Evaluation of Present Scenario and Estimation of future

prospects of Portfolio Management

Project Done By,

Name Roll No Name Roll No

Bhavika Rathod 4 Jaitee Wazalwar 21

Shailesh Deshprabhu 6 Mayura Telang 22

Neha Bansod 8 Yogini Parulkar 23

Rahul Bandiwadekar 9 Sneha Mane 37

    Ashwati Nair 38

Chapter Topics Page

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1 Portfolio Management  3

2 Equity markets  

  Present Prospects  3

  Trends  4

  Participants  5

  Reforms  6

3 Insurance  

  Present Scenario  9

  Participants in the insurance sector  11

  Reforms  11

4 Mutual Funds  

  Types of Mutual Funds  13

  Growth of Mutual Funds & Market Share  16

5 Debt Markets  

  Classification of Indian Debt Market  17

  Advantages & Disadvantages Debt Market  18

  Types of Debt Instruments  19

  Reforms in Debt Market  20

  Recent Developments in Bond Market  21

6 Evaluation of the Present Scenario & Estimation Future Prospects  22

7 Role of SEBI in Portfolio Management  27

  Bibliography  32

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Portfolio Management

Definition of Portfolio Management:

“It is a process of encompassing many activities of investment in assets and securities. The portfolio management includes the planning, supervision, timing, rationalism and conservatism in the selection of securities to meet investor’s objectives."

Equity Markets

Present scenario

The Indian Equity Market is more popularly known as the Indian Stock Market. The Indian equity market has become the third biggest after China and Hong Kong in the Asian region.

The Bombay Stock Exchange (BSE) is the oldest stock exchange in Asia and largest number of listed companies in the world, with 4900 listed as of Feb 2010. On Feb 2010, the equity market capitalization of the companies listed on the BSE was US$1.28 trillion, which is one-tenth of the combined valuation of the Asia region & making it the 4th largest stock exchange in Asia and the 11th largest in the world. The above statistics show us the growth of Indian Equity Markets and BSE is considered to be a benchmark for Indian Equity Markets.

FII investments were to the tune of 2.5 billion Rs in Aug 2010 in equity market. Such huge indict allocations were unheard of till now since they knocked on Indian doors after our economy liberalized in 1991.

Asia’s third-largest economy has offered an attractive combination of economic stability and almost double-digit growth for fund managers anxious about US and European fragility. Net total foreign investments in Indian equities to August 31 were Rs594bn ($12.7bn), up from Rs403bn during the same period in 2009, according to SEBI.

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Indian equities trade at more than 17 times forecast earnings for 2010, compared with a five-year average of 16.2 times earnings. By comparison, emerging market equities in general trade on an average of 12 times 2010 earnings, while Russia trades at just 6.7 times forecast earnings. That is a hefty premium. Relative to past trading history, the Indian equity market looks fully priced. Within an emerging markets context it looks upwards.

Trends

Trading platform has become automatic, electronic, anonymous, order-driven, nation-wide and screen-based.

On any trading day, more than 10,000 terminals come alive, in 400 towns and cities; information is flashed on real time basis

The trading cycle has been shortened to T+2. This shortening of the cycle has been done in a phased manner but in a rapid succession – from T+5 to T+3 to T+2, all in a matter of two years.

Another material development, which proved to be of immense relief to the investors, was dematerialisation of the scrips. Now 99% of the scrips in the market are dematerialised.

At the stock exchanges, robust risk management system has been put in place, Value-at-risk margining and exposure limits, on-line monitoring of margins and positions, Clearing Corporation and Settlement Guarantee Fund mechanism for trade settlement – all these have made Indian capital market now arguably world class, in terms of transparency, efficiency and safety.

Antiquated and abused badla system or ALBM stands abolished. In its place, for hedging and trading purposes, a number of derivatives – in the form of futures and options, both index-based and stocks-specific have been introduced.

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SEBI has got corporate governance code and practice reviewed, by Narayana Murthy Committee.

Credit Rating Agencies have come up with their own methodology to rate the corporate according to their governing standards, linking it with wealth creation, management and distribution

Margin trading and securities lending have been introduced with adequate checks and balances.

The Central Listing Authority has become operational to provide an independent entry-point scrutiny of the corporate to be listed. Straight through Processing will get broadened market wide in another 3 month’s time.

The Central Registry of market intermediaries and professionals with unique identification number is under construction.

RTGS/NTGS is introduced

Participants

Participants in the Indian equity market are required to register with SEBI to carry out their businesses. These include:

Stockbrokers, sub brokers, share transfer agents, bankers to an issue, trustees of a trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and other such intermediaries who may be associated with the securities market in any manner.

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Depositories, participants, custodians of securities, FIIs, credit rating agencies, and other such intermediaries who may be associated with the securities market in any manner; and

Venture capital funds and collective investment schemes, including mutual funds.

Reforms

The development in Indian equity market since 1992 can be summarized as follows:

• Capital Issues (Control) Act of 1947 repealed and the office of Controller of Capital Issues abolished; control over price and premium of shares removed. Companies now free to raise funds from securities markets after filing prospectus with the Securities and Exchange Board of India (SEBI).

• The power to regulate stock exchanges delegated to SEBI by the Government. • SEBI introduces regulations for primary and other secondary market intermediaries, bringing them within the regulatory framework.

• Reforms by SEBI in the primary market include improved disclosure standards, introduction of prudential norms, and simplification of issue procedures. Companies required disclosing all material facts and specific risk factors associated with their projects while making public issues.

• Listing agreements of stock exchanges amended to require listed companies to furnish annual statement to the exchanges showing variations between financial projections and projected utilization of funds in the offer document and actual figures. This is to enable shareholders to make comparisons between performance and promises.

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• SEBI introduces a code of advertisement for public issues to ensure fair and truthful disclosures.

• Disclosure norms further strengthened by introducing cash flow statements.

• New issue procedures introduced—book building for institutional investors—aimed at reducing costs of issue.

• SEBI introduces regulations governing substantial acquisition of shares and takeovers and lays down conditions under which disclosures and mandatory public offers are to be made to the shareholders. Regulations further revised and strengthened in 1996.

• SEBI reconstitutes the governing boards of the stock exchanges and introduces capital adequacy norms for broker accounts.

• Over-the-Counter Exchange of India formed.

• National Stock Exchange (NSE) establishment as a stock exchange with nationwide electronic trading.

• Bombay Stock Exchange (BSE) introduces screen-based trading; 15 stock exchanges now have screened-based trading. BSE granted permission to expand its trading network to other centres.

• Capital adequacy requirement for brokers enforced.

• System of mark-to-market margins introduced in the stock exchanges.

• Stock-lending scheme introduced.

• Transparency brought out in short selling.

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• National Securities Clearing Corporation, Ltd. set up by NSE.

• BSE in the process of implementing a trade guarantee scheme.

• SEBI strengthens surveillance mechanisms and directs all stock exchanges to have separate surveillance departments.

• SEBI strengthens enforcement of its regulations. Begins the process of prosecuting companies for misstatements and ensures refunds of application money in several issues on account of misstatements in the prospectus.

• Indian companies permitted to access international capital markets through Euro issues.

• Foreign direct investment allowed in stock broking, asset management companies, merchant banking, and other nonbank finance companies.

• Foreign institutional investors (FIIs) allowed access to Indian capital markets on registration with SEBI.

• FIIs also permitted to invest in unlisted securities and corporate and Government debt.

• The Depositories Act enacted to facilitate the electronic book entry transfer of securities through depositories.

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Insurance

Present Scenario

The US$ 41-billion Indian life insurance industry is considered the fifth largest life insurance market, and growing at a rapid pace of 32-34 per cent annually, according to the Life Insurance Council.

Life Insurance Corporation of India (LIC) registered an 83 per cent increase in new business income in March 2010, while private players posted a 47 per cent growth in new business premium.

Moreover, according to IRDA, insurers sold 10.55 million new policies in 2009-10 with LIC selling 8.52 million and private companies 2.03 million policies. At the end of March 2010, LIC held 65 per cent market share in terms of new business income collection with the private sector contributing the remaining 35 per cent share in 2009-10.

According to IRDA, total premium collected in 2009-10 was US$ 24.64 billion, an increase of 25.46 per cent over US$ 19.64 billion collected in 2008-09.

A growth of 18 per cent is expected in total premium income and is likely to cross the US$ 64.93 billion mark, according to B Mathur, Secretary General, Life Insurance Council.

General Insurance:

According to data released by IRDA, the general insurance industry recorded 13.42 per cent growth in gross premium collected during 2009-10. The industry collected gross premium of US$ 7.84 billion in 2009-10 compared with US$ 6.91 billion in 2008-09.

The public sector players posted 13.85 per cent growth in gross premium in 2009-10. At the same time, private players recorded a 12.82 per cent increase in gross premium till March 2010.

During April-May 2010, non-life insurers mopped up US$ 1.59 billion against US$ 1.34 billion in the previous year, registering an increase of 19 per cent according to IRDA data.

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The four state-run insurers fared better than their private counterparts, with New India Insurance collecting the maximum premium of US$ 294.5 million in April and May 2010, compared to US$ 253.15 million in the previous year, growing by 16.34 per cent.

According to the IRDA's Summary Reports of Motor Data of Public and Private Sector Insurers - 2008-09, nearly 30 million vehicle policies were issued and a total premium worth US$ 1.83 billion was collected.

Health Insurance: The Indian health insurance market has emerged as a new and lucrative growth avenue for both the existing players as well as the new entrants. According to a latest research report "Booming Health Insurance in India" by research firm RNCOS released in April 2010, all emerging trends including the key factors driving the market growth. Furthermore, the report also identifies what could be the possible growth areas for expansion and gives a detailed overview of the competitive landscape. The Indian health insurance market has continued to post record growth in the last two fiscals (2008-09 and 2009-10). Moreover, as per the RNCOS estimates, the health insurance premium is expected to grow at a compound annual growth rate (CAGR) of over 25 per cent for the period spanning from 2009-10 to 2013-14.

Bancassurance: Private insurers have adopted bancassurance in a much bigger way than the state-owned Life Insurance Corporation (LIC) in recent years. Bancassurance is distribution of insurance products through a bank's network.

In 2008-09, private insurers forked out US$ 44.64 million as commission for bancassurance, while the payout by LIC for this distribution model was only US$ 26,075, as per official data.

According to Towers Watson India, Bancassurance Benchmarking survey 2009-10, released in May 2010, bancassurance will play a crucial role in the overall development of the Indian insurance sector with the channel expected to generate 40 per cent of private insurer’s premium income by 2012, compared to the current 25-28 per cent. In general insurance, presently 17 per cent of premium income comes from bancassurance.

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Participants in the Insurance Sector

Regulatory authorities: Regulatory authorities act in a supervisory capacity over the insurance industry.

Insurance agents and brokers: Insurance Agents and Brokers may deal with a number of insurers and may, in their dealings with customers, act on behalf of the insured (the customer) or on behalf of the insurer.

Insurance underwriters: Underwriters collect premiums from all those insured and pay out any claims. They determine the premium rates to be charged and the level of cover provided for each policy. Their underwriting guidelines set out which risks can be insured and whether standard policy terms will apply or whether special conditions are necessary.

Reforms Key Recommendations of Malhotra Committee

Structure Government stake in the insurance Companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so

that these subsidiaries can act as independent corporations.

All the insurance companies should be given greater freedom to operate.

Competition Private Companies with a minimum paid up capital of Rs.1billion should be

allowed to enter the industry. No Company should deal in both Life and General Insurance through a

single Entity.

Foreign companies may be allowed to enter the industry in collaboration with the domestic companies.

Postal Life Insurance should be allowed to operate in the rural market.

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Only one State Level Life Insurance Company should be allowed to operate in each state.

Regulatory Body The Insurance Act should be changed. An Insurance Regulatory body should be set up.

Controller of Insurance should be made independent.

Investments Mandatory Investments of LIC Life Fund in government securities to be

reduced from 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company.

Customer Service LIC should pay interest on delays in payments beyond 30 days Insurance companies must be encouraged to set up unit linked pension

plans.

Computerisation of operations and updating of technology to be carried out in the insurance industry.

Malhotra Committee also proposed setting up an independent regulatory body - The Insurance Regulatory and Development Authority (IRDA) to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives.

Insurance sector in India was liberalized in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. There is a 26 percent equity cap for foreign partners in an insurance company. There is a proposal to increase this limit to 49 percent. The opening up of the insurance sector has led to rapid growth of the sector.

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Mutual Funds

Definition

“A mutual fund is made up of money that is pooled together by a large number of investors who give their money to a fund manager to invest in a large portfolio of stocks and / or bond”

Mutual fund is a trust that manages the pool of money collected from various investors and it is managed by a team of professional fund managers (usually called an Asset Management Company) for a small fee. The investments by the Mutual Funds are made in equities, bonds, and debentures, call money etc., depending on the terms of each scheme floated by the Fund. The current value of such investments is now a day is calculated almost on daily basis and the same is reflected in the Net Asset Value (NAV) declared by the funds from time to time. This NAV keeps on changing with the changes in the equity and bond market.

Types of Mutual Funds

Closed-End Mutual Funds: A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. These funds have a stipulated maturity period generally ranging from 3 to 15 years. Once underwritten, closed-end funds trade on stock exchanges like stocks or bonds.

Open Ended Mutual Funds: Open-end funds are operated by a mutual fund house, which raises money from shareholders and invests in a group of assets, as per the stated objectives of the fund. Open-end funds raise money by selling shares of the fund to the public, in a manner similar to any other company, which sell its stock to raise the capital. An open-end mutual fund does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value.

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Large Cap Funds: Large cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth.

Mid Cap Funds: Mid cap funds are those mutual funds, which invest in small / medium sized companies. As there is no standard definition classifying companies as small or medium, each mutual fund has its own classification for small and medium sized companies. Generally, companies with a market capitalization of up to Rs 500 crore are classified as small. Those companies that have a market capitalization between Rs 500 crore and Rs 1,000 crore are classified as medium sized.

Equity Mutual Funds: Equity mutual funds are also known as stock mutual funds. Equity mutual funds invest pooled amounts of money in the stocks of public companies. Stocks represent part ownership, or equity, in companies, and the aim of stock ownership is to see the value of the companies increase over time. Stocks are often categorized by their market capitalization (or caps), and can be classified in three basic sizes: small, medium, and large.

Balanced Fund: Balanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk.

Growth Funds: Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. They focus on those companies, which are experiencing significant earnings or revenue growth, rather than companies that pay out dividends. Growth funds tend to look for the fastest-growing companies in the market.

Value Funds: Value funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation. They invest in companies that the market has overlooked, and stocks that have fallen out of favour with mainstream investors, either due to changing investor preferences, a poor quarterly earnings report, or hard times in a particular industry.

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Money Market Mutual Funds: A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free. Money market funds are generally the safest and most secure of mutual fund investments.

Sector Mutual Funds: Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. Also known as thematic funds, these funds concentrate on one industry such as infrastructure, banking, technology, energy, real estate, power heath care, FMCG, pharmaceuticals etc.

Index Funds: An index fund is a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market. An Index fund follows a passive investing strategy called indexing. It involves tracking an index say for example, the Sensex or the Nifty and builds a portfolio with the same stocks in the same proportions as the index. The fund makes no effort to beat the index and in fact it merely tries to earn the same return.

Growth Facts & Market Share In the past 6 years, Mutual Funds in India have recorded a growth of 100 %. In India, the rate of saving is 23 %.

In the future, there lies a big scope for the Indian Mutual Funds industry to expand.

Several asset management companies, which are foreign based, are now entering the Indian markets.

A number of commodity Mutual Funds will be introduced in the future. The SEBI (Securities Exchange Board of India) has granted the permission for the same.

There is also enough scope for the Indian Mutual funds to enter into the semi-urban and rural areas.

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Financial planners will play a major role in the Mutual Funds market by providing people with proper financial planning.

Distribution of Assets under management by Mutual funds – Aug 2010

Particulars Rs. (Crores) % Total

Income 347,321 49

Equity 179,200 25

Balanced 18,781 3

Liquid/ Money Market 128,843 18

GILT 3,324 1

ELSS-Equity 25,598 4

Gold ETF's 2,639 NA

Other ETF's 1,427 NA

Investing Overseas 2,533 NA

Source: amfiindia.com

Debt Markets

Debt market refers to the financial market where investors buy and sell debt securities, mostly in the form of bonds. These markets are important source of funds, especially in a developing economy like India. India debt market is one of the largest in Asia. Like all other countries, debt market in India is also considered a useful substitute to banking channels for finance.

The most distinguishing feature of the debt instruments of Indian debt market is that the return is fixed. This means, returns are almost risk-free. This fixed return on the bond is often termed as the 'coupon rate' or the 'interest rate'. Therefore, the buyer (of bond) is giving the seller a loan at a fixed interest rate, which equals to the coupon rate.

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Classification of Indian Debt Market

Indian debt market can be classified into two categories:

Government Securities Market (G-Sec Market): It consists of central and state government securities. It means that, the central and state government is taking loans. It is also the most dominant category in the India debt market.

Bond Market: It consists of Financial Institutions bonds, corporate bonds and debentures and Public Sector Units bonds. These bonds are issued to meet financial requirements at a fixed cost and hence remove uncertainty in financial costs.

Advantages

The biggest advantage of investing in Indian debt market is its assured returns. The returns that the market offer is almost risk-free (though there is always certain amount of risks, however the trend says that return is almost assured). Safer are the government securities. On the other hand, there is certain amount of risk in the corporate, FI and PSU debt instruments. However, investors can take help from the credit rating agencies, which rate those debt instruments. The interest in the instruments may vary depending upon the ratings.

Another advantage of investing in Indian debt market is its high liquidity. Banks offer easy loans to the investors against government securities.

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Disadvantages

As there are several advantages of investing in Indian debt market, there are certain disadvantages as well. As the returns here are risk free, those are not as high as the equity market at the same time. So, at one hand you are getting assured returns, but on the other hand, you are getting less return at the same time.

Retail participation is also very less here, though increased recently. There are also some issues of liquidity and price discovery as the retail debt market is not yet quite well developed.

Types of Debt InstrumentsThere are various types of debt instruments available that one can find in Indian debt market.

Government Securities: It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the Government of India. These securities have a maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where interests are payable semi-annually. For shorter term, there are Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days.

Corporate Bonds: These bonds come from PSUs and private corporations and are offered for an extensive range of tenures up to 15 years. There are also some

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perpetual bonds. Comparing to G-Secs, corporate bonds carry higher risks, which depend upon the corporation, the industry where the corporation is currently operating, the current market conditions, and the rating of the corporation. However, these bonds also give higher returns than the G-Secs.

Certificate of Deposit: These are negotiable money market instruments. Certificate of Deposits (CDs), which usually offer higher returns than Bank term deposits, are issued in dematerialised (demat) form and also as a Usance Promissory Notes. There are several institutions that can issue CDs. Banks can offer CDs which have maturity between 7 days and 1 year. CDs from financial institutions have maturity between 1 and 3 years. There are some agencies like ICRA, FITCH, and CARE; CRISIL etc. that offer ratings of CDs. CDs are available in the denominations of Rs. 1 Lac and in multiple of that.

Commercial Papers: There are short-term securities with maturity of 7 to 365 days. CPs is issued by corporate entities at a discount to face value.

Reforms in Debt Market

The system of auction introduced to sell the government securities

The introduction of delivery versus payment (DvP) system by the Reserve Bank of India to nullify the risk of settlement in securities and assure the smooth functioning of the securities delivery and payment

The computerization of the SGL

The launch of innovative products such as capital indexed bonds and zero coupon bonds to attract more and more investors from the wider spectrum of the populace

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Sophistication of the markets for bonds such as inflation indexed bonds

The development of the more and more primary dealers as creators of the Government of India bonds market.

The establishment of the a powerful regulatory system called the trade for trade system by the Reserve Bank of India which stated that all deals are to be settled with bonds and funds

A new segment called the Wholesale Debt Market (WDM) was established at the NSE to report the trading volume of the Government of India bonds market

Issue of ad hoc treasury bills by the Government of India as a funding instrument was abolished with the introduction of the Ways And Means agreement.

Recent Developments in Bond Market

The domestic debt market is becoming increasingly sensitive to developments beyond the nation’s borders; the 10-year Indian government bond mimicked the movements of its US counterpart last month.

In May2010, yields on both Indian and US 10-year treasury paper fell substantially. The yield on US paper fell to 7.90% and yields on the Indian security dropped to 6.6%. Bond prices and yields move in opposite direction.

In absolute terms, yields dropped 30 basis points and 53 basis points, respectively. One basis point is one-hundredth of a percentage point.

According to debt market participants, the close tracking of movements in the 10-year US treasury by its Indian counterpart showed the linkages India

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has developed with global markets. As a result, say bond dealers, all financial markets have reason to track developments overseas.

The yield on the domestic 10-year bond closed at 7.506%, down from 7.515% on Tuesday.

Commercial Paper rates in India are attractive at 7.5 per cent and after deduction of cost of hedging, that is, 3.6 per cent (one year rupee dollar forward), FIIs would still make 3.9 per cent, far higher than the 1.1 per cent on the one-year US Dollar LIBOR (London Interbank Offered Rate)

The sudden surge in FII inflows is due to the prop books of foreign banks, emerging market bond funds and India-dedicated fixed income funds. With 10- year paper at 2.9 per cent in the US and 2.6-2.7 per cent in Germany, inflows into Indian debt market is relatively more attractive

The enhancement of FII investment cap in debt from $5 billion a couple years ago to $20 billion ($5 billion - G sec + $15 billion-corporate paper) is another reason for rising inflows

Evaluation of the Present Scenario & Estimation Future Prospects of Portfolio Management

The portfolio management is growing rapidly serving broad array of investors – both individual and institutional – with investment portfolio ranging in asset size from few thousands to crores of rupees. Despite growing importance, the subject of portfolio and investment management is new in the country and is largely misunderstood. In most cases, portfolio management has been practiced as an investment management counselling in which the investor has been advised to seek assets that would grow in value and / or provide income.

Portfolio management is concerned with efficient management of investment in the securities. An investment is defined as the current commitment of funds for a period of time in order to derive a future flow of funds that will compensate the investing unit:

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- For the time the funds are committed.

- For the expected rate of inflation, and

- For the uncertainty involved in the future flow of funds.

Evaluation of Portfolio Management Evaluation

There are two basic approaches to the portfolio management - passive and active.

The optimal allocation of the above mentioned components of the passive management approach requires a reliable estimate of the variance and expected return that are possible to measure with some analysis. Moreover, according to the Efficient Market Hypothesis (EMH) all the assets on the market should be efficiently priced that implies that the described passive management strategy should work.

However, there is some evidence that active managers may have a superior performance relative to the managers that utilize passive strategy. One of the objectives of the active portfolio managers is to construct a risky portfolio that maximizes the Sharpe's measure that means maximizing the slope of Capital Allocation Line (CAL). Thus a "good" active manager has a steeper CAL or reward-to-variability ratio than that of a passive manager. This relation points out one of the ways to evaluate the performance of active versus passive strategy managers through the use of a realized Sharpe's ratio as one of the ways to assess relative risk-adjusted return. Ideally, clients will pick the manager with a higher Sharpe's ratio that probably has the real ability to forecast returns. The constant stability over time in performance of such a manager will help to define the optimal fracture of the portfolio to be invested with the manger to get a desired return within the specified variance level.

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The choice of an optimal measure to assess the performance of an actively managed portfolio depends on the role of the observed portfolio. For example, Sharpe's ratio is used when the portfolio represents the entire investment fund, Treynor measure - when the scrutinized portfolio represents one sub-portfolio of many, and the Information ratio can be applied to measure the return, when the portfolio under question is composed of both actively and passively managed portfolios.

The perfect market timing is able to add value to the performance of active mangers; however, the rate of return for such manager will be uncertain. Moreover, this means that standard portfolio risk measures are unable to catch the real risk characteristics thus providing also an opportunity for a downside scenario.

With this being distressing, the studies of mutual fund performance did not reveal any considerable ability to outperform the market index; however it is believed that good active managers can save the losses during the market downswings thus adding overall value to the portfolio.

To evaluate active portfolio management from the client's perspective, it is important to remember that is has its price. In other words, potential customer should weight expected value-added from the active portfolio management versus additional expenses and make a decision based on the adjusted price.

Portfolio evaluating refers to the evaluation of the performance of the portfolio. It is essentially the process of comparing the return earned on a portfolio with the return earned on one or more other portfolio or on a benchmark portfolio. Portfolio evaluation essentially comprises of two functions, performance measurement and performance evaluation. Performance measurement is an accounting function which measures the return earned on a portfolio during the holding period or investment period. Performance evaluation, on the other hand, address such issues as whether the performance was superior or inferior, whether the performance was due to skill or luck etc.

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The ability of the investor depends upon the absorption of latest developments, which occurred in the market. The ability of expectations if any, we must able to cope up with the wind immediately. Investment analysts continuously monitor and evaluate the result of the portfolio performance. The expert portfolio constructer shall show superior performance over the market and other factors. The performance also depends upon the timing of investments and superior investment analyst’s capabilities for selection. The investor will have to assess the extent to which the objectives are achieved. For evaluation of portfolio, the investor shall keep in mind the secured average returns, average or below average as compared to the market situation. Selection of proper securities is the first requirement. The evaluation of a portfolio performance can be made based on the following methods:

a) Sharpe’s Measure

b) Treynor’s Measure

c) Jensen’s Measure

(a) Sharpe’ Measure:

The objective of modern portfolio theory is maximization of return or minimization of risk. In this context the research studies have tried to evolve a composite index to measure risk based return. The credit for evaluating the systematic, unsystematic and residual risk goes to Sharpe, Treynor and Jensen. Sharpe measure total risk by calculating standard deviation. The method adopted by Sharpe is to rank all portfolios on the basis of evaluation measure. Reward is in the numerator as risk premium. Total risk is in the denominator as standard deviation of its return. We will get a measure of portfolio’s total risk and variability of return in relation to the risk premium. The measure of a portfolio can be done by the following formula:

SI =(Rt – Rf)/σf

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Where,

SI = Sharpe’s Index

Rt = Average return on portfolio

Rf = Risk free return

σf = Standard deviation of the portfolio return.

(b) Treynor’s Measure:

The Treynor’s measure related a portfolio’s excess return to non-diversifiable or systematic risk. The Treynor’s measure employs beta. The Treynor based his formula on the concept of characteristic line. It is the risk measure of standard deviation, namely the total risk of the portfolio is replaced by beta. The equation can be presented as follow:

Tn =(Rn – Rf)/βm

Where, Tn = Treynor’s measure of performance

Rn = Return on the portfolio

Rf = Risk free rate of return

βm = Beta of the portfolio (A measure of systematic risk)

(c) Jensen’s Measure:

Jensen attempts to construct a measure of absolute performance on a risk-adjusted basis. This measure is based on CAPM model. It measures the portfolio manager’s predictive ability to achieve higher return than expected for the accepted riskiness. The ability to earn returns through successful prediction of security prices on a standard measurement. The Jensen measure of the performance of portfolio can be calculated by applying the following formula:

Rp = Rf + (RMI – Rf) x β

Where,

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Rp = Return on portfolio

RMI = Return on market index

Rf = Risk free rate of return

Future Prospects of Portfolio Management

Foreign institutional investors increasingly drive the Indian stock market. They own over 15% of the country’s market capital and their significance is much more when looking at free float. Emerging market could continue to re-rate themselves given sustained improvement in economic fundamentals. Emerging market countries have been able to maintain strong fundamentals aided by strong real GDP growth, lower levels of interest rates and inflation. 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 floes to emerging markets have been seeing record levels, portfolio weightages are yet to touch peaks.

Role of SEBI in Portfolio Management

The S.E.B.I. has imposed a number of obligations and a code of conduct on

them. The portfolio manager should have a high standard of integrity, honesty and

should not have been convicted of any economic offence or moral turpitude. He

should not resort to rigging up of prices, insider trading or creating false markets,

etc. their books of accounts are subject to inspection to inspection and audit by

S.E.B.I. The observance of the code of conduct and guidelines given by the S.E.B.I.

are subject to inspection and penalties for violation are imposed. The manager has

to submit periodical returns and documents as may be required by the SEBI from

time-to- time.

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The difference between a discretionary portfolio manager and a non- discretionary portfolio manager as per SEBI

The discretionary portfolio manager individually and independently manages the funds of each client in accordance with the needs of the client.

The non-discretionary portfolio manager manages the funds in accordance with the directions of the client.

The procedure of obtaining registration as a portfolio manager from 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 application in Form A along with additional information submitted to SEBI office at Bandra Office, Mumbai

The capital adequacy requirement of a portfolio manager

The portfolio manager is required to have a minimum net worth of Rs. 2 crore.

Registration fee to be paid by the portfolio managers

Yes. Every portfolio manager is required to pay Rs. 10 lakhs as registration fees at the time of grant of certificate of registration by SEBI.

Validity period for the certificate of registration to remain valid

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 it wishes to continue as a registered portfolio manager.

The renewal fee to be paid by the portfolio manager

The portfolio manager is required to pay Rs. 5 lakh as renewal fees to SEBI.

Is there any contract between the portfolio manager and its client?

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Yes. 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.

Fees a portfolio manager can charge from its clients for the services rendered

SEBI Portfolio Manager Regulations have not prescribed any scale of fee to be charged by the portfolio manager to its clients.

However, the regulations provide that the portfolio manager shall charge a fee as per the agreement with the client for rendering portfolio management services. The fee so charged may be a fixed amount or a return based fee or a combination of both. The portfolio manager shall take specific prior permission from the client for charging such fees for each activity for which service is rendered by the portfolio manager directly or indirectly (where such service is outsourced).

Specified value of funds or securities below which a portfolio manager can’t accept from the client while opening the account for the purpose of rendering portfolio management service to the client

The portfolio manager is required to accept minimum Rs. 5 lakhs or securities having a minimum worth of Rs. 5 lakhs from the client while opening the account for the purpose of rendering portfolio management service to the client.

Portfolio manager can only invest and not borrow on behalf of his clients.

Reports a Portfolio Manager has to keep and show it to client

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:-

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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 disclosure mechanism of the portfolio managers to their clients

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.

Please note that the disclosure document is neither approved nor disapproved by SEBI nor does SEBI certify the accuracy or adequacy of the contents of the Documents.

Approvation by SEBI of any of the services offered by portfolio managers

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No. SEBI does not approve any of the services offered by the Portfolio Manager. An investor has to invest in the services based on the terms and conditions laid out in the disclosure document and the agreement between the portfolio manager and the investor.

Does SEBI approve the disclosure document of the portfolio manager?

The Disclosure Document is neither approved nor disapproved by SEBI. SEBI does not certify the accuracy or adequacy of the contents of the Disclosure Document.

The rules governing services of a Portfolio ManagerThe services of a Portfolio Manager are governed by the agreement between the portfolio manager and the investor. The agreement should cover the minimum details as specified in the SEBI Portfolio Manager Regulations. However, additional requirements can be specified by the Portfolio Manager in the agreement with the client. Hence, an investor is advised to read the agreement carefully before signing it.

Lock-in period a portfolio manager can impose on the investor

Portfolio managers cannot impose a lock-in on the investment of their clients. However, a portfolio manager can charge exit fees from the client for early exit, as laid down in the agreement.

The basis on which the performance of the portfolio manager calculated

The performance of a discretionary portfolio manager is calculated using weighted average method taking each individual category of investments for the immediately preceding three years and in such cases performance indicator is also disclosed.

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Bibliography

Portfolio Management – T.Y.B.F.M

Portfolio Management - ICFAI

www.strategy2act.com

www.sebi.gov.in

www.amfiindia.com

www.equitymaster.com

www.moneycontrol.com

www.money.rediff.com

www.irda.com

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www.google.com/news

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