| Trainee Manager Institute: n.k.college
Status: Offline Posts: 26 Management Paradise Rupees.: 181 Join Date: Nov 2007 Location: borivli | Re: Portfolio Management Services -
November 28th, 2007
hey this prjct on PMS.......ready project...it will help u.
EXECUTIVE SUMMARY
In Today’s Competitive world, where banks and financial institutions provide number of services which provides a customer with a wide spectrum of investment opportunities. They in order to retain their customers provide them special services besides traditional services.
The invention of new technology and services by banks and financial institutions has given the consumers a wide range of investment avenues to invest in. One of the special services brought out by banks and financial institutions is PORTFOLIO MANAGEMENT SERVICES (PMS) which aims at providing an investor to invest a combination of securities all together which enables him to earn maximum returns at minimum level of risk.
The main objective of this project is to review the real meaning of Portfolio Management, its objectives, role, framework, responsibilities of portfolio manger and the study of various other issues related to it such as its comparison with, Mutual funds, role of Merchant Bankers in Portfolio Management, SEBI guidelines.
I am inclined to this topic, as it has given me actual knowledge of this service along with its working and how the portfolio manager manages the portfolio.
Moreover, it has guided me to understand this so called complex world of investment and also increase my knowledge to such extent. I hope it will prove beneficial to me in developing my further career.
INTRODUCTION
PORTFOLIO MANAGEMENT SERVICES
As per definition of SEBI Portfolio means “a collection of securities owned by an investor”. It represents the total holdings of securities belonging to any person". It comprises of different types of assets and securities. Portfolio management refers to the management or administration of a portfolio of securities to protect and enhance the value of the underlying investment. It is the management of various securities (shares, bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. It helps to reduce risk without sacrificing returns. It involves a proper investment decision with regards to what to buy and sell. It involves proper money management. It is also known as Investment Management.
Portfolio Management Services, called, as PMS are the advisory services provided by corporate financial intermediaries. It enables investors to promote and protect their investments that help them to generate higher returns. It devotes sufficient time in reshuffling the investments on hand in line with the changing dynamics. It provides the skill and expertise to steer through these complex, volatile and dynamic times. It is a choice of selecting and revising spectrum of securities to it with the characteristics of an investor. It prevents holding of stocks of depreciating-value. It acts as a financial intermediary and is subject to regulatory control of SEBI.
ROLE OF PORTFOLIO MANAGEMENT
In the beginning of the nineties India embarked on a programme of economic liberalization and globalization. This reform process has made the Indian capital markets active. The Indian stock markets are steadily moving towards capital efficiency, with rapid computerization, increasing market transparency, better infrastructure, better customer service, closer integration and higher volumes. Large institutional investors with their diversified portfolios dominate the markets. A large number of mutual funds have been set up in the country since 1987. With this development, investment securities have gained considerable momentum.
Along with the spread of securities investment among ordinary investors, the acceptance of quantitative techniques by the investment community changed the investment scenario in India. Professional portfolio management, backed by competent research, began to be practiced by mutual funds, investment consultants and big brokers. The Securities and Exchange Board of India, the stock market regulatory body in India, is supervising the whole process with a view to making portfolio management a responsible professional service to be rendered by experts in the field. With the advent of computers the whole process of portfolio management has become quite easy. The computer can absorb large volumes of data, perform the computations accurately and quickly give out the results in a desired form.
The trend towards liberalization and globalization of the economy has promoted free flow capital across international borders. Portfolios now include not only domestic securities but also foreign securities. Diversification has become international.
Another significant development in the field of portfolio management is the introduction of derivatives securities such as options and futures. The trading in derivative securities, their valuation, etc. has broadened the scope of portfolio management. Portfolio management is a dynamic concept, having systematic approach that helps it to achieve efficiency in investment.
SCOPE OF PORTFOLIO MANAGEMENT
Portfolio management is a continuous process. It is a dynamic activity. The following are the basic operations of a portfolio management:
Ø Monitoring the performance of portfolio by incorporating the latest market conditions.
Ø Identification of the investor’s objective, constraints and preferences.
Ø Making an evaluation of portfolio income (comparison with targets and achievements).
Ø Making revision in the portfolio.
Ø Implementation of strategies in tune with the investment objectives.
ELEMENTS OF PORTFOLIO MANAGEMENT
Portfolio management is an on-going process involving the following basic tasks:
ü Identification of the investor’s objectives, constraints and preferences, which will help formulate the investment policy.
ü Strategies are to be developed and implemented in tune with the investment policy formulated. This will help the selection of asset classes and securities in each class depending upon their risk-return attributes.
ü Review and monitoring of the performance of the portfolio by continuous overview of the market conditions, companies performance and investor’s circumstances.
ü Finally, the evaluation of the portfolio for the results to compare with the targets and needed adjustments have to be made in the portfolio to the emerging conditions and to make up for any shortfalls in achievement vis-à-vis targets.
The collection of data on the investor’s preferences, objectives, etc., is the foundation of portfolio management. This gives an idea of channels of investment in terms of asset classes to be selected and securities to be chosen based upon the liquidity requirements, time horizon, taxes, asset preferences of investors, etc. these are the building blocks for the construction of a portfolio.
According to these objectives and constraints, the investment policy can be formulated. The policy will lay down the weights to be given to different asset classes of investment such as equity share, preference shares, debentures, company deposits, etc., and the proportion of funds to be invested in each class and selection of assets and securities in each class are made on this basis. The next stage is to formulate the investment strategy for a time horizon for income and capital appreciation and for a level of risk tolerance. The investment strategies developed by the portfolio managers have to be correlated with their expectation of the capital market and the individual sectors of industry. Then a particular combination of assets is chosen on the basis of investment strategy and managers expectations of the market.
OBJECTIVES OF PORTFOLIO MANAGEMENT
The objective of portfolio management is to maximize the return and minimize the risk. These objectives are categorized into:
1. Basic Objectives.
2. Subsidiary Objectives.
1. Basic Objectives
The basic objectives of a portfolio management are further divided into two kinds viz., (a) maximize yield (b) minimize risk. The aim of the portfolio management is to enhance the return for the level of risk to the portfolio owner. A desired return for a given risk level is being started. The level of risk of a portfolio depends upon many factors. The investor, who invests the savings in the financial asset, requires a regular return and capital appreciation.
2. Subsidiary Objectives
The subsidiary objectives of a portfolio management are expecting a reasonable income, appreciation of capital at the time of disposal, safety of the investment and liquidity etc. The objective of investor is to get a reasonable return on his investment without any risk. Any investor desires regularity of income at a consistent rate. However, it may not always be possible to get such income. Every investor has to dispose his holding after a stipulated period of time for a capital appreciation. Capital appreciation of a financial asset is highly influenced by a strong brand image, market leadership, guaranteed sales, financial strength, large pool of reverses, retained earnings and accumulated profits of the company. The idea of growth stocks is the right issue in the right industry, bought at the right time. A portfolio management desires the safety of the investment. The portfolio objective is to take the precautionary measures about the safety of the principal even by diversification process. The safety of the investment calls for careful review of economic and industry trends. Liquidity of the investment is most important, which may not be neglected by any investor/portfolio manager. An investment is to be liquid, it must have “termination and marketable” facility at any time.
PORTFOLIO MANAGER
Ø Portfolio Manager is a professional who manages the portfolio of an investor with the objective of profitability, growth and risk minimization.
Ø According to SEBI, Any person 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, as the case may be is a portfolio manager.
Ø He is expected to manage the investor’s assets prudently and choose particular investment avenues appropriate for particular times aiming at maximization of profit. He tracks and monitors all your investments, cash flow and assets, through live price updates.
Ø The manager has to balance the parameters which defines a good investment i.e. security, liquidity and return. The goal is to obtain the highest return for the client of the managed portfolio.
Ø There are two types of portfolio manager known as Discretionary Portfolio Manager and Non Discretionary Portfolio Manager. Discretionary portfolio manager is the one who individually and independently manages the funds of each client in accordance with the needs of the client and non-discretionary portfolio manager is the one who manages the funds in accordance with the directions of the client.
GENERAL RESPONSIBILITIES OF A PORTFOLIO MANAGER
Following are some of the responsibilities of a Portfolio Manager:
Ø The portfolio manager shall act in a fiduciary capacity with regard to the client's funds.
Ø The portfolio manager shall transact the securities within the limitations placed by the client.
Ø The portfolio manager shall not derive any direct or indirect benefit out of the client's funds or securities.
Ø The portfolio manager shall not borrow funds or securities on behalf of the client.
Ø The portfolio manager shall ensure proper and timely handling of complaints from his clients and take appropriate action immediately
Ø The portfolio manager shall not lend securities held on behalf of clients to a third person except as provided under these regulations.
CODE OF CONDUCT OF A PORTFOLIO MANAGER
Every portfolio manager in India as per the regulation 13 of SEBI shall follow the following Code of Conduct:
1. A portfolio manager shall maintain a high standard of integrity fairness.
2. The client’s funds should be deployed as soon as he receives.
3. A portfolio manager shall render all times high standards and unbiased service.
4. A portfolio manager shall not make any statement that is likely to be harmful to the integration of other portfolio manager.
5. A portfolio manager shall not make any exaggerated statement.
6. A portfolio manager shall not disclose to any client or press any confidential information about his client, which has come to his knowledge.
7. A portfolio manager shall always provide true and adequate information.
8. A portfolio manager should render the best pose advice to the client.
SEBI GUIDELINES TO PORTFOLIO MANAGEMENT
SEBI has issued detailed guidelines for portfolio management services. The guidelines have been made to protect the interest of investors. The salient features of these guidelines are:
Ø The nature of portfolio management service shall be investment consultant.
Ø The portfolio manager shall not guarantee any return to his client.
Ø Client’s funds will be kept in a separate bank account.
Ø The portfolio manager shall act as trustee of client’s funds.
Ø The portfolio manager can invest in money or capital market.
Ø Purchase and sale of securities will be at a prevailing market price.
POWERS OF SEBI
The Securities and Exchange Board of India has the following powers to control and manage the portfolio managers:
1. The portfolio manager shall submit to SEBI such reports, returns and documents as may be prescribed.
2. SEBI may investigate the affairs of a portfolio manager such as inspection of books of accounts, records, etc.,
3. SEBI has full authority in the event of violation of any provision to suspend or cancel the license.
4. No exemptions will be given under any circumstances to portfolio manager.
OBJECTIVES OF INVESTORS
Following are the objectives of the investors:
1. Safety of their investment.
2. Maximum regulation return.
3. Liquidity.
4. Minimization of risk.
An investor may decide on the basis of a detailed study of marketing information that the shares he has sold earlier are worth buying again. The current prices may be higher than the price at which he has relinquished them. It is better to buy shares in a rising market than to hold on to shares in a falling market. The growth potential of a company may improve due to the rising trend in sales or profits, modernization and expansion changes in government policies and other such factors.
INVESTORS ALERT
Do’s:
ü Only intermediaries having specific SEBI registration for rendering Portfolio management services can offer portfolio management services.
ü Investors should make sure that they are dealing with SEBI authorized portfolio manager.
ü Investors must obtain a disclosure document from the portfolio manager broadly covering manner and quantum of fee payable by the clients, portfolio risks, performance of the portfolio manager etc.
ü Investors must check whether the portfolio manager has a necessary infrastructure to effectively service their requirements.
ü Investors must enter into an agreement with the portfolio manager.
ü Investors should make sure that they receive a periodical report on their portfolio as per the agreed terms.
ü Investors must make sure that portfolio manager has got the respective portfolio account by an independent charted accountant every year and that the certificate given by the charted accountant is given to an investor by the portfolio manager.
ü In case of complaints, the investors must approach the authorities for redressal in a timely manner.
Don’ts:
ü Investors should not deal with unregistered portfolio managers.
ü They should not hesitate to approach the authorities for redressal of the grievances.
ü They should not invest unless they have understood the details of the scheme including risks involved.
ü They should not invest without verifying the background and performance of the portfolio manager.
ü The promise of guaranteed returns should not influence the investors.
TYPES OF RISK IN PORTFOLIO MANGEMENT
Each and every investor has to face risk while investing. What is Risk? Risk is the uncertainty of income/capital appreciation or loss of both. Risk is classified into: Systematic risk or Market related risk and Unsystematic risk or Company related risk.
· Systematic risk refers to that portion of variation in return caused by factors that affect the price of all securities. It cannot be avoided. It relates to economic trends with effect to the whole market. This is further divided into the following:
ü Market risks: A variation in price sparked off due to real, social political and economical events is referred as market risks.
ü Interest rate risks: Uncertainties of future market values and the size of future incomes, caused by fluctuations in the general level of interest is referred to as interest rate risk. Here price of securities tend to move inversely with the change in rate of interest.
ü Inflation risks: Uncertainties in purchasing power is said to be inflation risk.
· Unsystematic risk refers to that portion of risk that is caused due to factors related to a firm or industry. This is further divided into:
ü Business risk: Business risk arises due to changes in operating conditions caused by conditions that thrust upon the firm which are beyond its control such as business cycles, government controls, etc.
ü Internal risk: Internal risk is associated with the efficiency with which a firm conducts its operations within the broader environment imposed upon it.
ü Financial risk: Financial risk is associated with the capital structure of a firm. A firm with no debt financing has no financial risk. The extends depends upon the leverage of the firms capital structure.
DIFFERENCE BETWEEN PORTFOLIO MANAGEMENT SERVICES (PMS) AND MUTUAL FUNDS
While the concept of Portfolio Management Services and Mutual Funds remains the same of collecting money from investors, pooling them and investing the funds in various securities. There are some differences between them described as follows:
ü In the case of portfolio management, the target investors are high net-worth investors, while in the case of mutual funds the target investors include the retail investors.
ü In case of portfolio management, the investments of each investor are managed separately, while in the case of MFs the funds collected under a scheme are pooled and the returns are distributed in the same proportion, in which the investors/ unit holders make the investments.
ü The investments in portfolio management are managed taking the risk profile of individuals into account. In mutual fund, the risk is pooled depending on the objective of a scheme.
In case of portfolio management, the investors are offered the advantage of personalized service to try to meet each individual client’s investment objectives separately while in case of mutual funds investors are not offered any such advantage of personalized services.
ROLE OF MERCHANT BANKERS IN RESPECT TO PORTFOLIO MANAGEMENT
Merchant Banking is the institution, which covers a wide range of activities such as customer services, portfolio management, credit syndication, insurance, etc. Merchant bankers are the persons who are engaged in business of issue management by making arrangements regarding selling, buying or subscribing securities as a manager, consultant, and advisor or by rendering corporate advisory services.
Let us have a look on the role played by Merchant bankers in relation to Portfolio Management:
Portfolio refers to investment in different kinds of securities such as shares, debentures, etc. it is not merely a collection of un-related assets but a carefully blended asset combination within a unified framework. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return with minimum risk.
Merchant Bankers provide portfolio management services to their clients. Today the investor is very prudent and he is interested in safety, liquidity, and profitability of his investment, but he cannot study and choose the appropriate securities, he requires expert guidance. Merchant bankers have a role to play in this regard. They have to conduct regular market and economic surveys to know the following needs:
ü Monetary and fiscal policies of the government.
ü Financial statements of various corporate sectors in which the investments have to be made by the investors.
ü Secondary market position i.e., how the share market is moving.
ü Changing pattern of the industry.
ü The competition faced by the industry with similar type of industries.
The Merchant bankers have to analyze the surveys and help the prospective investors in choosing the shares. The portfolio managers will generally have to classify the investors based on capacity and risk they can take and arrange appropriate investment. Thus portfolio management plans successful investment strategies for investors. Merchant bankers also help NRI-Non Resident Indians in selecting right type of securities and offering expertise guidance in fulfilling government regulations. By this service to NRI account holders, Merchant bankers can mobilize more resources for the corporate sector.
PORTFOLIO MANAGEMENT BY CORPORATES
Investors, whose objective is maximization of their wealth, own Corporates. Corporate ownership pattern in India shows that the bulk owners are the financial institutions and mutual funds, LIC, GIC, and other corporates, leaving aside, the FFIs, FIIs and NRIs. The ownership of individual shareholders does not exceed an average to 20-30%. The interest of financial and non-financial institutions and corporates do not coincide with that of individual shareholders who are the true savers of the household sectors while the former categories are only intermediaries.
Corporate Managers secure funds from banks, and financial institutions, next only to promoters and hence their interest stands prominent in the minds of the portfolio managers in the corporate business. In case of listed corporate securities, there is no direct dialogue between Corporate Managers and the individual investors, except through the daily price quotation of the scrip on the exchanges. The share price reflects the investor’s perception of that company, relative to others in the field.
The companies generally keep continuous contact and dialogue with financing bankers and financial institutions and not with other categories of investors, in matter of operations. The role of individual investors and remaining categories of investors can have their say only in the Annual general body meetings or other extra ordinary general body meetings, called by the corporate management.
The Government and SEBI regulations, the Company law and the Listing Agreement with the Stock Exchange also guide the performance of corporates and their operations. The prudential norms for raising resources, allocation of funds and declaration of dividends, etc., are governed by the Law and Government notifications from time-to-time.
PORTFOLIO INVESTMENT BY FOREIGN INSTITUTIONAL INVESTORS
A country with a developing economy cannot depend exclusively on its own domestic savings to propel its economy's rapid growth. The domestic savings of India presently are 25% of its GDP. But this can provide only a 2 to 3% growth of its economy on annual basis. The country has to maintain an 8 to 10% growth for a period of two decades to reach the level of advanced nations and to wipe out widespread poverty of its people. The gap is to be covered by inflow of foreign investment along with advanced technology. As per the Development Goals and Strategy of the 10th Plan, which is currently under implementation:
"The strategy to achieve a high annual growth target of 8.00% combines accelerated capital accumulation to raise the average investment rate from 24.23% to 28.41% with an increase in capital-use efficiency to reduce the ratio of incremental capital to output from 4.00 to about 3.55. Private sector development, infrastructure development, and increased foreign investment and trade are key to increasing efficiency"
The regular inflow of external capital investment is indispensable to sustain our economic growth at the planned level and this is well recognized by the plan document itself. When remittances are made by Foreign Institutional Investors for portfolio investments, such remittances are on trading account, as securities can be bought, as well as sold back through approved stock exchanges. This may be trading transaction, but net amount at any time (purchases minus sales) is a significant figure and this adds to the foreign exchange reserves of the country.
MANAGEMENT OF INVESTMENT PORTFOLIOS
Investment Management or Portfolio Management deals with the manner in which investors analyze, select and evaluate investments in terms of their risks and expected returns. It is both an art and a science.
The art aspect derives from the notion that some investors, by whatever means, have the ability to consistently pick up investments that outperform other investments on a risk/expected-return basis. Although many techniques have been developed to assist investors in the selection of investments, the concept of market efficiency maintains that for most investors, the ability to consistently select high-return/low risk investments may be difficult to do. An efficient market is one where prices reflect a given body of information. In such a situation, one investment should not persistently dominate another in terms of risk |
Re: Portfolio Management Services -
June 26th, 2007
