Portfolio Management Services in India Final Copy 100 Marks Project

PORTFOLIO MANAGEMENT
PORTFOLIO MANAGEMENT SERVICES IN INDIA

BACHELOR OF COMMERCE (FINANCIAL MARKET) SEMESTER 2012-2013 SUBMITTED BY Amey A Warang ROLL NO :- 45 UNDER THE GUIDANCE OF MR Bhavdas
V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE
CERTIFICATE
This is to certify that Master/Miss________________________________________ Of B.com (financial markets) Semester-V(2012) has successfully completed the project on __________________________________________________________ Under the guidance of ________________________________________________.
________________ _______________ Course Coordinator. Principal
________________ Project Guide/Internal Examiner
________________ External Examiner
DATE: PLACE:
DECLARATION I _______________________________________________The student of B.com(financial market)-V(2012-2013) hereby declare that I have completed the project on __________________________________________________ The information presented through this project is true and original to the best of my knowledge.
DATE : PLACE: ____________________ STUDENT SIGNATURE Amey A Warang ROLL NO :- 45
ACKNOWLEDGEMENT
Talent and capabilities are of course necessary but opportunities and good guidance are two very important things without which no person can climb those infant ladders towards progress. With regard to my project with actuarial science I would like to thank each and everyone who offered help, guideline and support whenever required . I take immense pleasure in thanking Mr Bhavdas at the actuarial society and other staff for their support and guidance in the project work. I am extremely grateful to my Mr Bhavdas for her valuable guidance and kindly suggestion. Finally and yet importantly I would like to express my heart felt thanks to my beloved parents and sister for their blessing , my friends/classmates for their help and wishes for the successful completion of this project.
_______________ Amey A Warang
OBJECTIVES:The main objective of this topic is to get knowledge of growth of portfolio management services in India. To get proper scenario of portfolio management services in India. To get proper output in development of portfolio management services in India. To get to know proper impact of portfolio management services in India. To get to know advantages & disadvantages of portfolio management services in Indian financial markets.
SR No. Particulars. 1 2 3 4 5 6 7 8 9 Introduction.
Page No.
INTRODUCTION
Portfolio management involves maintaining a proper combination of securities which comprise the investors portfolio in a manner that they give maximum return with minimum risk. This requires framing of proper investment policy. Investment policy means formation of guidelines for allocation of available funds among the various types of securities including variation in such proportion under changing environment. This requires proper mix between different securities in a manner that it can maximize the return with minimum risk to the investor. Broadly speaking investors can be divided into two groups. Individual investors are those individuals who save money and invest in the market in order to get return over it. They are not much educated, expert and they do not have time to carry out detailed study. On the other hand institutional investors are companies, mutual funds, banks and insurance companies who have surplus funds which need to be invested profitably. These investors have time and resources to carry out detailed research for the purpose of investing. They can employ financial experts in order to take investment decisions. They have large investment portfolio. The management of large investment portfolio is a unique and important task for portfolio managers and many corporate bodies.
Stock exchange operations are peculiar in nature and most of the Investors feel insecure in managing their investment on the stock market because it is difficult for an individual to identify companies which have growth prospects for investment. Further due to volatile nature of the markets, its require constant reshuffling of portfolios to capitalized on the growth opportunities. Even after identifying the growth oriented companies and their securities, the trading practices are also complicated, making it a difficult task for investors to trade in all the exchange and follow up on post trading formalities. That is why professional investment advice through portfolio management service can help the investors to make an intelligent and informed choice between alternative investments opportunities without the worry of loosing their invested money.
MEANING OF PORTFOLIO MANAGEMENT

Portfolio management in common parlance refers to the selection of securities and their continuous shifting in the portfolio to optimize returns to suit the objectives of an investor. In India, as well as in a number of western countries, portfolio management service has assumed the role of a specialized service now a days and a number of professional merchant bankers compete aggressively to provide the best to high networth clients, who have little time to manage their investments. The idea is catching on with the boom in the capital market and an increasing number of people are inclined to make profits out of their hard-earned savings.
Portfolio management service is one of the merchant banking activities recognized by Securities and Exchange Board of India(SEBI). The service can be rendered either by merchant bankers or portfolio managers or discretionary portfolio manager as define in clause (e) and (f) of Rule 2 of Securities and Exchang Board of India(Portfolio Managers)Rules, 1993 and their functioning are guided by the SEBI.
WHAT IS PORTFOLIO MANAGEMENT SERVICE?

Portfolio Management Services account is an investment portfolio in Stocks, Debt and fixed income products managed by a professional money manager, that can potentially be tailored to meet specific investment objectives. When investor invest in PMS, he own individual securities unlike a mutual fund investor, who owns units of the entire fund. He have the freedom and flexibility to tailor his portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of portfolios, Individual investors account may be unique. As per SEBI guidelines, only those entities who are registered with SEBI for providing PMS services can offer PMS to clients. There is no separate certification required for selling any PMS product. So this is case where miss-selling can happen. As per the SEBI guidelines, the minimum investment required to open a PMS account is Rs.5Lacs. However, different providers have different minimum balance requirements for different products. For eg Birla AMC PMS is having minimum amount requirement of Rs25lacs for a product. Similarly HSBC AMC is having minimum requirement of 50lacs for their PMS and Reliance is having minimum requirement of Rs.1Crore. In India Portfolio Management Services are also provided by equity broking firms & wealth management services.
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PHASES OF PORTFOLIO MANAGEMENT

Portfolio Management comprises of many activities that are targeted at optimizing the investment of clients funds. There are basically five phases in the portfolio management and each of these phases makes up an integral part of the Portfolio Management and the success of it depends on the effectiveness in implementing these phases. Security Analysis: There are many types of securities available in the market including equity shares, preference shares, debentures and bonds. Apart from it, there are many new securities that are issued by companies such as Convertible debentures, Deep Discount bonds, floating rate bonds, flexi bonds, zero coupon bonds, global depository receipts, etc. It forms the initial phase of the portfolio management process and involves the evaluation and analysis of risk return features of individual securities. The basic approach for investing in securities is to sell the overpriced securities and purchase underpriced securities. The security analysis comprises of Fundamental Analysis and technical Analysis. Portfolio Analysis:
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A portfolio refers to a group of securities that are kept together as an investment. Investors make investment in various securities to diversify the investment to make it risk averse. A large number of portfolios can be created by using the securities from desired set of securities obtained from initial phase of security analysis.
By selecting the different sets of securities and varying the amount of investments in each security, various portfolios are designed. After identifying the range of possible portfolios, the risk-return characteristics are measured and expressed quantitatively. It involves the mathematically calculation of return and risk of each portfolio. Portfolio Selection During this phase, portfolio is selected on the basis of input from previous phase Portfolio Analysis. The main target of the portfolio selection is to build a portfolio that offer highest returns at a given risk. The portfolios that yield good returns at a level of risk are called as efficient portfolios. The set of efficient portfolios is formed and from this set of efficient portfolios, the optimal portfolio is chosen for investment. The optimal portfolio is determined in an objective and disciplined way by using the analytical tools and conceptual framework provided by Markowitzs portfolio theory. Portfolio Revision After selecting the optimal portfolio, investor is required to monitor it constantly to ensure that the portfolio remains optimal with passage of time. Due to dynamic changes in the economy and financial markets, the attractive securities may cease to provide profitable returns. These market changes result in new securities that promises high returns at low risks. In such conditions, investor needs to do portfolio revision by buying new securities and selling the existing securities. As a result of portfolio revision, the mix and proportion of securities in the portfolio changes.
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Portfolio Evaluation This phase involves the regular analysis and assessment of portfolio performances in terms of risk and returns over a period of time. During this phase, the returns are measured quantitatively along with risk born over a period of time by a portfolio. The performance of the portfolio is compared with the objective norms. Moreover, this procedure assists in identifying the weaknesses in the investment processes.
Objectives Of Portfolio Management.

To Keep the security, safety of Principal sum intact both in terms of money as well as its purchasing power. Stability of the flow of income so as to facilitate planning more accurately and systematically the re-investment or consumption of income. To attain capital growth by re-investing in growth securities or through purchase of growth securities. Marketability of the security which is essential for providing flexibility to investment portfolio. Liquidity i.e. nearness to money which is desirable for the investor so as to take advantage of attractive opportunities upcoming in the market. Diversification: The basic objective of building a portfolio is to reduce the risk of loss of capital and income by investing in various types of securities and over a wide range of industries.
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Favourable tax status : The effective yield an investor gets from his investment depends on tax to which it is subject. By minimizing the tax burden, yield can be effectively improved.
How can investor invest in a Portfolio Management Services (PMS)?

There are two ways in which an investor can invest in a Portfolio Management Services: 1. Through Cheque payment. 2. Through transferring existing shares held by the customer to the PMS account. The Value of the portfolio transferred should be above the minimum investment criteria. Beside this customer will need sign a few documents like PMS agreement with the provider, Power of Attorney agreement, New demat account opening format
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(even if investor has a demat account he is required to open a new one)& documents like PAN, address proof and Identity proofs are mandatory. NRIs can invest in a PMS. The NRI needs to open a PIS account for investing in PMS. The documentation required for an NRI, however, is different from a resident Indian. A checklist of documents is provided by each PMS provider.
BASIC .
PRINCIPLES
OF
PORTFOLIO
MANAGEMENT
There are two basic principles for effective portfolio management which are given below:1. Effective investment planning for the investment in securities by considering the following factorsa. Fiscal,financial and monetary policies of the Govt.of India and the Reserve Bank of India. b. Industrial and economic environment and its impact on industry Prospect in
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terms of prospective technological changes, competition in the market, capacity utilization with industry and demand prospects etc. 2. Constant review of investment: Its require to review the investment in securities and to continue the selling and purchasing of investment in more profitable manner. For this purpose they have to carry the following analysis: a. To assess the quality of the management of the companies in which investment has been made or proposed to be made. b. To assess the financial and trend analysis of companies balance sheet and profit&loss Accounts to identify the optimum capital structure and better performance for the purpose of withholding the investment from poor companies. c. To analysis the security market and its trend in continuous basis to arrive at a conclusion as to whether the securities already in possession should be disinvested and new securities be purchased. If so the timing for investment or dis-investment is also revealed.
Why portfolio management?

Today, the financial market is increasingly complex and managing our own portfolio will take up a lot of time and effort. There are situations when we dont have time or knowledge to explore the best investment alternatives in the market. This is a common problem faced by many wannabe investors. At this juncture, portfolio management services can help investor to get out of this dilemma. So one can simply assign our investments to portfolio management services who will report the investor regularly on investors portfolio performance. Dont feel lost in this complex world of investments. Let the experts do their job.
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But why should investor opt for PMS? Here are a few aspects on which portfolio managers say they score on top like:
Balanced Portfolio: Professional research and advice, will help investor with information on the best investment options and ideas for his portfolio. Maximum Returns, Minimum Risks: Portfolio management services assure investor of the best downside protection for his portfolio. Investor will benefit with practical financial advice that can help convert all paper gains into real profits in the shortest time. Adjust Investor Portfolio To Market Trends: When investor avail of portfolio management services, portfolio manager enjoy greater freedom and flexibility to diversify investor investments. Personalized Advice: Get investment advice and strategies from expert Fund Managers. Professional Management: Money management services that work for investor. Continuous Monitoring: Investor are informed about their investment decisions. Hassle Free Operation: High standards of service and complete portfolio transparency. Greater control: Investor have greater control over the asset allocation in PMS. Here the portfolio can be customized to suit investor risk-return profile. Transparency: PMS provides comprehensive communications and performance reporting that will give investors a complete picture regarding the securities held on his behalf.
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Types of Portfolio Management.
TYPES OF PORTFOLIO MANAGEMENT
Discretionary
Non Discretionary
Advisory
1) Discretionary: This service gives the flexibility and freedom to investment manager to operate on behalf of the investor fully. The investment manager can choose the investment avenue and may decide the appropriate time for the transaction. Further, he implements the investment decisions. The client may give a negative list of stocks in a discretionary PMS at the time of opening his account and the Fund Manager would ensure that those stocks are not bought in his portfolio. Majority of PMS providers in India offer Discretionary Services. There are two options, Fixed Fee :- The Fixed Fee portfolio Under this portfolio, fixed management fees shall be charged of upto 5.0% per annum of the NAV of the client's portfolio. Additional applicable taxes shall be charged on the amount of fees.
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Variable Fee :- The Fixed Fee and Performance Linked portfolio Under this portfolio, management fees shall be charged as a combination of fixed and variable basis. Fixed fees shall be upto 5.0 % per annum of the NAV of the client's portfolio, and variable fees shall be charged on the Positive Annual Portfolio Returns based on higher water marking principle. Additional applicable taxes shall be charged on the amount of fees. 2) Non-Discretionary: Under this portfolio the Client directs the Portfolio Manager to the desired avenues of investments while the Portfolio Manager passively manages and executes transactions based on the Client's directions. Under a Non-Discretionary Portfolio Management, the Portfolio Manager executes the investment instructions and follows up with payments, settlements, custody and other back-office functions. This is generally for Institutional Clients. 3) Advisory: Under this portfolio, the Portfolio Manager, based on the risk profile of the Client, offers his advice from time to time, however the final decision and execution of the transaction rests with the Client without intervention or backoffice assistance from the Portfolio Manager. This is generally for Institutional Clients.
Who provide Portfolio management service?

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PORTFOLIO
services.
MANGER provide portfolio management
Who is a portfolio manager & what are his functions?

A portfolio manager is a corporate body, who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client, the management or administration of a portfolio of securities or the funds of the client. A portfolio manager need to be registered with SEBI, For registration as a portfolio manager, an applicant is required to pay a non-refundable application fee of Rs.1,00,000/- by way of demand draft drawn in favour of Securities and Exchange Board of India, payable at Mumbai. The capital adequacy requirement of a portfolio manager is minimum networth of Rs.2cr. Every portfolio manager is required to pay Rs.10lakhs as registration fees at the time of grant of certificate of registration by SEBI. The certificate of registration remains valid for three years. The portfolio manager has to apply for renewal of its registration certificate to SEBI, 3 months before the expiry of the validity of the certificate, if he wishes to continue as a registered portfolio manager. He is required to pay Rs.5lakh as renewal fees to SEBI. The portfolio manager, before taking up an assignment of management of funds or portfolio of securities on behalf of the client, enters into an agreement in writing with the client, clearly defining the inter se relationship and setting out their mutual rights, liabilities and obligations relating to the management of funds or portfolio of securities, containing the details as specified in Schedule IV of the SEBI (Portfolio Managers) Regulations, 1993. The portfolio manager shall furnish periodically a report to the client, as agreed in the contract, but not exceeding a period of six months and as and when required by the client and such report shall contain the following details, namely:V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE
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(a) The composition and the value of the portfolio, description of security, number of securities, value of each security held in the portfolio, cash balance and aggregate value of the portfolio as on the date of report; (b) Transactions undertaken during the period of report including date of transaction and details of purchases and sales; (c) Beneficial interest received during that period in respect of interest, dividend, bonus shares, rights shares and debentures; (d) Expenses incurred in managing the portfolio of the client; (e) Details of risk foreseen by the portfolio manager and the risk relating to the securities recommended by the portfolio manager for investment or disinvestment. This report may also be available on the website with restricted access to each client. The portfolio manager shall, in terms of the agreement with the client, also furnish to the client documents and information relating only to the management of a portfolio. The client has right to obtain details of his portfolio from the portfolio managers. The portfolio manager provides to the client the Disclosure Document at least two days prior to entering into an agreement with the client. The Disclosure Document contains the quantum and manner of payment of fees payable by the client for each activity, portfolio risks, complete disclosures in respect of transactions with related parties, the performance of the portfolio manager and the audited financial statements of the portfolio manager for the immediately preceding three years. The disclosure document is neither approved nor disapproved by SEBI nor does SEBI certify the accuracy or adequacy of the contents of the Documents. Portfolio managers cannot impose a lock-in on the investment made by their clients. However, a portfolio manager can charge exit fees from the client for early exit, as laid down in the agreement. The performance of a discretionary portfolio manager is calculated using weighted average method taking each individual category of investments
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for the immediately preceding three years and in such cases performance indicator is also disclosed.
Services provided in Portfolio Management.

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So investor are lured by the sales pitch and entrusted his money to a PMS. Now what can he expect from this service? 1. Portfolio managers work as a personal relationship Manager with whom the client can interact at any time as per his preference. 2. To discuss any topics regarding money or saving, the client can interact with his portfolio manager on a monthly basis. 3. The client can also discuss on any major changes that he wants in his asset allocation or investment strategies. 4. Portfolio management service (PMS) handles all types of administrative work such as opening a new bank account or dealing with a financial settlement or depository transaction. 5. For online Portfolio management service (PMS), the client receives a User-ID and Password that helps him in getting online access to his portfolio details as and when he wants. 6 .Portfolio management service (PMS) also helps tax planning and tax management of client based on detailed statement of transactions in his portfolio.
Working of a Portfolio Management Services (PMS)

Each PMS account is unique and the valuation and portfolio of each account may differ from one another. There is no NAV for a PMS scheme, however the
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customer will get the valuation of his portfolio on a daily basis from the PMS provider. Each PMS account is unique from one another. Every PMS scheme has a model portfolio and all the investments for a particular investor are done in the Portfolio Management Services on the basis of model portfolio of the scheme. However the portfolio may differ from investor to investor. This is because of: 1. 2. 3. 4. Entry of investors at different time. Difference in amount of investments by the investors Redemptions/additional purchase done by investor Market scenario Eg If the model portfolio has investment in Infosys, and the current view of the Fund Manager on Infosys is HOLD(and not BUY), a new investor may not have Infosys in his portfolio.
Under PMS schemes the fund manager interaction also takes place. The frequency depends on the size of the client portfolio and the Portfolio Management Services provider. Bigger the portfolio, frequency of interaction is more. Generally, the PMS provider arranges for fund manager interaction on a quarterly/half yearly basis.
Portfolio Management Process Techniques.

Portfolio management (PM) techniques are the systematic methods for analyzing or evaluating a set of projects or activities for achieving the optimal balance between stability and growth, risks and returns; and attractions and drawbacks. It focuses on achieving this balance by using the limited resources available in best possible manner.
Common aspects of Portfolio management (PM) techniques.

The individual projects are assessed and the results are balanced. Thus PM involves appropriate single project evaluation techniques for achieving the desired balance.
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It is mandatory to examine the every project in the similar fashion for ensuring the validity and consistency of the input data. Portfolio Management (PM) Techniques There are various techniques that are used for supporting the portfolio management process: Heuristic models Scoring techniques Visual or mapping techniques Portfolio Management involves selection of a portfolio of new product development projects for achieving the below mentioned goals: Maximizing the profitability Maximizing the value of the portfolio Providing optimal balance Supporting the strategy of the enterprise Project Portfolio Management Techniques comprises of complete spectrum of project portfolio management (PPM) functions. It includes selecting projects and their successful execution by creating project-friendly and formalized environment. The efficient Portfolio Management is ensured by the senior management team of an organization which conduct regular meetings for managing the product pipeline and making decisions related to the product portfolio.
Activities of Portfolio management

Creating a product strategy including products, strategy approach, markets, customers, competitive emphasis, etc Understanding the budget or resources available for balancing the portfolio Assessment of project for investment requirements, risks, profitability and other suitable factors The portfolio management techniques must be used for the proper balance of following goals. Risk vs. profitability
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New products v/s Improvements Strategy fit v/s Reward Market v/s Product line Long-term v/s short-term Initially, the Portfolio Management techniques are used for optimizing the financial returns or projects profitability by applying heuristic or mathematical models. However, this approach fails to address the need to balance the portfolio as per the organizations strategy. Later, Scoring techniques came into picture when these are used for weighting and scoring criteria for considering factors such as profitability, risk, investment requirements, and strategic alignment. The drawbacks of these techniques include inability to optimize the mix of projects and over emphasis on financial measures. Mapping techniques are widely used for visualizing a portfolios balance by graphical presentation in the form of a two-dimensional (2 D) graph that displays balance between two factors as mentioned below. Marketplace fit vs. product line coverage Risks vs. profitability Financial return vs. probability of success The development of new product needs significant investments and Portfolio Management has become widely used tool for making strategic decisions regarding the product development and the investment of company resources. The revenues are based increasingly on new products that are developed during last one to three years. Therefore, the companys profitability and its continued existence depend on the portfolio decisions regarding the product development and the investment of company resources. The revenues are based increasingly on new products that are developed during
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last one to three years. Therefore, the companys profitability and its continued existence depend on the portfolio decisions.
Strategies Provided Through Portfolio Management Are:
Portfolio management strategies.

Portfolio Management Strategies refer to the approaches that are applied for the efficient portfolio management in order to generate the highest possible returns at lowest possible risks. There are two basic approaches for portfolio management including Active Portfolio Management Strategy and Passive Portfolio Management Strategy.
Active Portfolio Management Strategy:

The Active portfolio management relies on the fact that particular style of analysis or management can generate returns that can beat the market. It involves higher than average costs and it stresses on taking advantage of market inefficiencies. It is implemented by the advices of analysts and managers who analyze and evaluate market for the presence of inefficiencies. The active management approach of the portfolio management involves the following styles of the stock selection. Top-down Approach: In this approach, managers observe the market as a whole and decide about the industries and sectors that are expected to perform well in the ongoing economic cycle. After the decision is made on the sectors, the specific stocks are selected on the basis of companies that are expected to perform well in that particular sector.
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Bottom-up: In this approach, the market conditions and expected trends are ignored and the evaluations of the companies are based on the strength of their product pipeline, financial statements, or any other criteria. It stresses the fact that strong companies perform well irrespective of the prevailing market or economic conditions. Benefits of Active portfolio Management strategy The active portfolio management strategy allows the portfolio managers to select a variety of investments rather than investing in the market as a whole. There may be different kinds of motivations for the investors to follow active management strategy. In order to generate profits, the investors consider that some market segments are less efficient than others. Portfolio Manager may manage the volatility or risks of market by investing in less-risky and high-quality companies instead of investing in market as a whole. Investors may take additional risk for achieving higher-than-market returns. Those investments which are not vastly correlated to the market function as portfolio diversifier and decrease the portfolio volatility as a whole. Investors may follow a strategy for avoiding certain industries in comparison to the market as a whole. Investors that follow actively-managed fund are more aligned for achieving their specific investment goals.
Drawbacks of Active Management.

There are chances of bad investment choices to be made by fund manager Fund Manager may follow an unsafe theory for the management of the portfolio The costs related to the active management are higher in comparison to passive management in case of lack of frequent trading Fund managers should actively evaluate the funds prospectus before investing in an actively-managed mutual fund because most of the actively-managed large
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and mid-cap stock funds fail to beat or outperform their passively managed counterparts. Higher transaction costs results due to frequent trading with active fund management strategies that reduces the funds return. The short-term capital gains due to frequent trading have an unfavourable income tax impact.
Passive Portfolio Management Strategy :

Passive asset management relies on the fact that markets are efficient and it is not possible to beat the market returns regularly over time and best returns are obtained from the low cost investments kept for the long term. The passive management approach of the portfolio management involves the following styles of the stock selection.
Efficient market theory: This theory relies on the fact that the information
that affects the markets is immediately available and processed by all investors. Thus, such information is always considered in evaluation of the market prices. The portfolio managers who follows this theory, firmly believes that market averages cannot be beaten consistently. Indexing: According to this theory, the index funds are used for taking the advantages of efficient market theory and for creating a portfolio that impersonate a specific index. The index funds can offer benefits over the actively managed funds because they have lower than average expense ratios and transaction costs. Apart from Active and Passive Portfolio Management Strategies, there are three more kinds of portfolios including Patient Portfolio, Aggressive Portfolio and Conservative Portfolio.
Patient Portfolio: This type of portfolio involves making investments in wellknown stocks. The investors buy and hold stocks for longer periods. In this portfolio, the majority of the stocks represent companies that have classic growth
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and those expected to generate higher earnings on a regular basis irrespective of financial conditions.
Aggressive Portfolio: This type of portfolio involves making investments in

expensive stocks that provide good returns and big rewards along with carrying big risks. This portfolio is a collection of stocks of companies of different sizes that are rapidly growing and expected to generate rapid annual earnings growth over the next few years.
Conservative Portfolio:
This type of portfolio involves the collection of stocks after carefully observing the market returns, earnings growth and consistent dividend history.
Portfolio Management Payment Criteria:

There are types of payment criteria offered by portfolio managers to their client, such as:

Fixed-linked management fee. Performance-linked management fee. 2-2.5% of the
In fixed-link management fee the client usually pays between portfolio value calculated on a weighted average method.
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In performance-linked management fee the client pays a flat fee ranging between 0.5-1.5% based on the performance of portfolio managers. The profits are calculated on the basis of 'high watermarking' concept. This means, that the fee is paid only on the basis of positive returns on the investment. In addition to these criteria, the manager also gets around 15-20% of the total profit earned by the client. The portfolio managers can also claim some separate charges gained from brokerage, custodial services, and tax payments.
Portfolio Management Services (PMS) Charges:

A PMS charges following fees. The charges are decided at the time of investment and are vetted by the investor. Entry Load PMS schemes may have an entry load of 3%. It is charged at the time of buying the PMS only. Management Charges Every Portfolio Management Services scheme charges Fund Management charges. Fund Management Charges may vary from 1% to 3%
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depending upon the PMS provider. It is charged on a quarterly basis to the PMS account. Profit Sharing Some PMS schemes also have profit sharing arrangements (in addition to the fixed fees), wherein the provider charges a certain amount of fees/profit over the stipulated return generated in the fund. For Eg PMS X has fixed charges of 2% plus a charge of 20% of fees for return generated above 15% in the year. In this case if the return generated in the year by the scheme is 25%, the fees charged by the PMS will be 2% + {(25%-15%)*20%}. The Fees charged is different for every Portfolio Management Services provider and for every scheme. It is advisable for the investor to check the charges of the scheme. Apart from the charges mentioned above, the PMS also charges the investors on following counts as all the investments are done in the name of the investor:

Custodian Fee Demat Account opening charges Audit charges Transaction brokerage
Taxation for Portfolio Management Services (PMS):
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Any income from Portfolio Management Services account is a business income. Unlike MF, PMS is not required to remain 65%+ invested in equity to get equity taxation benefit. Each Portfolio Management Services account is in the name of additional investor and so the tax treatment is done on an individual investor level. Profit on the same can be considered as business income. (ie slabwise) Profit can be considered as Capital gains. [STCG(15%) or LTCG(Taxfree)]. It depends on clients Chartered Accountant or the assessing officer how he treats this Income. The PMS provider sends an audited statement at the end of the FY giving details of STCG and LTCG, it is on the client and his CA to decide to treat it as capital gain or business income.
Benefits of Portfolio Management:

There are large number of benefits of Portfolio Management that can provide high value returns in case, if it is performed on regular basis and implemented properly. There are many companies that aimed to utilize their management efforts on balanced project portfolio for achieving optimal performance and returns for the entire portfolio.PMS benefits investor in following ways: Professional Management PMS is provided by qualified and professional investment managers with the objective to deliver consistent long term performance while controlling risk.
1. Continuous Monitoring It is important to recognize that portfolios need to be constantly monitored and periodic changes should be made to optimize the results.
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2. Risk Control The investment manager employs a qualified research team to establish the investor's investment strategy and providing the information to the investment manager. This also helps in reducing the investment related risks up to significant extent.
3. Hassle Free Operation The investment manager gives the investor a customized service. He takes care of all the administrative aspects of the investor's portfolio with a periodic reporting on the overall status of the portfolio and performance. The investment manager provides various types of reports to his investors on a regular basis. These reports are related to the transactions made on their behalf, current holdings of the investment portfolio and realized Profits and Losses to name a few.
4. Flexibility The Portfolio Manager has fair amount of flexibility in terms of investing patterns and procedures. He can create a reasonable concentration in the investor portfolios by investing disproportionate amounts in favour of compelling opportunities.
5. Transparency PMS provides comprehensive communications and performance reporting. Investors will get regular statements and updates from the investment manager. The account statements will give investor a complete picture regarding the securities held on his behalf. These reports help investor in understanding and measuring their tax liabilities. All kinds of direct taxes (Income Tax) have to be borne and paid by the investor.
6. Customized Advice PMS gives select investors the benefit of tailor made investment advice designed to achieve their financial objectives.
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7. Personalized Approach In PMS, investor may gain direct personalized access to the professional investment managers who actively manage his investment portfolio. There is a portfolio theory which is specifically designed for investment approach. This theory helps the investors to estimate the risk and return associated with the investment they are going to make. This estimation is made statistically. The investments portfolio can be improved, rate of return can increase and the risk associated will be reduced if we combine those investments which have different price fluctuation.
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PROBLEMS FACED BY PORTFOLIO MANAGER:

The implementing of the effective portfolio management is very challenging in the difficult economic conditions. The market volatility and uncertainty exerts pressure on the portfolio managers and investors to minimize the risks and still generate good returns or maintain their investments if not growing them.
Facing the challenges: Portfolio Managers should be prepared to deal with tough market conditions so that they can spend money on and resources on their vital investments. As per the experts and analysts, the economy magnifies the impact of challenges rather than creating any new challenges. Some of the vital challenges faced by Portfolio Managers are as follows Deciding to take an initiative before its scoped out. Ensuring that right resources are used on most important securities Managing the portfolios outside their politics
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Modifying the existing projects and investments in efficient manner so as to maintain the portfolio returns in difficult market conditions. Fewer Funds available for investments in portfolio The difficult economic conditions usually left the investors with fewer dollars available for maintaining or growing their portfolios. There are many portfolio managers or investors that cut down on their investing for new assets or securities. The costs of maintaining and managing the portfolio increase with the number of securities or assets. The portfolio managers focus on finding ways for sharing the resources between various stocks. Assessing the Applications and Systems The portfolio managers can also assess the applications and systems to cut down the costs and evaluate their worth to the company. The PMs can get rid of various unnecessary tools and outdated systems that are incurring huge costs to the company. Efficient Portfolio Management Every proposed investment should be carefully assessed to ensure there is efficient business case for the portfolio. It should also go through a standardized process depending on the unique goals of the organization. A proper planning is required for formulating various metrics and processes. After selecting the stocks to be invested, the optimal portfolio is finalized and swift action should be taken. The efficient
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optimization and management of the portfolio should be done for ensuring that portfolio will generate good returns at an acceptable level of risks even in difficult economic times. The product portfolio management involves grouping of major products that are developed and sold by businesses into (logical) portfolios. These products are organized according to major line-of-business or business segment. The management team actively manages the product portfolios by taking decisions regarding the development of new products, modifying existing products or discontinue any other products. The addition of new products helps in diversifying the investments and investment risks. Major tasks involved with Portfolio Management are as follows. Taking decisions about investment mix and policy Matching investments to objectives Asset allocation for individuals and institution Balancing risk against performance. As per the modern portfolio theory, a diversified portfolio that includes different types or classes of securities; reduces the investment risk. It is because any one of the security may yield strong returns in any economic climate.
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Portfolio Management Theory:

Modern portfolio theory (MPT) refers to the theory of investment that seeks to maximize the expected return of portfolio at a given level of risk. Similarly it also attempts to diminish risk for a given level of return expected. To achieve this, portfolio manager choose the proportions of different assets in a portfolio carefully. The modern portfolio theory is extensively used for practice in the financial industry, however basic assumptions of this theory has faced certain challenges in fields like behavioral economics. Modern Portfolio theory (MPT) presents the concept of diversification in investing by using mathematical formulation. It aims to select a collection of investment assets which has lower risk than any individual asset. It can be observed spontaneously as dynamic market conditions cause changes in value of different types of assets in conflicting ways. The prices in the bond market may fall independently from prices in the
39
stocks market, thus there is overall lower risk in a collection of both bond and stocks assets as compared to individual asset. Moreover, the diversification reduces the risk even if cases where assets returns are positively correlated. In technical terms, a Modern Portfolio theory (MPT) represents the return of asset as a normally distributed function or as an elliptically distributed random variable where risk is defined as the standard deviation of return. According to MPT, the return of a portfolio is equivalent to the weighted combination of the assets returns because the portfolio is modelled as a weighted combination of assets. MPT aims to reduce the total variance of the return of portfolio by combining various assets whose returns are negatively correlated or not positively correlated. MPT assumes that the markets are competent and investors are logical. MPT stress the fact that assets in an investment portfolio must not be chosen individually where each asset is selected on the basis of its own merits. Instead, it is important to observe the changes in price of each asset relative to changes in the price of every other asset in the portfolio. Investing in the assets is basically the exchange between risk and expected return. The assets with higher expected returns are usually more risky. MPT assists in the selection of a portfolio with the maximum possible expected return at a given level of risk. Similarly, MPT assists in the selection of a portfolio with the lowest possible risk at a given amount of expected return. Thus, it is not possible to have a targeted expected return exceeding the
40
highest-returning available security except there is possibility of negative holdings. MPT stresses the diversification and assists the portfolio managers in finding the best possible diversification strategy. A Portfolio Manager is responsible for building a portfolio of assets such as stocks, bonds and other assets that generates the maximum possible rate of return at the least possible level of risk. The portfolio management involves allocation of funds in various assets to achieve diversification of portfolio that offer maximum return at the lowest possible risk.
How to Select an Optimal Portfolio: An optimal stock portfolio refers to a stock portfolio that incorporates the stocks configured in such a manner that they yield the optimal return statistically possible at a given level of risk accepted by an investor. The modern portfolio theory stresses on the optimal portfolio concept by assuming that the investors try to minimize risk obsessively while looking for the highest return possible. As per this theory, investors should make rational decisions for achieving maximum returns at their acceptable level of risk. The working of the optimal portfolio can be easily understood by looking at the chart below. The optimal-risk portfolio is generally found in the middle of the curve. If one goes further
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higher up the curve, it will mean taking more risk proportionately for achieving lower incremental return. Similarly if one goes at lower end of the curve, it will mean low risk/low return portfolios. Risk % (Standard Deviation) As an investor, you can select how much risk is acceptabl e to you in the portfolio by selecting any other point that lies on the efficient frontier. It will provide you the maximum returns for the amount of risk acceptable to you. One cannot calculate the optimization of the portfolio mentally. Investors use various sophisticated computer programs for determining optimal portfolios by estimating hundreds or thousands of different expected returns at each level of risk. For example, if you have Rs.1,00,000 to invest to build your portfolio of stocks of three companies A, B and C; then you need to decide how much money should be invested in each
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stock that can provide best return possible at a level of risk acceptable by you. For this, lets create 10 random portfolios where each portfolio comprises of different proportions of the three stocks A, B and C. The RISK/RETURN profiles of all these portfolios are mentioned in table below. Risk Return Profile Portfolio A B C Risk Returns Portfolio 1 32% 38% 30% 12.10% 11.51% Portfolio 2 68% 12% 20% 15.54% 12.76% Portfolio 3 27% 51% 22% 12.91% 11.59% Portfolio 4 20% 20% 60% 9.89% 11.00% Portfolio 5 60% 20% 20% 14.86% 12.71% Portfolio 6 12% 74% 14% 13.48% 11.22% Portfolio 7 15% 80% 5% 14.28% 11.40% Portfolio 8 38% 19% 43% 11.76% 11.71% Portfolio 9 42% 19% 39% 12.05% 12.49% Portfolio 10 74% 10% 16% 16.35% 13.06% In this table, you can observe that each portfolio has a unique RISK/RETURN profile because of different cash/stock allocation Risk/Reward Profile After the analysis of the collection of stocks, those portfolio configurations that fall on the efficient frontier are considered as optimal portfolios. The various optimal portfolios are
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summarised in the risk/return table. This table allows the investors to choose that optimal portfolio which provide highest return statistically possible at a given level of risk acceptable to them. Risk /Return Table of Optimal Portfolios Risk Returns A B C 9.0% 10.98% 10% 21% 69% 9.5% 11.21% 18% 17% 65% 10.0% 11.73% 21% 15% 63% 10.5% 11.96% 28% 14% 58% 11.0% 12.23% 22% 19% 61% 11.5% 12.61% 30% 27% 43% 12.0% 12.83% 28% 21% 50% 12.5% 12.92% 37% 12% 51% 13.0% 13.02% 30% 38% 32% 13.5% 13.12% 26% 27% 47% 14.0% 13.23% 21% 46% 33% Thus, the optimal portfolio configuration that contains three stocks (A, B, C) is the one that gives a return higher than 11.21% at a risk of 9.50% Optimal Portfolio Risk Return A B C 9.5% 11.21% 18% 17% 65%
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Procedure for setting up portfolio management services: Portfolio has been in existence for a very long time. The focus is on matching the characteristics of the assets with the needs of the investors on an ad hoc basis. Portfolio management can be described as a systematic, continuous, dynamic and flexible process which involves identifying and specifying an investors
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objectives, preferences and constraints to develop clear investment policies. Developing strategies by choosing optimal combinations of financial and real assets available in the market and implementing the strategies it also includes monitoring the market conditions, relative asset values and the investors circumstances. It has to make adjustments in the portfolio to reflect significant changes in one or more relevant variables. This process, by and large, applies to the activities of all kinds of investment managers and investors. While considering the application for registration made in the prescribed form, the SEBI takes into account all matters relevant to the activities related to the portfolio manager. It has to consider the following important matters: Necessary infrastructure like adequate office staff, equipment and manpower to discharge the day to day activities. To employ minimum two persons with experience to conduct portfolio management business. Any person who is directly or indirectly connected with the applicant has not been granted registration. The capital adequacy is not less than a net worth of Rs 50 lacs in terms of capital plus free reserves. The applicant or his partner or director or principal officer is not involved in any litigation connected with the securities market.
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The applicant has professional qualification in finance or low or accounting and business management. The grant of certificate is in the interest of the investors.
REGULATION OF PORTFOLIO MANAGEMENT SERVICES:
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Portfolio management is a dynamic process which involves the following steps:

Identification of objectives constraints and preferences of investors for formulation of investment policy. Develop and implement strategies in tune with investment policy formulated. It helps the selection of asset classes and securities in each class depending upon their risk return attributes. Review and monitoring of the performance of the portfolio by continuous overview of the market conditions and performance of the companies. Evaluation of the portfolio for the results to compare
with targets and some adjustments for the future.
Basically portfolio management is similar to mutual fund investment. Both are types of managed funds. Lets classify the difference between both in detail.
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How is PMS different from a Mutual Fund? Both PMS and Mutual Funds are types of managed Funds. The difference to the investor in a Portfolio Management Services over a Mutual Fund is: Concentrated Portfolio. Portfolio can be tailored to suit the needs of investor. Investors directly own the stocks, rather than the fund owning the stocks. Difference in taxation. Distingiush between Portfolio Management Services & Mutual Fund:
Features
Management
PMS
Mutual fund
Provide ongoing, Provide access to personalized access to professional money professional money management services. management services. Portfolio can be tailored Portfolio structured to to address each investor's meet the fund's stated specific needs. investment objective. investors directly own the individual securities in their portfolio, allowing for tax management flexibility. Shareholders own shares of the fund and cannot influence buy and sell decisions or control their exposure to incurring tax
Customization
Ownership
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liabilities.
Liquidity
Although managers may Mutual funds generally hold cash, they are not hold some cash to meet required to hold cash to redemptions. meet redemptions. Significantly higher minimum investments than mutual funds. Generally, minimum ranges from Rs. 1Crore + for Equity Options Rs. 5Crore + for Fixed Income Options Rs. 20Lacs + for Structured products. Generally more flexible than mutual funds. The Portfolio Manager may move to 100% cash if required . Provide ongoing, personalized access to professional money management service.
Minimums
Flexibility
Comparatively flexible.
less
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Benefits of Choosing Portfolio Management Services (PMS) Instead of Mutual Funds:

While selecting Portfolio management service (PMS) over mutual funds services it is found that portfolio managers offer some very services which are better than the standardized product services offered by mutual funds managers. Such as: Asset Allocation: Asset allocation plan offered by Portfolio management service PMS helps in allocating savings of a client in terms of stocks, bonds or equity funds. The plan is tailor made and is designed after the detailed analysis of client's investment goals, saving pattern, and risk taking capacity. Timing: portfolio managers preserve client's money on time. Portfolio management service help in allocating right amount of money in right type of saving plan at right time. This means, portfolio manager provides their expert advice on when his client should invest his money in equities or bonds and when he should take his money out of a particular saving plan. Portfolio manager analyzes the market and provides his expert advice to the client regarding the amount of cash he should take out at the time of big risk in stock market. Flexibility: portfolio manager plan saving of his client according to their need and preferences. But sometimes, portfolio managers can invest client's money according to his preference because they know the market very well than his client. It is his client's duty to provide him a level of flexibility so that he can manage the investment with full efficiency and effectiveness. In comparison to mutual funds, portfolio managers do not need to follow any rigid rules of investing a particular amount of money in a particular mode of investment. Mutual fund managers need to work according to the regulations set up by financial authorities of their country. Like in India, they have to follow rules set up by SEBI.
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SEBI NORMS:
SEBI has laid down certain norms for portfolio management services (PMS). SEBI has prohibited the portfolio managers to assume any risk on behalf of their clients. The portfolio manager cannot assure any fixed returns to their clients. The investments made by them are subject to risk which the client has to bear. The investment consultancy and the management have to charged at rates which are fixed at the time of entering into a contract. The clients are not allowed to share the profits or discounts or any other incentives from the portfolio managers. The portfolio managers are also prohibited to lend their clients, BADLA financing and bill discounting as per SEBI norms. The portfolio manager cannot put the clients funds in any investment, not permitted by the contract entered into with the client. The investments are allowed both in capital market and money market. The norms also provides that the clients money should be kept in a separate account with the public sector bank. These funds cannot be mixed with his own funds. All the deals done for the clients account should be entered in his name and contract notes, bills etc should be passed in his name. A separate ledger account is maintained for all purchases or sales on clients behalf, which should be done at the market price. Final settlement and termination of the contract should also be completed as per the terms of the contract. Portfolio managers act only on contractual basis and also on fiduciary basis. No contract for less than an year is permitted by the SEBI norms.
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Evaluation of Present Scenario AND Estimation of Future Prospectus:

In India there are large number of savers. The saving rate is high as 32% GDP per annum and investment at 34% of GDP. However the return in form of output growth is about 7 to 8 percent per annum. This is due to poor investment strategy involving high capital output ratios low productivity of capital and also high rates of obsolescence of capital. It is also same at the micro level. The use of capital in India is wasteful n inefficient. Thus the portfolio managers in India lack the expertise and experience. The average Indian household saves around 55% in the financial form and 45% in physical form. Nearly 64% of those in financial form is held in cash and bank deposits. Therefore the investors get negative real returns. Again, around 24% of the financial savings is held in the form of Insurance, Provident Fund, Pension Funds. Another 5% is invested in government instruments like post office savings. Therefore the real returns are low and also lower than average inflation rates. The investment by average household in shares and debentures and Mutual Funds Schemes is only around 6% of their financial savings. The objectives of the investors in India are income, capital appreciation, safety, marketability, liquidity and hedge against inflation. The only investments satisfying all their objectives and the real return would be higher than any other savings instruments. Therefore art and science of investments and portfolio management is important. Mutual fund is the most suitable investment for the common man. The Association of Mutual Funds in India (AMFI) claims that there goal is to develop the Mutual fund industry on professional, healthy and ethical lines and to enhance and maintain standards in all areas with a view to protect and promote interests of mutual funds and there unit holder. Distribution of assets under management by Mutual Funds
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Particulars Liquid / Money market Debt-oriented Equity-oriented Total All schemes total
(Rs.) Crores 80,049 2,91,068 1,82,403 5,53,520 5,87,658
In liquid equity and debt schemes Retail share Corporate share Banks/ FII share HNIs share Source: AMFIs website 31/3/2012
94% 20% 52% 5% 22%
The above table shows that liquid and money market market schemes, equity and debt oriented schemes account for 94 percent of the assets under management of all the mutual funds, corporates, Banks and financial institutions and High Net Worth Individuals (HNI) accounted for nearly 22 percent opf AUMs. Retail accounted for accounts 20 percent of AUMs. In liquid and money market funds and in the debt oriented funds companies, banks and financial institutions for more than 80 percent of AUMs. RBIs latest report on currency and finance states that the net financial savings of the households sector in 2011-12 were 10.9 percent of the GDP lower than 11.5 percent in 2010-11. The household investment in shares and debentures went to Rs 19,349 crore from Rs 89,134 crore. This is great market which the mutual funds in India have not taken advantage of. They have to learn to innovate and usher in a retail revolution in mutual funds. Thus the portfolio managers have a great scope for in the mutual fund industry. The Indian stock market is increasingly driven by foreign institutional investors they own over 15 % of the countrys market capital and their significance is much more when looking at the free float. Emerging markets could continue to re-rate themselves given sustained improvement in economic fundamentals. Emerging market countries have been able to maintain n strong fundamentals aided by
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strong real GDP Growth, lower level of interest rates and inflations. This should allow for improved risk- return profiles for overseas investors. Overseas investors also face reduced risks while investing in emerging markets as they have sound economic fundamentals compared to those of the developed world. Even though Fund flows to emerging markets have been seeing record levels portfolio weightages are yet to touch the peaks.
CONCLUSION: Value Your Money Before Selecting Portfolio Management Services (PMS): Equity basis: Equity portfolio offered by Portfolio management services helps in adding high value than what a debt portfolio offers. Because of this, many portfolio managers emphasis on equity investments and some offer hybrid products. Large surplus to invest: The client should always choose the portfolio managers after considering his portfolio size and the fee he would charge for managing his portfolio. PMS are recommended to those clients who have large surplus amount of money to invest. Otherwise, the company can also think for cheap options like a financial planner or advisor to construct an asset allocation plan and to manage investment.
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WEBLOGRAPHY & BIBLOGRAPHY Textbook Reference book Investopedia
Newspaper www.GOOGLE.com
www.scribd.com www.mbaprojects.com www.tflguide.com

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PORTFOLIO MANAGEMENT

PORTFOLIO MANAGEMENT SERVICES IN INDIA

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

________________ _______________ Course Coordinator. Principal

________________ Project Guide/Internal Examiner

________________ External Examiner

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

DATE : PLACE: ____________________ STUDENT SIGNATURE Amey A Warang ROLL NO :- 45

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

_______________ Amey A Warang

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

SR No. Particulars. 1 2 3 4 5 6 7 8 9 Introduction.

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

MEANING OF PORTFOLIO MANAGEMENT

WHAT IS PORTFOLIO MANAGEMENT SERVICE?

PHASES OF PORTFOLIO MANAGEMENT

Objectives Of Portfolio Management.

How can investor invest in a Portfolio Management Services (PMS)?

Why portfolio management?

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

Types of Portfolio Management.

TYPES OF PORTFOLIO MANAGEMENT

Who provide Portfolio management service?

MANGER provide portfolio management

Who is a portfolio manager & what are his functions?

Services provided in Portfolio Management.

Working of a Portfolio Management Services (PMS)

Portfolio Management Process Techniques.

Common aspects of Portfolio management (PM) techniques.

Activities of Portfolio management

Strategies Provided Through Portfolio Management Are:

Portfolio management strategies.

Active Portfolio Management Strategy:

Drawbacks of Active Management.

Passive Portfolio Management Strategy :

Aggressive Portfolio: This type of portfolio involves making investments in

Portfolio Management Payment Criteria:

Fixed-linked management fee. Performance-linked management fee. 2-2.5% of the

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

Portfolio Management Services (PMS) Charges:

Taxation for Portfolio Management Services (PMS):

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

Benefits of Portfolio Management:

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

PROBLEMS FACED BY PORTFOLIO MANAGER:

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

Portfolio Management Theory:

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

REGULATION OF PORTFOLIO MANAGEMENT SERVICES:

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

Portfolio management is a dynamic process which involves the following steps:

with targets and some adjustments for the future.

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

Benefits of Choosing Portfolio Management Services (PMS) Instead of Mutual Funds:

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

V.E.S. COLLEGE OF ARTS, SCIENCE AND COMMERCE

Evaluation of Present Scenario AND Estimation of Future Prospectus:

__ _ Course Coordinator. Principal