to have
lower fees because they mirror an established index and are thus passively
managed.

Page | 23
4. EXCHANGE-TRADED FUNDS (ETFS)

If preferred not to invest with mutual funds, ETF’s can be a viable


alternative. ETF’s are like mutual funds that trade like stocks. ETF’s are similar to
mutual funds in that they represent a large basket of stocks - usually grouped by
sector, capitalization, country and the like - except that they are not actively
managed, but instead track a chosen index or other basket of stocks. Because they
are passively managed, ETF’s offer cost savings over mutual funds while
providing diversification. ETF’s also cover a wide range of asset classes and can
be a useful tool for rounding out the portfolio.

3.4.3 STEP 3: REASSESSING PORTFOLIO WEIGHTINGS

Once there is an established portfolio, there is a need to analyze and rebalance it


periodically because market movements may cause the initial weightings to change. To
assess the portfolio's actual asset allocation, quantitatively categorize the investments and
determine their values' proportion to the whole.

The other factors that are likely to change over time are the current financial
situation, future needs and risk tolerance. If these things change, there may need to adjust
your portfolio accordingly. If the investors risk tolerance has dropped, there may be the
need to reduce the amount of equities held. Or maybe now the investor is ready to take on
greater risk and asset allocation requires that a small proportion of assets be held in
riskier small-cap stocks.

Essentially, to rebalance, we need to determine which of our positions are over


weighted and underweighted. For example, say we are holding 30% of current assets in
small-cap equities, while the asset allocation suggests we should only have 15% of assets
in that class. Rebalancing involves determining how much of this position we need to
reduce and allocate to other classes.

3.4.4 STEP 4: REBALANCING STRATEGICALLY

Page | 24
Once we have determined which securities we need to reduce and by how much,
decide which underweighted securities which will buy with the proceeds from selling the
overweighed securities.

When selling assets to rebalance the portfolio it is very important to consider the
tax implications of readjusting your portfolio. Perhaps the investment in growth stocks
has appreciated strongly over the past year, but if we were to sell all of your equity
positions to rebalance your portfolio, we may incur significant capital gains taxes. In this
case, it might be more beneficial to simply not contribute any new funds to that asset
class in the future while continuing to contribute to other asset classes. This will reduce
your growth stocks' weighting in the portfolio over time without incurring capital gains
taxes.

At the same time, we also need to consider the outlook of the securities. If we
suspect that those same over weighted growth stocks are ominously ready to fall, we may
want to sell in spite of the tax implications. Analyst opinions and research reports can be
useful tools to help gauge the outlook for your holdings. And tax-loss selling is a strategy
that can be applied to reduce tax implications.

3.5 IMPORTANCE OF DIVERSIFICATION

Throughout the entire portfolio construction process, it is vital that that we


remember to maintain our diversification above all else. It is not enough simply to own
securities from each asset class; we must also diversify within each class. Ensure that

Page | 25
your holdings within a given asset class are spread across an array of subclasses and
industry sectors.

Investors can achieve excellent diversification by using mutual funds and ETFs.
These investment vehicles allow individual investors to obtain the economies of scale
that large fund managers enjoy, which the average person would not be able to produce
with a small amount of money.

Overall, a well-diversified portfolio is the best bet for consistent long-term growth
of our investments. It protects our assets from the risks of large declines and structural
changes in the economy over time. Monitor the diversification of our portfolio, making
adjustments when necessary and we will greatly increase your chances of long-term
financial success.

4.MODES OF INVESTMENT

Investment or investing is a term with several closely-related meanings in


business management, finance and economics, related to saving or deferring
consumption. Investing is the active redirection of resources: from being consumed

Page | 26
today, to creating benefits in the future; the use of assets to earn income or profit. An
investment is a choice by an individual or an organization such as a pension fund, after at
least some careful analysis or thought, to place or lend money in a vehicle (e.g. property,
stock securities, bonds) that has sufficiently low risk and provides the possibility of
generating returns over a period of time. Placing or lending money in a vehicle that risks
the loss of the principal sum or that has not been thoroughly analyzed is, by definition
speculation, not investment.

An asset is usually purchased, or equivalently a deposit is made in a bank, in


hopes of getting a future return or interest from it. The basic meaning of the term being
an asset held to have some recurring or capital gains. It is an asset that is expected to give
returns without any work on the asset per se.

4.1ASSET

An asset is defined as a probable future economic benefit obtained or controlled


by a particular entity as a result of a past transaction or event.

CLASSIFICATION OF ASSETS

Page | 27
Assets may be classified in many ways. In a company's balance sheet certain
divisions are required by generally accepted accounting principles (GAAP), which vary
from country to country.

4.1.1CURRENT ASSETS

Current assets are cash and other assets expected to be converted to cash, sold, or
consumed either in a year or in the operating cycle. These assets are continually turned
over in the course of a business during normal business activity. There are 5 major items
included into current assets:

• CASH AND CASH EQUIVALENTS

It is the most liquid asset, which includes currency, deposit accounts, and
negotiable instruments (e.g., money orders, cheque, and bank drafts).

• SHORT-TERM INVESTMENTS

Includes securities bought and held for sale in the near future to generate income
on short-term price differences (trading securities).

• RECEIVABLES

Usually reported as net of allowance for uncollectible accounts.

• INVENTORY

Trading these assets is a normal business of a company. The inventory value


reported on the balance sheet is usually the historical cost or fair market value,
whichever is lower. This is known as the "lower of cost or market" rule.

• PREPAID EXPENSES

These are expenses paid in cash and recorded as assets before they are used or
consumed (a common example is insurance).

The phrase net current asset is often used and refers to the total of current assets less the
total of current liabilities.

Page | 28
4.1.2 LONG-TERM INVESTMENTS

Often referred to simply as "investments". Long-term investments are to be held


for many years and are not intended to be disposed in the near future. This group usually
consists of four types of investments:

• Investments in securities, such as bonds, common stock, or long-term notes.

• Investments in fixed assets not used in operations (e.g., land held for sale).

• Investments in special funds (e.g., sinking funds or pension funds).

• Investments in subsidiaries or affiliated companies.

• Different forms of insurance may also be treated as long term investments.

4.1.3 FIXED ASSETS

Also referred to as PPE (property, plant, and equipment), or tangible assets, these
are purchased for continued and long-term use in earning profit in a business. This group
includes land, buildings, machinery, furniture, tools, and certain wasting resources e.g.,
timberland and minerals. They are written off against profits over their anticipated life by
charging depreciation expenses (with exception of land). Accumulated depreciation is
shown in the face of the balance sheet or in the notes.

These are also called capital assets in management accounting.

4.1.4.INTANGIBLE ASSETS

Intangible assets lack physical substance and usually are very hard to evaluate.
They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc.
These assets are (according to US GAAP) amortized to expense over 5 to 40 years with
the exception of goodwill.

Some assets such as websites are treated differently in different countries and may fall
under either tangible or intangible assets.

4.1.5 OTHER ASSETS

Page | 29
This section includes a high variety of assets, most commonly:

• Long-term prepaid expenses

• Long-term receivables

• Intangible assets (if they represent just a very small fraction of total assets)

• Property held for sales

In a lot of cases this section is too general and broad, because assets could be classified
into four above categories.

4.2 SECURITY
A security is a fungible, negotiable instrument representing financial value.
Securities are broadly categorized into debt securities, such as banknotes, bonds and
debentures, and equity securities, e.g. common stocks. The company or other entity
issuing the security is called the issuer. What specifically qualifies as a security is

Page | 30
dependent on the regulatory structure in a country. For example private investment pools
may have some features of securities, but they may not be registered or regulated as such
if they meet various restrictions.

Securities may be represented by a certificate or, more typically, by an electronic


book entry. Certificates may be bearer, meaning they entitle the holder to rights under the
security merely by holding the security, or registered, meaning they entitle the holder to
rights only if he or she appears on a security register maintained by the issuer or an
intermediary. They include shares of corporate stock or mutual funds, bonds issued by
corporations or governmental agencies, stock options or other options, limited partnership
units, and various other formal investment instruments that are negotiable and fungible.

Securities are traditionally divided into debt securities and equities.

4.2.1 DEBT

Debt securities may be called debentures, bonds, deposits, notes or commercial


paper depending on their maturity and certain other characteristics. The holder of a debt
security is typically entitled to the payment of principal and interest, together with other
contractual rights under the terms of the issue, such as the right to receive certain
information. Debt securities are generally issued for a fixed term and redeemable by the
issuer at the end of that term. Debt securities may be protected by collateral or may be
unsecured, and, if they are unsecured, may be contractually "senior" to other unsecured
debt meaning their holders would have a priority in a bankruptcy of the issuer. Debt that
is not senior is "subordinated".

• CORPORATE BONDS

They represent the debt of commercial or industrial entities. Debentures have


a long maturity, typically at least ten years, whereas notes have a shorter maturity.
Commercial paper is a simple form of debt security that essentially represents a post-
dated check with a maturity of not more than 270 days.
Page | 31
• MONEY MARKET INSTRUMENTS

They are short term debt instruments that may have characteristics of deposit
accounts, such as certificates of deposit, and certain bills of exchange. They are
highly liquid and are sometimes referred to as "near cash". Commercial paper is also
often highly liquid.

• GOVERNMENT BONDS

They are medium or long term debt securities issued by sovereign governments or
their agencies. Typically they carry a lower rate of interest than corporate bonds, and
serve as a source of finance for governments.

• SUPRANATIONAL BONDS

They represent the debt of international organizations such as the World Bank, the
International Monetary Fund, regional multilateral development banks and others.

4.2.2 EQUITY

An equity security is a share in the capital stock of a company (typically common


stock, although preferred equity is also a form of capital stock). The holder of equity is a
shareholder, owning a share, or fractional part of the issuer. Unlike debt securities, which
typically require regular payments (interest) to the holder, equity securities are not
entitled to any payment. In bankruptcy, they share only in the residual interest of the
issuer after all obligations have been paid out to creditors. However, equity generally
entitles the holder to a pro rata portion of control of the company, meaning that a holder
of a majority of the equity is usually entitled to control the issuer. Equity also enjoys the
right to profits and capital gain, whereas holders of debt securities receive only interest
and repayment of principal regardless of how well the issuer performs financially.
Furthermore, debt securities do not have voting rights outside of bankruptcy. In other
words, equity holders are entitled to the "upside" of the business and to control the
business.

4.2.3 HYBRID

Page | 32
Hybrid securities combine some of the characteristics of both debt and equity
securities.

4.2.4 PREFERENCE SHARES

They form an intermediate class of security between equities and debt. If the
issuer is liquidated, they carry the right to receive interest and/or a return of capital in
priority to ordinary shareholders. However, from a legal perspective, they are capital
stock and therefore may entitle holders to some degree of control depending on whether
they contain voting rights.

4.2.5 CONVERTIBLES

They are bonds or preferred stock which can be converted, at the election of the
holder of the convertibles, into the common stock of the issuing company. The
convertibility, however, may be forced if the convertible is a callable bond, and the issuer
calls the bond. The bondholder has about 1 month to convert it, or the company will call
the bond by giving the holder the call price, which may be less than the value of the
converted stock. This is referred to as a forced conversion.

4.2.6 EQUITY WARRANTS

They are options issued by the company that allows the holder of the warrant to purchase
a specific number of shares at a specified price within a specified time. They are often
issued together with bonds or existing equities, and are, sometimes, detachable from them
and separately tradable. When the holder of the warrant exercises it, he pays the money
directly to the company, and the company issues new shares to holder.

Warrants, like other convertible securities, increases the number of shares outstanding,
and are always accounted for in financial reports as fully diluted earnings per share,
which assumes that all warrants and convertibles will be exercised.

4.2.7 THE SECURITIES MARKET

PRIMARY AND SECONDARY MARKET

Page | 33
The public securities markets can be divided into primary and secondary markets.
The distinguishing difference between the two markets is that in the primary market, the
money for the securities is received by the issuer of those securities from investors,
whereas in the secondary market, the money goes from one investor to the other. When a
company issues public stock for the first time, this is called an Initial Public Offering
(IPO). A company can later issue more new shares, or issue shares that have been
previously registered in a shelf registration. These later new issues are also sold in the
primary market, but they are not considered to be an IPO. Issuers usually retain
investment banks to assist them in administering the IPO, getting SEC (or other
regulatory body) approval, and selling the new issue. When the investment bank buys the
entire new issue from the issuer at a discount to resell it at a markup, it is called an
underwriting, or firm commitment. However, if the investment bank considers the risk
too great for an underwriting, it may only assent to a best effort agreement, where the
investment bank will simply do its best to sell the new issue.

In order for the primary market to thrive, there must be a secondary market, or
aftermarket, where holders of securities can sell them to other investors for cash,
hopefully at a profit. Otherwise, few people would purchase primary issues, and, thus,
companies and governments would be unable to raise money for their operations.
Organized exchanges constitute the main secondary markets. Many smaller issues and
most debt securities trade in the decentralized, dealer-based over-the-counter markets.

4.2.8 PUBLIC OFFER AND PRIVATE PLACEMENT

In the primary markets, securities may be offered to the public in a public offer.
Alternatively, they may be offered privately to a limited number of qualified persons in a
private placement. Often a combination of the two is used. The distinction between the
two is important to securities regulation and company law. Privately placed securities are
often not publicly tradable and may only be bought and sold by sophisticated qualified
investors. As a result, the secondary market is not as liquid.

Another category, sovereign debt, is generally sold by auction to a specialised


class of dealers.

Page | 34
4.3 BONDS

Bonds are issued by the government municipality, corporation, federal agency or


other entity known as the issuer. They issue bonds to pool up money from the public for
their establishment. It helps them by exempting them from certain amount of income tax.
This is something like issuing loan, the issuer promises to pay a specified rate of interest
during the life of the bond and to repay the principal of the bond when it is matured.

Page | 35
Bonds may be of many types - they may be regular income, infrastructure, tax
saving or deep discount bonds. These are financial instruments with a fixed coupon rate
and a definite period after which these are redeemed. The fundamental difference
between debentures and bonds is that the former is normally secured whereas the latter is
not. Hence in general bonds are issued at a higher interest rate than debentures. This
avenue of financing is mainly availed by highly reputed corporate concerns and financial
institutions.

The three main kinds of instruments in this category are as follows:

• Fixed rate
• Floating rate
• Discount bonds
• The bonds may also be regular income with the coupons being paid at fixed
intervals or cumulative in which the interest is paid on redemption.
• Unlike debentures, bonds can be floated with a fixed interest or floating interest
rate. They can also be floated without interest and are called discount bonds as
they are issued at a discount to the face value and an investor is paid the face
value on redemption and if offered for longer terms are known as deep discount
bonds.
• The main advantage with interest bearing bonds is the floating interest rate, which
is stipulated based on certain mark-up over stock market index or some such
index.
• From the point of view of the investor bonds are instruments carrying higher risk
and higher returns as compared to debentures.
• This has to be kept in mind while floating bond issues for financing purposes.
With the current buoyancy in capital markets for equity instruments the demand
for corporate bonds is low

Page | 36
4.4 DEBENTURES

They are fixed interest debt instruments with varying period of maturity. Can
either be placed privately or offered for subscription. May or may not be listed on the
stock exchange. If listed on the stock exchanges, they should be rated prior to the listing
by any of the credit rating agencies designated by SEBI. When offered for subscription a
debenture redemption reserve has to be maintained. The period of maturity normally
varies from 3 to 10 years and may also be more for projects with a high gestation period.

Page | 37
4.4.1 TYPES OF DEBENTURES

There are different kinds of debentures, which can be offered. They are as follows:

• Non convertible debentures (NCD)


• Partially convertible debentures (PCD)
• Fully convertible debentures (FCD)

The difference in the above instruments is regarding the redeemability of the instrument:

• In case of NCDs, the total amount of the instrument is redeemed by the issuer,
• In case of PCDs, part of the instrument is redeemed and part of it is converted into
equity,
• In case of FCDs, the whole value of the instrument is converted into equity. The
conversion price is stated when the instrument is issued.
• The price of each equity share received by way of converting the face value of the
convertible security i.e. debenture is called the conversion price.
• The number of equity shares exchangeable per unit of the convertible security i.e.
debentures is called the conversion ratio.
• The period of time after which the debenture is converted into equity is called the
conversion period.
• The convertible instruments are generally used to stem the sudden outflow of the
capital at the time of maturity of the instrument causing temporary liquidity
problems. Alternately, the company has to raise funds from a different source or
issue fresh instruments to tide over and also has to bear the transaction costs in the
process.
• Debentures might be either Callable or Puttable
• CALLABLE DEBENTURE

It is a debenture in which the issuing company has the option of


redeeming the security before the specified redemption date at a pre-
determined price.

Page | 38
• PUTTABLE SECURITY

It is a security where the holder of the instrument has the option of


getting it redeemed before maturity.

4.5 MUTUAL FUNDS

These funds are operated by Investment Company, where the company raises the
money from the public and invests the same in a variety of different financial instruments
or securities like equity shares, government securities, bonds, debentures etc. Investment
companies acts as a financial intermediaries as they collect the money from the public
and invest on the behalf of the investors. Mutual funds are substitute for those who are
unable to invest directly in equities or debt because of resource, time or knowledge
constraints.

Page | 39
Mutual funds issues units to the investors. The appreciation of portfolio or
securities in which the mutual fund has invested the money leads to the appreciation in
the value of units held by the investors. Mutual funds are usually a long term investment.
Mutual fund units are issued and redeemed by the fund management company based on
the fund’s net asset value, which is determined at the end of each trading session.

4.5.1 TYPES OF MUTUAL FUNDS

Mutual funds are classified

4.5.1.1 ON THE BASIS OF OBJECTIVE

EQUITY FUNDS/ GROWTH FUNDS

Funds that are invested in equity shares are called equity funds. The objective of this fund
is capital appreciation and it is best suited for the investors seeking for capital
appreciation. There are different types of equity funds such as

 DIVERSIFIED FUNDS

These funds are invested in companies spread across sectors. These funds
are generally meant for risk-averse investors who want a diversified portfolio
across sectors.

 SECTOR FUNDS

These funds invest primarily in equity shares of companies in a particular


business sector or industry. These funds are targeted at investor who are bullish or
fancy the prospects of a particular sector.

Page | 40
 INDEX FUNDS

These funds invest in the same pattern as popular market indices lick S&P
CNX nifty or CNX midcap 200. The money collected from the investors is
invested only in the stocks, which represent the index. For e.g. a Nifty Index Fund
will invest only in theNifty 50 stocks. The objective of such funds is not to best
the market but to give a return equivalent to the market return.

TAX SAVING FUNDS

These funds offer tax benefits to investors under the income tax Act.
Opportunities provided under this scheme are in the form of tax rebates under the income
tax act

DEBT/INCOME FUNDS

These investments predominantly invest in high-rated fixed-income-bearing


instruments like bonds, debentures, government securities, commercial paper and other
money market instruments. They are best suited for the medium to long term investors as
it is a low risk fund and preserve the capital and they provide a regular income

LIQUID FUNDS/ MONEY MARKET FUNDS

These funds invest in highly liquid money market instruments. The period of
investment could be as short as a day and provides easy liquidity. These funds are
alternative for savings and short terms fixed deposit accounts with comparatively higher
returns and are ideal for corporate, institutional investors and business houses that invest
their funds for very short periods.

GILT FUNDS

These funds invest in central and state government securities. Since they are
government backed bonds they give a secured return and also ensure safety of the

Page | 41
principal amount. These funds are low risk and are best suited for medium to long-term
investors

BALANCED FUNDS

These funds invest both in equity shares and fixed income bearing debt instruments in
some proportion. They provide a steady return and reduce volatility of the fund. These
funds are ideal for medium to long term investors who are willing to take moderate risk

4.5.1.2 ON THE BASIS OF FLEXBILITY

OPEN – ENDED FUNDS

These funds do not have a fixed date of redemption. Generally they are open for
subscription and redemption throughout the year. Their prices are linked to the daily net
asset value (NAV). From the investor’s perspective, they are much more liquid than
closed ended funds.

CLOSED – ENDED FUNDS

These funds are open initially for entry during the initial public offering (IPO)
and the rafter closed for entry as well as exit. These funds have a fixed date of
redemption and they are generally traded at a discount to NAV, but the discount narrows
as the maturity nears. These funds are pen for subscription only once and can be
redeemed only on the fixed date of redemption. The units of these funds are listed on
stock exchanges are tradable and the subscribers to the fund would be bale t exit from the
fund at any time through the secondary market.

Page | 42
Fig.5 Types of Mutual Funds

4.5.2 BENEFITS OF MUTUAL FUND INVESTMENT

Benefits in investing in mutual funds are liquidity, affordability, diversification,


convenience and professional management.

4.5.2.1 LIQUIDITY

Mutual fund helps in providing liquidity. Investors can sell their mutual fund units
on any business day and receive current market value on their investments. Current unit
values are usually calculated daily, based on the market value of the underlying
securities.

4.5.2.2 AFFORDABILITY

Investing in mutual funds is affordable when compared with other asset class
investment. Many mutual fund company allow the minimum investment of Rupees 5000.

Page | 43
4.5.2.3 DIVERSIFICATION

Mutual fund enhance in diversification of asset class investment. By holding


different assets- bonds, equities and cash-reduces the risk of being in the wrong
investment at the wrong time. Mutual fund investment provides detailed reports and
statements that make record keeping simple. Individual can easily monitor the
performance of his/her mutual funds simply by reviewing the business pages of most
newspapers.

4.5.2.4 CONVENIENCE

Most mutual funds will also provide us with the convenience of periodic plans,
automatic withdrawal plans and the automatic reinvestment of interest and dividends.

4.5.2.5 PROFESSIONAL MANAGEMENT

Portfolio managers make investments in accordance with the guidelines and


restrictions outlined in the fund’s prospectus. These professionals have at their disposal
current market information and the expertise to make informed investment decision for
the portfolio.

Additional benefits apart from this, mutual fund investment offers the unique
feature to investors of allowing for fixed investments. Another unique feature of mutual
fund investment is that any distributions that are paid by the fund can be automatically re-
invested into additional units of the same fund at no cost. Investing in mutual funds saves
time. By having the mutual fund manager manage individual’s investments and
individual no longer have to spend time analyzing and worrying about individual stocks.

4.6 INSURANCE

Insurance, in law and economics, is a form of risk management primarily used to


hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer
of the risk of a loss, from one entity to another, in exchange for a premium. Insurer is the
company that sells the insurance. Insurance rate is a factor used to determine the amount,

Page | 44
called the premium, to be charged for a certain amount of insurance coverage. Risk
management, the practice of appraising and controlling risk, has evolved as a discrete
field of study and practice.

4.6.1TYPES OF INSURANCE

Any risk that can be quantified can potentially be insured. Specific kinds of risk
that may give rise to claims are known as "perils". An insurance policy will set out in
details which perils are covered by the policy and which are not.

Below are lists of the many different types of insurance that exist. A single policy
may cover risks in one or more of the categories set forth below.

4.6.1.1 BUSINESS INSURANCE

It is a kind of insurance that protects businesses against risks. Some principal subtypes of
business insurance are (a) the various kinds of professional liability insurance, also called
professional indemnity insurance, which are discussed below under that name; and (b)
the business owners policy (BOP), which bundles into one policy many of the kinds of
coverage that a business owner needs, in a way analogous to how homeowners insurance bundles
the coverage’s that a homeowner needs.

4.6.1.2 LIFE & ANNUITY COVERAGE’S

• LIFE INSURANCE

It provides a monetary benefit to a decedent's family or other designated


beneficiary, and may specifically provide for income to an insured person's
family, burial, funeral and other final expenses. Life insurance policies often
allow the option of having the proceeds paid to the beneficiary either in a lump
sum cash payment or an annuity.

• ANNUITIES

It provide a stream of payments and are generally classified as insurance


because they are issued by insurance companies and regulated as insurance and
require the same kinds of actuarial and investment management expertise that life
insurance requires. Annuities and pensions that pay a benefit for life are

Page | 45
sometimes regarded as insurance against the possibility that a retiree will outlive
his or her financial resources.

4.6.1.3 DISABILITY COVERAGE’S

• DISABILITY INSURANCE

These policies provide financial support in the event the policyholder is


unable to work because of disabling illness or injury. It provides monthly support
to help pay such obligations as mortgages and credit cards.

• TOTAL PERMANENT DISABILITY INSURANCE

This insurance provides benefits when a person is permanently disabled


and can no longer work in their profession, often taken as an adjunct to life
insurance.

• WORKERS' COMPENSATION

This insurance replaces all or part of a worker's wages lost and


accompanying medical expense incurred because of a job-related injury.

4.6.1.4 PROPERTY & CASUALTY COVERAGE’S

• PROPERTY INSURANCE

It provides protection against risks to property, such as fire, theft or


weather damage. This includes specialized forms of insurance such as fire
insurance, flood insurance, earthquake insurance, home insurance, inland marine
insurance or boiler insurance.

• CASUALTY INSURANCE

It insures against accidents, not necessarily tied to any specific property.

4.6.1.5 LIABILITY COVERAGE’S

• LIABILITY INSURANCE

Page | 46
It is a very broad superset that covers legal claims against the insured. Many types of
insurance include an aspect of liability coverage. For example, a homeowner's insurance
policy will normally include liability coverage which protects the insured in the event of a
claim brought by someone who slips and falls on the property; automobile insurance also
includes an aspect of liability insurance that indemnifies against the harm that a crashing car
can cause to others' lives, health, or property. The protection offered by a liability insurance
policy is twofold: a legal defense in the event of a lawsuit commenced against the
policyholder and indemnification (payment on behalf of the insured) with respect to a
settlement or court verdict. Liability policies typically cover only the negligence of the
insured, and will not apply to results of willful or intentional acts by the insured.

4.6.1.6 CREDIT COVERAGE’S

• CREDIT INSURANCE

It repays some or all of a loan back when certain things happen to the
borrower such as unemployment, disability, or death. Mortgage insurance is a
form of credit insurance, although the name credit insurance more often is used to
refer to policies that cover other kinds of debt.

• MORTGAGE INSURANCE

It insures the lender against default by the borrower.

4.7 GOLD

Gold is been valued as a currency, a commodity, investment or an object of


beauty. Investing in gold is less risk when compared to all other asset class investment.
These are because of high liquidity and no credit risk. The market risk in gold commodity
is not much high. Investing in gold is generally accepted universally. Investing in gold is
popular in India because historically these acted as a good hedge against inflation.

Page | 47
4.7.1 THE RETURNS FROM GOLD

During the 1950s, gold appreciated only marginally; from Rs 99 per 10 gm in


1950 to Rs 111 per gm in 1960. During the next decade, from 1960-70, it moved up to Rs
184.Between 1970 and 1980 came the massive rise from Rs 184 to Rs 1,330.

During the 1980s, it moved up another 240 per cent. The trend of gold prices in
India in the last few years is given in Table 1 which reveals that between 1950 and 2007
gold appreciated 95-fold, an annual compound rate of return of 8.32 per cent.

4.7.2 GOLD PRICES IN INDIA

March End Gold Price Per 100 Gm


(Rs)
1925 18
1930 18
1935 30
1940 36
1945 62
1950 99
1955 79
1960 111
1965 71
1970 184
1975 540
1980 1,330
1985 2,130
1990 3,200
1995 4,658
1996 5,713
1997 4,750
1998 4,050
1999 4,220
2000 4,395
2001 4,410
2002 5,030
2003 5,260
2004 6,005
2005 6,165
2006 8,210
2007 9,500

Page | 48
4.7.3HOW TO BUY GOLD

4.7.3.1 GOLD DEPOSIT SCHEME

Introduced in 1999, this scheme is managed by SBI . Individuals, HUFs, trusts


and companies can deposit a minimum of 200 gm of gold with no upper limit, in
exchange for gold bonds carrying a tax-free interest of 3 to 4 per cent depending upon
the tenure of the bond ranging from 3 to 7 years.

Furthermore, these bonds are free from wealth tax and capital gains tax. The
principal can be collected back in gold or cash at the investor's option.

4.7.3.2 BUYING GOLD BARS AND COINS

We can now also buy gold coins or bars/biscuits from various authorised
banks and dealers.

Incidentally, we shouldn’t t be mistaken into thinking that buying ornaments is the


same as investing in gold. In practice, gold converted into ornaments is rarely sold.

4.7.3.3 GOLD EXCHANGE-TRADED FUNDS

The modern international method of investing in gold is via gold mutual funds.
India should soon be catching up in this area.

In his Union Budget for 2005-06, Finance Minister P Chidambaram had proposed
that Securities and Exchange Board of India should permit mutual funds to introduce
Gold Exchange Traded Funds (Gold ETFs) with gold as the underlying asset.

Page | 49
According to the Budget proposals, the scheme would enable households to buy
and sell gold in units for as little as Rs 100 and such units could be traded in the same
manner as units of mutual funds.

Gold Exchange Traded Funds are a relatively recent phenomenon even in the
American market where the first Gold ETF--StreetTracks Gold--made its debut in the
New York Stock Exchange in November 2004. Each unit of the StreetTracks Gold ETF
represents one-tenth an ounce of gold.

In Gold Exchange Traded Fund, the underlying asset is exclusively gold bullion,
and not a basket of stocks as is the case of equity ETFs. Gold ETFs are shares or units of
gold that are owned by investors and are fully backed by gold bullion bars held by a
custodian.

Like other ETFs, they are traded on a stock exchange.

Gold ETFs will allow investors to buy gold in small increments. In the global
market, one unit represents one-tenth of an ounce fine gold (1 oz-28.35 grams). If an
investor in the fund holds 100 units, the fund must have physical gold worth 10 ozs.

The value of the unit will move in accordance with the price of gold. Just like
mutual funds, the value per unit will be the total value of the gold held, divided by the
number of units, minus the expenses of the fund. Gold ETFs, like any share, can be
traded and bought by the investors through their stockbrokers.

They can be used for speculating in the short-term for betting on the price of gold,
or it can be used for long-term investing. Just like the ETFs, Gold ETFs can be open-
ended funds or closed ended funds.

In India, the ETF structure may be particularly suitable for a gold fund because of
the unavailability of a highly liquid, organized market for gold or gold-backed securities.

4.7.4 TAX IMPLICATIONS

Page | 50
Since there is no income as such from holding gold, there is no liability of income
tax. But bullion and jewellery are subject to capital gains tax and wealth tax, without any
exemptions whatsoever.

While determining the value of gold ornaments for the purpose of wealth tax, making
charges should be ignored, unless the ornaments are studded with precious stones. The
value of gold contained in the ornaments can be reduced by 15 to 20 per cent because the
dealer invariably deducts 15 per cent of the ruling rate of standard gold when ornaments
are sold in the open market.

4.7.5 THE PROSPECTS FOR GOLD

Many contemporary investors forget that when gold price went up during the late
1970s, the metal was just trying to catch up with prices of other things, which had already
gone up.

In 1970, when the price of gold was $35 an ounce (due to the gold standard then
followed in U.S.A.), was unquestionably undervalued. We can safely invest in gold. But
take care to keep our jewellery in bank lockers. We can also raise loans on gold for your
other portfolio investments. If the Indian economy continues to be liberalized and
unshackled fast, several new options may emerge for investors to invest in gold bars, gold
coins, gold funds, gold mining companies and gold options.

It will also lead to the eventual equalization of domestic and international prices.

Page | 51
4.8 REAL ESTATE

Buying real estate is about more than just finding a place to call home. Investing
in real estate has become increasingly popular over the last fifty years and has become a
common investment vehicle. Although the real estate market has plenty of opportunities
for making big gains, buying and owning real estate is a lot more complicated than
investing in stocks and bonds.

Real estate is a legal term that encompasses land along with anything permanently
affixed to the land, such as buildings, specifically property that is stationary, or fixed in
location. Real estate is often considered synonymous with real property. However, in
some situations the term "real estate" refers to the land and fixtures together, as
distinguished from "real property," referring to ownership rights of the land itself.

Real estate as an investment is different from financial instruments such as


Shares, Fixed Deposits, Bonds, Mutual Funds, Gold and Silver. The investment required
normally is higher than other investment avenues. Investment in property has substantial

Page | 52
advantages. The advantages include pride of ownership, personal control, possible self-
use, and occupancy, security of capital and high operating yield.

With the development of private property ownership, real estate has become a
major area of business. Purchasing real estate requires a significant investment, and each
parcel of land has unique characteristics, so the real estate industry has evolved into
several distinct fields.

4.8.1 SCENARIO IN INDIA

With property boom spreading in all directions, real estate in India is touching
new heights. However, the growth also depends on the policies adopted by the
government to facilitate investments mainly in the economic and industrial sector.

4.8.2WHY INVEST IN INDIAN REAL ESTATE?

Flying high on the wings of booming real estate, property in India has become a
dream for every potential investor looking forward to dig profits. All are eyeing Indian
property market for a wide variety of reasons:

• It’s ever growing economy which is on a continuous rise with 8.1 percent increase
witnessed in the last financial year. The boom in economy increases purchasing
power of its people and creates demand for real estate sector.

• India is going to produce an estimated 2 million new graduates from various


Indian universities during this year, creating demand for 100 million square feet
of office and industrial space.

• Presence of a large number of Fortune 500 and other reputed companies will
attract more companies to initiate their operational bases in India thus creating
more demand for corporate space.

Page | 53
• Real estate investments in India yield huge dividends. 70 percent of foreign
investors in India are making profits and another 12 percent are breaking even.

• Apart from IT, ITES and Business Process Outsourcing (BPO) India has shown
its expertise in sectors like auto-components, chemicals, apparels,
pharmaceuticals and jewellery where it can match the best in the world. These
positive attributes of India is definitely going to attract more foreign investors in
the near future.

Indian real estate sector is on boom and this is the right time to invest in property in
India to reap the highest rewards.

4.8.3PITFALLS THAT MAY BE ENCOUNTERED

4.8.3.1 ILLIQUIDITY

Direct investments require large commitment of funds and that makes


diversification of an investor’s portfolio difficult. Real estates are also difficult to
covert to cash quickly. It may be used as collateral for a loan.

4.8.3.2 MAINTENANCE BURDEN

Property maintenance involves significant amount of time effort and costs.

4.8.3.3 GOVERNMENT CONTROLS

Real estate has significant government involvement. This is most unlike other
investment avenues. Government uses real estate as a taxation base through stamp
duties, land taxes and general levies at the municipal and the state level. Government

Page | 54
decision on infrastructure development or other wise have a substantial impact on real
estate prices.

4.8.3.4 REAL ESTATE CYCLES

The long term trend in real estate values has been to approximate the
general inflationary levels in the economy. There are periods of rapid growth well
behind the inflation trajectory. It is regarded as a dangerous investment in the
medium and short run, but often considered safe in the long run.

4.8.3.5 HIGH TRANSACTION COST

Transaction costs in a real investment are higher than most other


investments. This is primarily due to government taxes and duties on real estate
transactions.

4.8.3.6LACK OF INFORMATION

The real estate market is one of the most information inefficient markets.
The information required to make decisions is difficult to obtain, often imprecise
and sometimes misleading.

The diversified nature of property is, however useful for asset allocation purpose. It is
perhaps the only investment avenue that gives high yield and capital gains potential.

Page | 55
4.9 ART
Art as an investment avenue has been considered an interesting and profitable
alternative, but it is also extremely risky.

With uncertain stock market returns and interest rates at their lowest in decades,
nervous investors are now considering alternative investment avenues. Some of them are
hoping to find solace in alternative investments such as fine art, wine and even stamps.

Page | 56
These alternative investments' performance is alluring. Indices tracking the
performance of high-class art have held up well in the recent economic slowdown, while
art-auction houses report record prices. Art as an object of investment has been debated
for long.

While some artworks have appreciated enormously in value over time, it is


difficult to make a case for artworks overall earning a positive net rate of return in real
terms over the long run

From 1875 to 2000 art has outperformed fixed income, but underperformed equities. And
in the past two and half years of stock market losses, art has outperformed equities.

For frightened investors this may sound soothing. But art is high-risk investment, riskier
than stocks. Prices of art fluctuate more widely than stocks.

Art market is illiquid, opaque and unregulated. Transaction costs are too high, sometimes
up to 25% and may in fact wipe out the profits. Further, the money invested in art is at the
mercy of erratic public taste and short-lived trends.

Above all, art's unpredictable value makes it as easy to lose as to profit.

5.ASSET SELECTION AND RISK PROFILING

5.1THE ASSET SELECTION DECISION

There are three basic asset classes-equity, debt and cash. Optimum asset
allocation can determine up to 90% of the portfolio’s return. Asset allocation at any
particular point in time is based on one’s investor profile. As an investor progresses in his

Page | 57
life stage his financial goals also change and so does his profile. Thus it is of prime
relevance to review one’s investor profile from time to time.

After having decided on the proportions of the portfolio that are to be invested in
various asset classes, we also have to decide on exactly what assets are to be held with
each other. An optimal asset allocation plan is complete only when we invest the
proportions of each asset class in assets that suit the investor profile.

As a basic strategy the right investment in any asset is a balance of three things:
liquidity, safety and return. We can find other assets to invest in apart from the ones
mentioned above. We always have to remember that we are trying to increase our income
and build the value of our assets.

5.2 RISK PROFILING

Risk profiling is the first step in permitting you to develop an optimum risk
financing strategy containing all the elements necessary to reduce your risk, improve
cover and minimize cost.

Investing in financial markets carries risks. This means there is a chance the value
of your investments will rise or fall in value. Do you prefer slow but steady investment
growth, or are you willing to experience ups and downs for the potential of greater

Page | 58
returns over the long run? Everyone has a different attitude to money. Some people want
or need certainty that the value of their investment will not fluctuate by much. In
exchange for this assurance they are prepared to accept the prospect of lower returns in
the long run. Others are willing to accept that the value of their investment could go down
in the short term in anticipation of achieving higher returns in the long run.
Understanding your attitude to money is vital in determining how to invest your money.
Investment Profiling consists primarily in understanding a client’s risk tolerance
in relation to his or her current financial situation and future financial needs, and
proposing the most appropriate risk profile and related investment strategy. The client
risk profile reflects both the level of risk capacity and return expectations agreed with the
client.

Used on an on-going basis, Investment Profiling can also be used to provide consistent
proactive advice. As a result, Investment Profiling is instrumental in generating
transactions backed by a structured, traceable and controllable advice rationale.

The risk profiling questionnaire is used to determine the most appropriate investment
strategies are totally configurable.

1. Defining the investment profile.


2. Generating a structured investment proposal.
3. Generating an investment profiling report.
4. Monitoring client portfolio against agreed investment profile.

With so many different types of investments to choose from, how does an investor
determine how much risk he or she can handle? Every individual is different, and it's hard
to create a steadfast model applicable to everyone, but here are two important things you
should consider when deciding how much risk to take.

5.2.1 TIME HORIZON

Before we make any investment, we should always determine the amount of


time you have to keep your money invested. If we have $20,000 to invest today but

Page | 59
need it in one year for a down payment on a new house, investing the money in
higher-risk stocks is not the best strategy. The riskier an investment is, the greater its
volatility or price fluctuations, so if your time horizon is relatively short, and we may
be forced to sell your securities at a significant a loss.

With a longer time horizon, investors have more time to recoup any possible
losses and are therefore theoretically be more tolerant of higher risks. For example, if
that $20,000 is meant for a lakeside cottage that we are planning to buy in ten years,
we can invest the money into higher-risk stocks because there is be more time
available to recover any losses and less likelihood of being forced to sell out of the
position too early.

5.2.2 BANKROLL

Determining the amount of money we can stand to lose is another important factor
of figuring out our risk tolerance. This might not be the most optimistic method of
investing; however, it is the most realistic. By investing only money that we can
afford to lose or afford to have tied up for some period of time, we won't be pressured
to sell off any investments because of panic or liquidity issues.

The more money we have, the more risk we are able to take and vice versa.
Compare, for instance, a person who has a net worth of $50,000 to another person
who has a net worth of $5,000,000. If both invest $25,000 of their net worth into
securities, the person with the lower net worth will be more affected by a decline than
the person with the higher net worth. Furthermore, if the investors face a liquidity
issue and require cash immediately, the first investor will have to sell off the
investment while the second investor can use his or her other funds.

Page | 60
5.3 INVESTMENT RISK PYRAMID

After deciding on how much risk is acceptable in your portfolio by acknowledging


your time horizon and bankroll, we can use the risk pyramid approach for balancing the
assets.

Page | 61
Fig.6 Investment Risk Pyramid

This pyramid can be thought of as an asset allocation tool that investors can use to
diversify their portfolio investments according to the risk profile of each security. The
pyramid, representing the investor's portfolio, has three distinct tiers:

5.3.1 TIER 1 –BASE OF THE PYRAMID

The foundation of the pyramid represents the strongest portion, which


supports everything above it. This area should be comprised of investments that
are low in risk and have foreseeable returns. It is the largest area and composes
the bulk of your assets.

5.3.2 TIER 2 – MIDDLE PORTION

This area should be made up of medium-risk investments that offer a


stable return while still allowing for capital appreciation. Although more risky
than the assets creating the base, these investments should still be relatively safe.

5.3.3TIER 3- SUMMIT

Page | 62
Reserved specifically for high-risk investments, this is the smallest area of
the pyramid (portfolio) and should be made up of money you can lose without any
serious repercussions. Furthermore, money in the summit should be fairly
disposable so that you don't have to sell prematurely in instances where there are
capital losses.

PERSONALIZING THE PYRAMID

Not all investors are created equally. While others prefer less risk, some investors
prefer even more risk than others who have a larger net worth. This diversity leads to the
beauty of the investment pyramid. Those who want more risk in their portfolios can
increase the size of the summit by decreasing the other two sections, and those wanting
less risk can increase the size of the base. The pyramid representing our portfolio should
be customized to our risk preference.

It is important for investors to understand the idea of risk and how it applies to
them. Making informed investment decisions entails not only researching individual
securities but also understanding our own finances and risk profile. To get an estimate of
the securities suitable for certain levels of risk tolerance and to maximize returns,
investors should have an idea of how much time and money they have to invest and the
returns they are looking for.

6. RESEARCH METHODOLOGY

In today’s world where there is constant inflation, the monthly salary is not enough to
satisfy our desires. So it is necessary to learn how to save and invest. One of the ways to
help our money to grow is by investing it in the various financial instruments in such a
way that we maximize returns and minimize risk. Various modes of investment have
been identified to reduce the risk of an investor.

Page | 63
6.1 SAMPLING

It is the selection of small number of elements from a larger defined target of


group of elements and expecting that the information gathered from the small group will
allow judgments to be made about the larger group. A sample is a smaller representation
of the larger whole. A sample contains primary sample units and a slice of population
representing the universe. The purpose of sampling is to draw inferences concerning the
universe.

6.2 SAMPLE SIZE

One can say that the sample size must be an optimum size that is it should neither
be large enough to give a confident interval of desired width and as such the size of the
sample must be chosen by logical process before the sample is taken from the universe.
In order to extract much feasible result through the study a sample size of 100 has been
taken for the study.

6.3 TYPE OF SAMPLING

The type of sampling used is simple random sampling. This type of sampling is
also known as chance sampling or probability sampling where each and every item of the
population has an equal chance of inclusion in the sample and each of the possible
samples in case of finite universe has the same probability of being selected. This
procedure gives each item an equal probability chance of being selected. In case of
infinite population the selection of each item in a random sample is controlled by the
same probability and that successive selection are independent of one another.

6.4 METHOD OF DATA COLLECTION

6.4.1PRIMARY DATA

It is collected either through experiment or survey. Questionnaire is the most


extensively used method. The questionnaire is to be prepared very carefully so that it

Page | 64
proves to be effective. The questionnaire is based on the primary and the secondary
objects of the study. There are totally 15 questions.

6.4.2 SECONDARY DATA

The data collected through previously conducted surveys and researches and other
indirect means is known as secondary data. In this case the data is collected from
journals, magazines and various websites.

7.FINDINGS AND ANALYSIS


7.1 FOR VARIOUS AGE GROUPS

7.1.1Below 30

They should consider how investments made today could help them tomorrow.
More the time spent on investments; the more likely they are likely to grow. They are in a

Page | 65
position to take a risk. It’s advisable that their portfolio must be heavy on the equity
funds. A major portion of the equity funds must be diversified.

Table 1: Below 30

7.1.2 30 to 40

Here there would be need to increase the allocation towards safer investments.
Here the investors are settled in their career, married and with children. They have
dependants to be taken care of. It is suggested that they invest in long term goals.

Page | 66
Table 2: 30-40

7.1.3 40 to 50

At this stage living expenses tend to peak. They still may have some medium term
goals to provide for. The foreseeable medium term liabilities will dictate risk containment
whereas long term goals will dictate a growth focus. A perfectly balanced decision
between risk and return is required here.

Page | 67
Table 3: 40-50

7.1.4 50 to 60

By this time most of the financial goals might have been met, save one that is
retirement. Ensuring a secure, comfortable retirement gets the top priority. To ensure a
safety on capital they must transfer their funds from risk bearing investments to safer
options. They must keep their investments liquid enough to meet contingencies.

Page | 68
Table 4: 50-60

7.2 BASED ON THE RISK PROFILE OF THE INVESTOR

7.2.1MODERATE RISK PROFILE

Page | 69
Table 5 : Moderate Risk Profile

• It could be worth investing a greater amount in growth schemes.


• A regular income seems rather important to this category. They should opt for
substantial bank deposits or mutual fund schemes that give them a monthly
income.

7.2.2 HIGH RISK PROFILE

Page | 70
Table 6: High Risk Profile

• As majority of high risk profile investors are fairly knowledgeable about stock
markets, they could invest all their savings directly in stocks. However, we
suggest that you invest at least 20% in traditional savings instruments like bank
deposits, PPF, etc. and the remaining 80% in stocks and mutual funds.

7.2.3 VERY HIGH RISK


Page | 71
Table 7: Very High Risk Profile

• Investors in this category seem to be fairly knowledgeable but it is better to let


professionals to take care of the investment by routing them through mutual funds
and stocks.

Page | 72
7.3 PLAN YOUR PORTFOLIO

Deciding on how to invest will depend on your investment goals. The amount
of time that is needed to get back the invested money will help to determine the asset
allocation. Each of the asset mixes has a different mix of investments, so each will strike
a different balance between risk and return potential.

7.3.1 GROWTH PORTFOLIO

For an investor who expect the return in long time horizon and is willing to
take on additional risk in tracking down of long- term growth, a higher weighting in
stocks may be appropriate.

Table 8:Growth Portfolio

Page | 73
7.3.2 CONSERVATIVE PORTFOLIO

As we get closer to the goals, we may want to shift our investments into more
conservative securities like fixed income mutual funds or certain individual bonds.
Adding more conservative fixed income investments to a portfolio can help modulate
potential ups and downs found in equity investments.

Table 9: Conservative Portfolio

Page | 74
7.3.3 BALANCED PORTFOLIO

A good portion of the investment should be in stable, income producing


investments, but should also continue to invest for appreciation to combat inflation.

Table 10: Balanced Portfolio

Page | 75
7.3.4 SHORT TERM PORTFOLIO

If the investor expects high returns in a period of short time then the investor
have a short time portfolio.

Table 11: Short Term Portfolio

Page | 76
8. CONCLUSION

Asset allocation is not a new idea. Today we talk about asset allocation rather
than diversification, but it is really just a new name for a very old tested investment
strategy.

Any investor must examine the investment before investing. This project has
helped us know the general information about the asset class investments and how the
portfolio of invest is chosen and how to invest in each asset class and risk factor involved
in each.

In today’s world there are a number of options given to us. There are various forms of
saving and investment, each having varying forms of returns and benefits. Each fund is
different from the other even if they are sponsored one same bank. They are beneficial for
people from different age groups and also have facilities for them. So it must be kept in
mind that you should chose a fund that benefits you the most and also pick according to
how much money you can invest.

8.1 ASSESS YOURSELF

Self-assessment of one’s needs; expectations and risk profile is of prime


importance failing which; one will make more mistakes in putting money in right
places than otherwise. One should identify the degree of risk bearing capacity one has
and also clearly state the expectations from the investments. Irrational expectations
will only bring pain.

8.2 TRY TO UNDERSTAND WHERE THE MONEY IS GOING

It is important to identify the nature of investment and to know if one is


compatible with the investment. One can lose substantially if one picks the wrong
kind of investments. In order to avoid any confusion it is better to go through the

Page | 77
literature such as offer document and fact sheets that companies provide on their
financial instruments.

8.3 DON'T RUSH IN PICKING FUNDS, THINK FIRST

One first has to decide what he wants the money for and it is this investment goal
that should be the guiding light for all investments done. It is thus important to know
the risks associated with the fund and align it with the quantum of risk one is willing
to take. One should take a look at the portfolio of the funds for the purpose. Excessive
exposure to any specific sector should be avoided, as it will only add to the risk of the
entire portfolio. Mutual funds invest with a certain ideology such as the "Value
Principle" or "Growth Philosophy". Both have their share of critics but both
philosophies work for investors of different kinds. Identifying the proposed
investment philosophy of the fund will give an insight into the kind of risks that it
shall be taking in future.

8.4 INVEST. DON’T SPECULATE

A common investor is limited in the degree of risk that he is willing to take. It is


thus of key importance that there is thought given to the process of investment and to
the time horizon of the intended investment. One should abstain from speculating
which in other words would mean getting out of one fund and investing in another
with the intention of making quick money. One would do well to remember that
nobody can perfectly time the market so staying invested is the best option unless
there are compelling reasons to exit.

8.5 DON’T PUT ALL THE EGGS IN ONE BASKET

This old age adage is of utmost Importance. No matter what the risk profile of a
person is, it is always advisable to diversify the risks associated. So putting one’s
money in different asset classes is generally the best option as it averages the risks in
each category. Thus, even investors of equity should be judicious and invest some

Page | 78
portion of the investment in debt. Diversification even in any particular asset class
(such as equity, debt) is good. Not all fund managers have the same acumen of fund
management and with identification of the best man being a tough task; it is good to
place money in the hands of several fund managers. This might reduce the maximum
return possible, but will also reduce the risks.

8.6 BE REGULAR

Investing should be a habit and not an exercise undertaken at one’s wishes, if one
has to really benefit from them. As we said earlier, since it is extremely difficult to
know when to enter or exit the market, it is important to beat the market by being
systematic. The basic philosophy of Rupee cost averaging would suggest that if one
invests regularly through the ups and downs of the market, he would stand a better
chance of generating more returns than the market for the entire duration.

8.7 DO YOUR HOMEWORK

It is important for all investors to research the avenues available to them


irrespective of the investor category they belong to. This is important because an
informed investor is in a better decision to make right decisions. Having identified the
risks associated with the investment is important and so one should try to know all
aspects associated with it. Asking the intermediaries is one of the ways to take care of
the problem.

8.8 FIND THE RIGHT INVESTMENTS

Finding investments that do not charge fees is of importance, as the fee charged
ultimately goes from the pocket of the investor. Investments that charge more will
reduce the yield to the investor. Finding the right investment is important. Investors of
equity should keep in mind that all dividends are currently tax-free in India and so
their tax liabilities can be reduced if the dividend payout option is used. Investors of
debt will be charged a tax on dividend distribution and so can easily avoid the payout
options.

Page | 79
8.9 KEEP TRACK OF YOUR INVESTMENTS

Finding the right investment is important but even more important is to keep track
of the way they are performing in the market. If the market is beginning to enter a
bearish phase, then investors of equity too will benefit by switching to debt
instruments as the losses can be minimized. One can always switch back to equity if
the equity market starts to show some buoyancy.

8.10 KNOW WHEN TO SELL YOUR INVESTMENT

Knowing when to exit an investment too is of utmost importance. One should book
profits immediately when enough has been earned i.e. the initial expectation from the
investment has been met with. Other factors like non-performance, hike in fee charged and
change in any basic attribute of the fund etc. are some of the reasons for to exit

Page | 80
9.BIBLIOGRAPHY

Barua, S.K. “Portfolio Management”. Tata McGraw Hill: (1992)

Bernstein,William. “The Intelligent Asset Allocator”. The McGraw Hill Companies:


2000.

Bernstein,William. “The Four Pillars of Investing”. The McGraw Hill Companies:


2002.

Brentani,Christine.“Portfolio Management in Practice”. Elseiver Butterworth-


Heinman: 2004.

Gibson,Roger.C. “Asset Allocation – Balancing Financial Risk”. The McGraw Hill


Companies: 1996.

Littauer, Stephen. “How to invest the smart way in stocks, bonds and mutual funds”.
Dearborn. (1998)

Pollack, Kenan. “The Real Life-Investing Guide: How to Buy Whatever”. McGraw-
Hill Professional. (1998)

Page | 81
10. APPENDICES
QUESTIONNAIRE

1. How old are you?

a) < 30 Years

b) 30-50 Years

c) > 50 Years

2. You need to provide for

a) Yourself

b) Your Spouse and children

c) Your Spouse and children, parents and dependants.

3. You want to

a) Increase your current income.

b) Create assets for the future rather than increase current income.

c) Plan a secure retirement.

4. You want to deploy your savings over what time frame

a) Less than 1 year.

b) Between 1-3 years.

c) More than 3 years.

5. Do you consider your financial position?

a) Very comfortable.

Page | 82
b) Fairly comfortable.

c) Stretched.

6. Do you expect your income to?

a) Increase substantially.

b) Stay ahead of inflation.

c) Drop due to inflation or other factors.

7. Do you expect your investments to?

a) Grow very quickly.

b) Grow steadily.

c) Keep pace with inflation.

8. Are you prepared to meet emergencies?

a) No.

b) Not yet, I am in the process of creating savings.

c) Yes, I have adequate emergency funds.

9. If you win Rs. 1,00,000 in a quiz contest, would you?

a) Invest in fixed deposits

b) Invest in stocks for a long term.

c) Indulge in short term speculation in stocks.

10. When allocating your savings, you are :

a) Most concerned with not losing your principal

b) Prepared to take some risks for growth.

Page | 83
c) Only concerned with fast growth.

11.How many years of experience do you have with investment products


the value of which can fluctuate

a) Less than a year.

b) Between 1 to 5 years.

c) More than 5 years.

12. Over the period of time the value of investments can rise and fall,
this is called fluctuation. Generally, the higher the investment risk the
higher the potential fluctuation but also the higher the potential returns.
On the other hand, the lower the investment risk the lower the potential
fluctuation but also the lower the potential returns. What level of
fluctuation would you generally be comfortable with?

a) Fluctuates between -10% and +10%

b) Fluctuates between -15% and +15%

c) Fluctuates between -20% and +20%

13. Would you say that you have?

a) A good understanding of investment.

b) A general understanding of investment.

c) No knowledge about investment.

14. Normally, what percentage of your monthly household income could


be available for investment or savings?

Page | 84
a) Between > 0% and 10%

b) Between > 10% and 25%

c) Between > 25% and 50%

15. If stock prices drop sharply, you would

a) Consider it a great buying opportunity.

b) Leave your investments untouched, but monitor them.

c) Shift to a safer haven.

16. In order to increase your returns would you.

a) Take more risks with your money.

b) Take more risks with some of your money.

c) Avoid taking more risks.

17. If you had surplus funds would you

a) Use it to speculate in the stock market.

b) Buy another house.

c) Pre-pay an outstanding housing loan.

Page | 85
11.Thesis Response Sheet

11.1 Thesis Response Sheet No.1

Page | 86
1) Name: Sneha Shanker Thadani

2) ID Number: SS/00931/FIN

3) The Topic of the study: “How to minimize risk through Portfolio Management”

4) Questionnaire made to collect Primary Data: Spoke to my guide regarding


the content of the thesis and also preparation of making the questionnaire.

5) Date when the Guide was consulted: July 15th, 2009.

6) The outcome of the discussion: Content of the thesis decided.

7) The Progress of the Thesis: Started collection of secondary data through


Internet, books and magazines.

11.2 Thesis Response Sheet No.2

1) Name: Sneha Shanker Thadani

Page | 87
2) ID Number: SS/00931/FIN

3) The Topic of the study: “How to minimize risk through Portfolio Management”

4) Date when the Guide was consulted: July 29th, 2009.

5) The outcome of the discussion: Discussed on the areas which require further
data collection and also verified what all has already been collected. Also briefed me in
how to go about on preparing the questionnaire

6) The Progress of the Thesis: Reviewed the secondary data collected and start
preparing the questionnaire.

11.3 Thesis Response Sheet No.3

1) Name: Sneha Shanker Thadani

Page | 88
2) ID Number: SS/00931/FIN

3) The Topic of the study: “How to minimize risk through Portfolio Management”

4) Questionnaire made to collect Primary Data: Prepared the questionnaire


based on the last meeting with the Guide. Please refer attached questionnaire

5) Date when the Guide was consulted: August 4th, 2009.

6) The outcome of the discussion: The questionnaire was approved by the guide
for the collection of the data. The whole outline to collect the information was also
planned

7) The Progress of the Thesis: The questionnaire was approved and collection of
primary data needs to be started.

11.4 Thesis Response Sheet No.4

1) Name: Sneha Shanker Thadani

Page | 89
2) ID Number: SS/00931/FIN

3) The Topic of the study: “How to minimize risk through Portfolio Management”

4) Date when the Guide was consulted: August 11th, 2009.

5) The outcome of the discussion: The data collection was discussed as per the
schedule.

6) The Progress of the Thesis: The interpretation of the primary data has begun
and also discussed how to combine it with the secondary data.

11.5 Thesis Response Sheet No.5

1) Name: Sneha Shanker Thadani

2) ID Number: SS/00931/FIN
Page | 90
3) The Topic of the study: “How to minimize risk through Portfolio Management”

4) Date when the Guide was consulted: August 20th, 2009.

5) The outcome of the discussion: The interpretation of the primary data was
approved.

6) The Progress of the Thesis: Process of final report preparation is in progress.

11.6 Thesis Response Sheet No.6

1) Name: Sneha Shanker Thadani

2) ID Number: SS/00931/FIN

Page | 91
3) The Topic of the study: “How to minimize risk through Portfolio Management”

4) Date when the Guide was consulted: August 27th, 2009.

5) The outcome of the discussion: Final report was shown to the guide. The thesis
was verified and approved

6) The Progress of the Thesis: Preparation of the final report is complete.

Page | 92