Portfolio Risk Analysis Project Report
-
Upload
meenakshi-jain -
Category
Documents
-
view
215 -
download
0
Transcript of Portfolio Risk Analysis Project Report
-
7/29/2019 Portfolio Risk Analysis Project Report
1/100
www.mbanetbook.co.in
-
7/29/2019 Portfolio Risk Analysis Project Report
2/100
CONTENTS
1. PREFACE.
2. INTRODUCTION.
3. AIM .
4. OBJECTIVES.
5. PORTFOLIO MANAGEMENT.
6. RISK ANALYSIS.
7. PORTFOLIO ANALYSIS.
7.1 FIXED DEPOSITS.
7.2 PUBLIC PROVIDENT FUND.7.3 GOI SECURITIES.
7.4 NATIONAL SAVING CERTFICATES.
7.5 POST OFFICE.
7.6 INSURANCE.
7.7 MUTUAL FUNDS.
7.8 STOCK MARKET.
8. RESEARCH MEHODOLOGY.
9. THE SURVEY.
9.1 FINDINGS.
10. ANALYSIS AND RECOMMNEDATIONS.
11. LIMITATIONS.
12. CONCLUSION.
13. APPENDIX.
14. BIBLIOGRAPHY.
2
-
7/29/2019 Portfolio Risk Analysis Project Report
3/100
PREFACE.
Investment is a long-term concept. An investment is a
commitment of funds made in expectation of some positive return.The main motive of investment is to earn returns. It is the basic
motivating factor behind all investments and the desire is to earn
better returns. When investment is done in one single security it
bears the risk and return features of that particular security only.
When it is done in a number of securities it forms a portfolio and
thereby it bears the aggregate risk and return features of the
various components of the portfolio. A general perception is that
risk in a portfolio is less as compared to that in an individual
security. Also the returns in a portfolio are comparatively high and
stable. In the present day the investor finds a large number of
avenues where he may invest hence the decisions regarding
portfolio are of great importance. This leads to the need for an
intensive analysis of various opportunities of investment and then
find out where to invest, when to invest, how much to invest and
for what duration to invest.
This project mainly aims to study all the available for an investor
and drawing a basic comparison among them and thereby deriving
results that would be useful to plan an ideal portfolio.
3
-
7/29/2019 Portfolio Risk Analysis Project Report
4/100
INTRODUCTION
A portfolio is a collection of investments all owned by the same
individual or organization. These investments often include stocks,
which are investments in individual businesses; bonds, which are
investments in debt that are designed to earn interest; and mutual
funds, which are essentially pools of money from many investors that
are invested by professionals or according to indices.
But the basic question is why should an investor maintain an
investment portfolio and that why should the individual not keep
himself limited to a single security?
And the answer to this question is that an investor has different types
of needs and one single form of investment shall be unable to meet all
his requirements. Also maintaining the whole amount in a single entity
shall be very risky.
So the key to investment success is the proper diversification of assets.
Diversification means more than just having different types of
investments. It means having a mix of investments across sectors,
time horizons, markets, and instruments. When one diversifies, the
money is spread among many different securities, thereby avoiding the
risk that the portfolio will be badly affected because a single security or
a particular market sector turns sour. Diversification is the key to abalanced investment portfolio. By diversifying across assets, the
investor can reduce the risk without necessarily having to reduce the
returns. The golden rule is that if there is a diversified portfolio the
overall portfolio risk will be lower.
4
-
7/29/2019 Portfolio Risk Analysis Project Report
5/100
A good portfolio will have stocks, bonds, mutual funds, money market
funds etc. of different companies from different sectors. But
diversification needs to be done carefully and with adequate prudence.
There are basically three steps to diversification. And in order to make
diversification all these steps need to be followed properly.
The first step is that of analysis of Liquidity Considerations. The
investor should establish how much of the portfolio will need to be
invested in relatively liquid assets that can be quickly converted to
cash when needed. Generally investment managers advise thatkeeping 10% to 15% of the portfolio in these types of investments is an
adequate amount for most people.
The second step is to establish the investment goals and objectives. If
one is looking for long-term results, he will have to concentrate on
growth investments-real estate or growth stocks. However, the aim of
investing is to develop a source of yearly income, concentration on
income-generating investments such as high-dividend stocks or bonds
will be needed.
The third and the final step is to select the specific investments. Here
the investor needs to consider the tax consequences of various
instruments. To maintain appropriate diversification, regular evaluation
of the investment strategy shall also be needed and a further analysis
how the investments are performing and whether or not the
investment goals of the individual has changed.
So a close and continuous monitoring of the various components of the
portfolio is needed. And thus arises the concept of portfolio
management.
5
-
7/29/2019 Portfolio Risk Analysis Project Report
6/100
AIM
The aim of the study is to mainly analyze the risk associated with
investment in various securities, and thereby find out that how an ideal
portfolio should be planned such that the investor gets the maximum
return out of the investment made and fulfilling his liquidity
requirement simultaneously.
6
-
7/29/2019 Portfolio Risk Analysis Project Report
7/100
OBJECTIVES
The aim of the project being an exhaustive analysis of portfolio
decisions of an investor the study would be carried out keeping thefollowing objectives in mind.
To study the concept of risk why does it arise and the various
types of risks that are associated with investment.
An intensive study of the various avenues of investment thoseare available to an investor.
To study the different types of risk and return factors that are
associated with each type of investment and thereby find out
the role that each type of security plays in an investors
portfolio.
To find out how individuals actually plan their portfolio, their
preferences about different types of investment opportunities
based on the collection of primary data.
Lastly, to analyze and find out that how an ideal portfolio can
be planned for an individual that would give him adequate
return without any hindrance to his liquidity requirements.
7
-
7/29/2019 Portfolio Risk Analysis Project Report
8/100
PORTFOLIO MANAGEMENT.
The way to manage the composition of the investment portfolio is
known as portfolio management. The processes, practices and specific
activities to perform continuous and consistent evaluation,
prioritization, budgeting, and finally selection of investments that
provides the greatest value to the investor. Through portfolio
management, the investor can explicitly assess the tradeoffs among
competing investment opportunities in terms of their benefit, costs,
and risks. Investment decisions can then be made based on a better
understanding of what will be gained or lost through the inclusion or
exclusion of certain investments.
The aim of Portfolio Management is to achieve the maximum return
from a portfolio that the investor has. The investor has to balance the
parameters which define a good investment i.e. security, liquidity
and return. The goal is to obtain the highest return out of the
investment made. It is the way of diversifying a portfolio of
investments that takes into account risk and return considerations.
Each investor has different kinds of needs and should keep in mind all
his needs before any investment decision is taken. The various needs
that an investor has are mainly of four types:
LONG TERM PROFIT: Investment is a long-term concept. When anyinvestor makes an investment he aims to acquire a good return in the
long run. This means that the investors have a desire for capital
appreciation in their investment. Any investment made should give
good yield in the long run. Such investors do not worry much about the
current earnings. They want the investment to grow in the long-term.
8
-
7/29/2019 Portfolio Risk Analysis Project Report
9/100
Such investors do not take a very high degree of risk. And their desire
for return is also not very high. This category of investors prefers
investing in the securities that have a fixed return and keep the capital
also safe. These types of investments are like debt based mutual
funds, bank and corporate fixed deposits.
TAX SAVING: Another investment aim that people have is that to save
tax. The income tax gives certain leverages in the payment of tax in
case certain amount of investment is made in certain specific kinds of
securities. These securities are mostly those that relate to the
infrastructure developments in the country. We find a very large
category of investors who invest only for the sole purpose to save tax.
Their investments are again very fixed. They are generally made in the
infrastructure bonds. Others include NSCs and treasury bills. But now
the taxation system has changed. All the leverages under Section80
(ccc), Section 88 and Section 80(l) have been clubbed under Section 80
c. and now there is a common limit of Rs. I00000/- so now the concept
of rebate in tax has been eliminated. But in case the withdrawals begin
to be taxed this would dampen the spirit of investment in these
securities.
INSURANCE: Insurance is also a motive of investment. The reason is
that each individual has certain amount of insurance needs. Life
insurance is also taken as a method of investment. It serves both
purposes that are of insurance as well as investment. Also we have a
large number of ULIPs that are attracting the investment from the
individuals. These ULIPs serve the dual benefit to the investor it fulfills
the investment needs as well as the insurance needs as well. Also with
the tax regime being changed these now stand in direct competition
with the ordinary mutual funds. But now the investor has to select fro
9
-
7/29/2019 Portfolio Risk Analysis Project Report
10/100
himself that what are his primary needs and what are of a secondary
nature.
SHORT TERM EARNINGS: Some of the investors aim for just short t
term earnings. These investors have a desire for high current earnings.
Hence they play in the stock market and trade actively in the securities
so that they may make short-term profits. These investors study the
market very closely as most of their investments are linked to the
market. This kind of investment is very short term in nature and here
the main aim is to gain high by due to the fluctuations in the market in
the short run. Only only those investors who have a high-risk appetite
do this type of investment. Also these types of investors do not prefer
any lock in period of their investments made. They have a high
preference for liquidity.
Now in any investors portfolio there can be large number of
combinations of securities. Each security has certain features
regarding the returns that it would pay and the risk that it has. So for
this purpose an analysis of all possible avenues of investment has been
made in the following chapters.
10
-
7/29/2019 Portfolio Risk Analysis Project Report
11/100
RISK ANALYSIS.
RISK IS A PART OF GODs GAME, ALIKE FOR MEN AND
NATIONS.
-George Woodberry.
Risk is the possibility of losing or of not gaining in value. It is the
measure of a particular investment's volatility and of the possibility
that it will cause an investor some degree of financial loss. It is the
difference between what should happen and what actually happens.
This can be in form of either in form of happening of some unexpected
negative event or the non-occurrence of an expected positive event. Inthe course of investment an investor faces a large number of risks and
some of them can be controlled and some of them are out of control of
an individual. Before any investment decision is taken it is necessary
for an individual to analyze all the possible risks associated to the
investment being made. An individual faces variety of risks that include
risk of loss of capital, risk of getting inadequate returns, unexpected
change in the government policies, any risk of loss that takes places to
fluctuations in the market. These are only some of the preliminary risks
that investors face but when an intensive analysis is made we find a
large number of risks that we generally ignore as an investor.
The two basic types of investment risks are:
BUSINESS RISK:
Business risk is, the most familiar risk that the investor generally
considers and easily understands. It is the potential for loss of value
through competition, mismanagement, and financial insolvency. It is
an unsystematic risk that is specific to the company in which the
11
-
7/29/2019 Portfolio Risk Analysis Project Report
12/100
investment is made. It arises due to the possibility that a company
may not be able to meet ongoing operating expenditures. There are
certain industries that are very vulnerable to this type of risk. So
before an investor invests his money in a company he is supposed to
carefully analyze the operational aspects of the company. This is a risk
that an investor can avoid by intensive study of the past performance
of the company. This type of a risk is more in investments made in the
equity market as well as mutual funds. The reason is that returns in
equity are directly related to the operations of the company and in
case of mutual funds on the efficiency of the fund manager and his
way to manage the portfolio of the fund.
VALUATION RISK
This risk is associated with the risk in the value at which the security is
available in the market. The value should be adequate and should give
the true position of the security. This type of risk mainly arises when a
security is directly purchased from the market. In case of equity shares
an investor who applies in an IPO should consider that at what price
the share is available in the open market and then bid accordingly. It
applies in case of mutual funds as well. When the purchase is NAV
based an investor should be careful about the return that the investor
shall get back from the investment in form of capital appreciation and
recurring return in form of dividends.
Now an investor has to understand that risk has got certain features
and before he takes any investment decision he should consider these
features of risk.
12
-
7/29/2019 Portfolio Risk Analysis Project Report
13/100
Risk can be quantified. As it has been defined as a negative event or
a positive event not occurring various methods have been developed
that help to quantify the risk that can be associated with the
investment being made. This feature creates an inbuilt feature of it
being mitigated. So now since risk can be quantified it can be
managed and controlled. This would help the investor to earn
returns like that prevailing in the market and maximize the return that
he earns in the course of investment.
Here a lot depends upon the risk bearing capacity of the investor.
It depends upon the investor that what is the amount of risk that he
wishes to take. Different investors have different risk appetite that
depends upon a variety of other factors. These include liquidity
preference of the investor, stage of a persons life, earning
requirements of the person and many other financial as well as
psychological factors.
During the course of study it was found that generally investors ignore
certain basic facts about risks involved in investment. Though risks are
pervasive and inherent to any financial decision but a common investorfails to understand them.
For any investor the risk is not same in all stages of his life. People in
the later stages of their life have a lower risk bearing capacity the
reason is that their earning capacity is lower and they have limited
savings. Hence people in this stage of their life need to carefully
examine all the risks associated with the investment being made by
them. Another factor that works in the later stages of the life are
liquidity is more desired due to causes like emergency medical needs
and the individuals do not have a regular recurring source of income.
Also people in the mid stage of their life cycle also have less risk
bearing capacity due to various responsibilities that they have. Hence
13
-
7/29/2019 Portfolio Risk Analysis Project Report
14/100
these investors need to keep their money safe such that they do not
face any problem in future. They not only have to generate enough
recurring income but also keep in mind the long term capital aspect in
mind while they take any investment decision. So the conclusion is that
age of a person has an inverse relationship with the age of the
investor.
Another factor of risk for the investors need to pay a lot of attention to
is that of inflation. It is considered as a tax on everyone. It destroys
value and creates recessions. Although it is believed inflation is under
control, the cure of higher interest rates may at some point be as bad
as the problem. Inflation can have very drastic effects on theinvestment made. It corrodes the real value of money.
Investors historically have retreated to hard assets such as real
estate and precious metals, especially gold, in times of inflation.
Inflation hurts investors on fixed incomes the most, since it
erodes the value of their income stream. But in normal course the
fails to understand that his fact. People who invest in fixed incomebearing sources of investment feel that they are able to earn a fixed
amount and do not realize the fact their real income is actually falling.
Stocks are the best protection against inflation since companies have
the ability to adjust prices to the rate of inflation.
So as a guard against the factor of inflation even the investors in the
later stage of their life maintain some of their assets in stocks. This
would help them to maintain a pace in their income.
Some investors fear from making investments in the equity market due
to the inherent risk that prevails in this form of investment. But the
investor should always try to get maximum out of the investment that
14
-
7/29/2019 Portfolio Risk Analysis Project Report
15/100
he makes and hence take advantage of the high returns in the equity
market. Equity and equity related instruments have been the only
option of investment that has beaten the effect of inflation. Nowadays
if an investor has a low risk capacity he can enter the equity market
with the help of mutual funds especially for the investors in the later
stages of the life. Here they would enjoy a large number of benefits
that have been stated later under the chapter of mutual funds.
So it is proved that assured returns are not always the best as they are
always lower than what an investment actually should earn. Hence it is
recommended for the investors to not be lured by the assured returns
they should try to make their money work hard for them so that the
yields are optimum. Not taking any risk is one of the biggest risks that
an investor might have to face.
Another risk is related to the trends in the market. One should neither
have an over optimistic view nor an over pessimistic view about the
market. Both the conditions may prove harmful for an investor. An
investor should not enter the market when it is on a rising trend under
the impression that it would further rise in future because the marketmay behave in just an opposite manner. Rather it would be a better
option to exit the market when it is high that would help the investor to
get good return on the initial investment made. Being too bullish can
prove harmful so the investors should keep a close watch of the
changes in the market. The same thing applies for a pessimistic
approach towards the market. Generally when the market is falling it is
the right time to enter the market. But if the fall is over estimated then
the investors would refrain from entering the market. And any profit
from future rise would not be available to the investor. So by carefully
studying the trends in the market an investor should adopt an
effective investment strategy so that the risk due wrong estimation
of the market trends can be reduced.
15
-
7/29/2019 Portfolio Risk Analysis Project Report
16/100
Only a close study of the market is also not sufficient decisions
regarding the selling and buying in the market also need to be taken
promptly. The reason is that suppose the market is high and an
investor plans to sell his security but by the time he finally decides to
sell it the prices may have reduced so the gap between the time of the
idea generation and the final action may be a cause of loss for the
investor. Even the buying decisions need to be taken promptly
as delay in actual purchase may lead to paying of high price by
the investor.
All macro factors need to be taken care of while deciding the portfolio
of an investor. The major risk that investors have is that of irrationality.
Most of the time we see that the investors tend to follow the crowd
instead of analyzing that what shall be a better option for them. The
information upon which the investment decision needs to be based
should be authentic.
But the final verdict is that risks cannot be eliminated they can
however be managed effectively if the investors are prepared to walk
an extra mile. Awareness about risk and knowledge regarding theramifications of the same is the first step to risk management. Risks
need to be treated as by-products of any investment exercise.
16
-
7/29/2019 Portfolio Risk Analysis Project Report
17/100
A PORTFOLIO MAY
INCLUDE:
17
-
7/29/2019 Portfolio Risk Analysis Project Report
18/100
FIXED DEPOSITS.
Fixed deposits remain the most popular instrument for financial
savings in India. They are the middle path investments with adequatereturns and sufficient liquidity. There are mainly two avenues for
parking savings in the form of fixed deposits. The most common are
bank deposits. For nationalized banks, the yield is generally low with a
maximum interest of 5%-5.5% per annum for a period of three years or
more. As opposed to that, NBFCs and company deposits are more
attractive.
The idea is to select the right company to minimize the risk. Company
deposits as a saving instrument have declined in popularity over the
last three years. The major reason being the slowdown in economy
resulting in default by some companies.
All that is likely to change for the better. Corporate performance is
likely to improve and stricter control by RBI should improve NBFCs
record. But still the investor needs to be selective and careful while he
makes a selection of the fixed deposit.
The term "fixed" in fixed deposits denotes the period of maturity or
tenor. Fixed Deposits, therefore, presupposes a certain length of time
for which the depositor decides to keep the money with the bank and
the rate of interest payable to the depositor is decided by this tenor.
The rate of interest differs from bank to bank and is generally higher
for private sector and foreign banks. This, however, does not mean
that the depositor loses all his rights over the money for the duration of
the tenor decided. The deposits can be withdrawn before the period is
over. However, the amount of interest payable to the depositor, in such
cases goes down which is charged as a penalty for premature
18
-
7/29/2019 Portfolio Risk Analysis Project Report
19/100
withdrawal made by the investor. Moreover, as per RBI regulations no
interest is paid for any premature withdrawals for the period 15 days to
29 or 15 to 45 days as the case may be.
So the main problem with the fixed deposits is that of liquidity andwithdrawal in case of need by the investor. But again the investor can
be quite sure about the returns that he would get from the investment
in the fixed deposits. So fixed deposit remains the choice of the
conservative investors who do not have much of liquidity
requirements.
Presently we see a lot of fall in the interest rates offered by the banks
but the Indian investor is not that enterprising and so a lot of investors
still prefer to invest in bank FDs rather than any other form of
investment.
The current rates that are being offered by the banks vary from 3.25%
to 6.25% that is much less than what is paid by the other areas of
investment. So the banks have started offering various schemes
related to fixed deposits.
The banks offer regular income scheme under the fixed deposits.
Under these schemes the interest is credited regularly to the investors
account and the investor can thereby withdraw the amount as per his
requirement. So the fixed deposits offer certain amount recurring
income to the investor. Certain banks also offer loans against these
deposits as well.
To state a few Punjab National Bank has large number of fixed deposit
schemes and hence the investor is offered a wide choice to select the
scheme according to his need. Like Anupam Account Scheme, Multi
Benefit Fixed Deposit Scheme. Canara Bank offers loan against
deposits and also allows part withdrawal from the deposit as and when
19
-
7/29/2019 Portfolio Risk Analysis Project Report
20/100
needed. Union Bank of India also a large number of deposit schemes
under fixed as well as recurring deposits. Hence the banks are making
efforts to attract the investors money and have been successful to
large extent.
There is only slight variation in the interest rates offered by the banks
on these deposits. Some of them, which were a part of study during its
course, have been stated below.
Rates offered by Union Bank of India are differentiated on the amount
of deposits. The rates are as follows:
FIXED DEPOSIT RATES OFFERED BY UNION BANK OF INDIA
Amount of Deposit (% p.a.)
PERIODLess than Rs. 15Lacs
Rs. 15 Lacs &above
Rs. 1 crore &above
07 - 14 days 3.50 4.00 4.00
15 - 45 days 4.25 4.25 4.25
46 - 90 days 4.50 4.50 4.50
91 - 179 days 4.75 4.75 4.75
180 days < 1year 5.00 5.00 5.00
1 year < 2years
5.25 5.25 5.25
2 years < 3years
5.50 5.50 5.50
3 years < 5years
5.75 5.75 5.75
5 years andabove
6.25 6.25 6.25
Canara Bank has an absolutely same rates list. But there a clear
distinction has not been made in the amount of deposit. Rates are
same for all amounts of deposit.
20
-
7/29/2019 Portfolio Risk Analysis Project Report
21/100
State Bank of India has a bit different rates being offered and some
additional benefits as well.
FIXED DEPOSIT RATES OFFERED BY STATE BANK OF INDIA
PERIOD %p.a.7 days to 14 days 3.0015 days to 45 days 4.0046 days up to 179 days 4.50180 days to less than one
year 5.001 year to less than 3 years 5.503 years to less than 5
years 5.755 years and above 6.25
The rate of interest on deposits of Senior Citizen under Senior Citizen
Deposit Scheme under Domestic pay additional Interest of 0.50% p.a.
for maturity periods of 1 year and above upto 5 years and 0.25%for
maturity period of 5 years and above.
RISK ANALYSIS OF FIXED DEPOSITS.
As far as the risk involved in investing in fixed deposits is concerned
there is hardly any risk involved. Neither there is risk of loss of capital
nor there is risk regarding the current earnings. But this safety is
limited to bank fixed deposits only. Corporate fixed deposits carry a
21
-
7/29/2019 Portfolio Risk Analysis Project Report
22/100
certain degree of risk. A lot depends upon the performance of the
company. If an investors desires to have a corporate fixed deposit then
it is necessary to work on the principle of adequate diversification over
a number of companies as well as industries. Also in case of corporate
fixed deposits the investor should not keep his money locked in for a
longer duration this ensures the safety of the principal money.
An investor needs to analyze the cash flows in the company. The
companies that offer higher rates of interest should be avoided as
most of the times they fail to pay so. Even companies with poor cash
flows are an alarm for the investors. So the risk level automatically
rises. But in India not many companies issue public deposits.
The return on these deposits is also certain to large extent. The
interest shall be paid at the end of the period if the withdrawal is not
made in midst of the duration for which the deposit has been made.
FIXED DEPOSIT TRENDS
Banks investments have grown faster than their loans. As a result,
banks investment-deposit ratio has moved up sharply from 38.0
percent to 42.4 per cent. Over the same period, banks credit-deposit
ratio has moved up from 53.6 per cent to 55.9 per cent, largely due to
the pick up in credit growth during the last year.
The preference of banks for government securities has been influenced
by several factors, of which the following are important:
High level of Statutory Liquidity Ratio (SLR): Banks are
statutorily required to invest 25 per cent of their net demand and
time liabilities in government and other approved securities. This
reflects the governments need to have access to bank funds to
22
-
7/29/2019 Portfolio Risk Analysis Project Report
23/100
finance its deficit. However, in a market driven regime, such
restrictions should be done away with and the SLR should be
brought down gradually.
Uniform risk-weights on all commercial lending: RBI
guidelines for capital adequacy require banks to assign 100%
risk weight to its loan portfolio while its investments in
government securities attract a risk weight of only 2.5% to cover
market risk. This skewness in risk-weights is unrealistic, as all
commercial loans do not bear the same level of risk. The new
Basel Capital Accord or Basel 2 recommends a continuum of risk
weights that reflects the borrowers credit rating. If such a riskweight structure were implemented in India, it would discourage
banks tendency to misallocate resources in favor of government
securities.
Inadequate laws to tackle NPA recovery: Till recently,
foreclosure laws in India favored borrowers, so that banks and
financial institutions found it extremely difficult to recover non-
performing assets. This further reinforced bankers aversion
towards medium to high-risk commercial debt. The Securitisation
Act, 2002 aims to rectify this problem by allowing lenders to
dispose of a defaulting borrowers asset within 60 days of having
sent a notice.
.
Banks investments have delivered good returns, but a large proportion
of banks investment portfolio is illiquid
Over the last few years, the sharp decline in interest rates has helped
banks make substantial gains from the sale of investments in
securities.
23
-
7/29/2019 Portfolio Risk Analysis Project Report
24/100
PUBLIC PROVIDENT FUND.
A provident fund is a fund that pays benefits to the company
employees who are fund members upon the termination of theiremployment. Contributions paid into the fund by both the employees
and the employers are invested in accordance with the pre-determined
condition of amount and risks. Now a public provident fund is one that
is taken to be a savings cum a tax saving instrument. It is like a
account in which a certain amount has to deposited on an yearly basis
and a certain amount of interest is paid on the amount deposited.
FEATURES OF PPF
A PPF account can be opened by an individual in his own name or
on behalf of a minor of whom he is the guardian or by the Karta
of Hindu undivided family of which he is a member or behalf of
an association of persons or a body of individuals consisting only
husband and wife governed by the system of community of
property in force .
An individual on his own behalf can open only one PPF account.
However, an additional account can be opened on behalf of a
minor of whom he is the guardian or a Hindu undivided family by
the Karta of which he is a member or on behalf of an association
of persons or a body of individuals.
A person having a GPF account can open a PPF account
The account can be opened in the Head Post Office or in the
branches of SBI or its subsidiaries or in the Nationalized Banks.
24
-
7/29/2019 Portfolio Risk Analysis Project Report
25/100
The account can be transferred at the request of the subscriber
from one Post office to another, including Bank to Post Office and
vice-versa.
Minimum Amount Rs.500/- in a year (financial year i.e. from 1st
April to 31st March) Maximum Amount in a year in Rs.70, 000/-.
If contributions in excess of Rs.70, 000/- are made during a year
Excess amount will be treated as Irregular subscription and
will neither carry any interest nor this excess amount will be
eligible for rebate under section 88 of I.T. Act. This excess
amount will be refunded without any interest.
PPF account can be revived paying a fee of Rs.50 along with
arrear of minimum subscription for each year of default before
maturity .The default Fee must be credited to Govt. Account
under the Sub Head 0049.
Where a deposit is made by means of an outstation cheque or
instrument, collection charges at the prescribed rate shall be
payable along with the deposit and the date of realization of the
amount shall be the date of deposit.
The subscriber can extend the account beyond 15 years for one
or more block(s) of 5 years without any loss of benefits.
Subscriber can continue to make deposit during this period
Withdrawal can be made any time after expiry of 5 years from
the end of the year in which the initial subscription was made.
The amount of withdrawal should not exceed 50% of the balance
at the end of 4th year immediately preceding the year in which
25
-
7/29/2019 Portfolio Risk Analysis Project Report
26/100
the amount is withdrawn or at the end of the preceding year
whichever is lower. Only one withdrawal is permissible in a year.
The first loan can be taken in the third financial year from the
financial year in which the account was opened up to 25% of the
amount at credit at the end of the first financial year.
Subsequent loan can be taken when the earlier loan with interest
has been fully repaid.
The loan is repayment either in lump sum or in convenient
installments numbering not more then 36. Interest at the rate of
1% above would be charged if loan is repaid in 36 month. Suchinterest should be paid in not more than 2 monthly installments
.If the amount of loan is not repaid within 3 month, interest on
outstanding amount of loan would be charged at 6%. Calculation
of interest from 1st day of the month following the month in
which the loan is drawn up to the last day of the month in which
the last installment of the loan is repaid
A subscriber may nominate one or more person to receive the
amount standing to his credit in the event of his death. No
nomination can, however, be made in respect of an account
opened on behalf of a minor. Nomination may also be made in
respect of an account on behalf of a Hindu undivided family.
Nomination may be cancelled or varied by a fresh nomination.
In the event of the death of the subscriber, the amount standing
to his credit can be repaid to his nominee or legal heir, as the
case may be, even before the expiry of fifteen years. Legal heirs
can claim the amount up to Rs. One lac without production of the
succession certificate after observing certain formalities
26
-
7/29/2019 Portfolio Risk Analysis Project Report
27/100
Subscription to the PPF qualify for deduction from the taxable
income of the subscriber for income tax purpose within the limits
laid down under section 80-C of the income tax act.
The interest credited to the funds is not counted as income for
the purpose of income tax. The amount including the interest
standing in the credit of the subscriber in the fund is also totally
exempt from the wealth tax.
PPF account is not transferable from one person to another. In
case of death of the subscriber, the nominee cannot continue theaccount of the deceased subscriber
A female subscriber can change her name in the PPF account in
the event of her marriage.
So all these make PPF a very popular investment option among the
investors. We find a lot of investors who select PPF as major
component of their portfolio. There are various reasons that lure the
investors money towards this form of investment.
Generally the risk perception towards PPF is very liberal. There is
hardly any type of risk in investing in PPF. Both the recurring return as
well as the capital of the investor is safe. Other than the factor of
safety other factors that attract investors are:
Fixed Return: This type of investment pays a fixed amount of
return @8% per annum. This leads to sense of security to the
investor as he is assured the return. Generally the investors who
have a conservative attitude prefer this type of investment. The
27
-
7/29/2019 Portfolio Risk Analysis Project Report
28/100
reason is that they do not want to take nay risk and desire some
amount of income of investment.
Small Investors Choice: The minimum amount of investment
needed in case of PPF is very small. Hence even the small
investors have the chance to take the opportunity to invest. The
minimum annual amount is only Rs.500/- which is an affordable
amount for even the small investors. So PPF is one of the most
attractive options of investment for the small investors.
Loan Facility: One has an added facility in case he holds a PPF
account that is the loan facility. One can take a loan in case of
need of money. The investor can take a loan after one year of
opening of the PPF account. But here there are some restrictions
regarding the re-payment of the loan. The principal has to be
paid within 3 years. But still in case of need an investor can use
this option. So this ensures some amount of liquidity in the fund.
Tax Benefits: The main advantage of PPF is of tax benefits. All
interest received under the fund are tax-free. And even
investment up to Rs. 70000/- helps to get a rebate in
income tax. So the main motive of most of PPF account holders is
to enjoy the tax benefit.
So all the factors make PPF a competitive area for investment. It is
advisable for the people in the later stage of the life cycle to
maintain a PPF account, as this would keep their principal safe and
give them small & regular returns. The only problem with PPF is that
of liquidity. Withdrawals are allowed only after the fifth year of
28
-
7/29/2019 Portfolio Risk Analysis Project Report
29/100
opening of the account and that too only 50% of the amount at the
credit of the account at the fourth year of the drawl.
GOI SECURITIES.
These securities are a part of the money market and have a high
degree of liquidity. The two basic features that these bonds have is
that they are totally risk free and that have a very high degree of
liquidity. They include the bonds that are issued by the Government of
India from time to time and the treasury bills.
GOI Bonds are sovereign i.e. credit risk-free coupon bearing
instruments which are issued by the Government of India. The
investors who have a conservative attitude generally go in for this form
of investment. The reason is that the investor is completely assured of
the returns as well as the liquidity of the investment being made. The
basic features of these bonds are:
29
-
7/29/2019 Portfolio Risk Analysis Project Report
30/100
These securities have a fixed coupon that is paid on specific
dates on half-yearly basis.
Securities are available in wide range of maturity dates, from
short dated (less than one year) to long dated (upto twenty
years).
Securities are available in primary and secondary market.
High liquidity-securities can be sold in the secondary market at
prevailing rates
Available in physical form or in demat -maintained in
Constituents Subsidiary General Ledger (CSGL) a/c with any bank
Securities held in CSGL a/c will have the convenience of
automatic credit of half yearly interest and the redemption
proceeds on due date
Reasonably good returns
Treasury Bills are discounted instruments issued by the Central
Government. These are also one of the most preferred forms of
investment that the conservative investors select as a part of their
portfolio.
The basic features of these bills are as follows:
Sovereign zero risk instruments. Hence there is no risk at all
of any kind involved in this form of investment.
30
-
7/29/2019 Portfolio Risk Analysis Project Report
31/100
They are generally short term, discounted Instruments with a
maximum tenor of 364 days.
Available in primary and secondary market. This makes them
more popular among the different forms of investment. They
are available by way of auction every week and also in the
secondary markets as per availability. The Reserve Bank of
India auctions 91 day T-Bills every week and 364 day T-Bill
every alternate week.
Issued at a discount to face value i.e., investors will buy the T-
bill at discount to face value of Rs.100 and on maturity theinvestor receives the face value of Rs.100.
No Tax Deduction at Source (TDS). This ensures some amount
of tax benefit as well.
Convenience of CSGL a/c as in case of Central Govt securities
such as automatic credit of redemption money.
The degree of liquidity is very high and returns are very
attractive. This leads to its increasing popularity among the
investors.
These days transactions in these forms of securities have been made
quite simple as well as paperless. The most convenient mode of
transacting in GOI Securities or Treasury Bills is by opening Constituent
SGL account with a Bank or NSDL. A Constituent SGL account is very
much like a depository account by means of which a person can
engage in paperless transaction in GOI Securities and Treasury Bills.
31
-
7/29/2019 Portfolio Risk Analysis Project Report
32/100
The investor can easily know the present value of the investment.
Rates on debt instruments can be obtained from banks that are active
in trading these instruments. Brokers who deal in debt instruments can
also provide these rates. But the rates are not very accurate as the
trading is not very regular.
The security bought can be held to maturity giving interest inflows on
the respective interest payment dates and redemption proceeds on
maturity. The interest accruals and Redemption proceeds for Gsecs
and T-Bills will be credited directly to the savings / current account of
the SGL account holder.
NATIONAL SAVING CETIFICATES.
32
-
7/29/2019 Portfolio Risk Analysis Project Report
33/100
National Saving Certificates, or NSCs, as they are more popularly
known, are a time-tested tax-saving instrument that combines
adequate returns with high safety. To main motive that the investors
have behind investing in NSCs is to save tax. The reason is that the
degree of liquidity is very less in case of NSC.
A lump sum payment has to be made at the time of investment. The
certificates are issued in the denomination of Rs.100, Rs.500, Rs.1,000,
Rs.5,000, Rs.10,000 and other denominations as may be notified by
the Central Government. The minimum amount of investment to be
made is of Rs. 100 and for the maximum there is no limit.
The interest is compounded half yearly @ 8%. And the maturity periodis six years. So the interest paid on a Rs. 1000/- certificate for the
various periods of time would be:
PERIOD INTERESTFirst Year 81.60Second Year 88.30Third Year 95.50
Fourth Year 103.30Fifth Year 111.70Sixth Year 120.80
33
-
7/29/2019 Portfolio Risk Analysis Project Report
34/100
BENEFITS TO THE INVESTOR
Tax Rebate: Deduction in income upto an amount of
Rs.100000/- is allowed on the investment made in national
saving certificates. So the investor can enjoy a deduction in the
gross income on which he is suppose to pay tax. This is the real
motive that attracts the investors towards making investment in
NSCs. There is no TDS applicable on the interest paid on NSC.
Loan Facility: The banks provide loans to the investors against
the certificates. But during that duration the certificates cannot
be encashed. This helps the investors to enjoy certain amount of
liquidity. So here it becomes quite similar to the public provident
fund.
Easy to Invest: The eligibility criterion for investing in an NSC is
quite simple. An individual can purchase it singly or jointly, by a
minor, a registered charitable trust and also a Hindu undivided
family. Also these certificates are available at post offices and
they can be paid for either in cash or by local cheque. So not
much of legal formalities are needed to purchase an NSC.
Easy Transferability: A NSC held in the name of one person
can be easily transferred in the name of another person and also
from one post office to another on payment of the prescribed
fees. But this facility can be availed only after the completion ofone year from the date of purchase of the NSC.
Negligible Risk: The degree of risk involved in investing in NSC
is absolutely nil. The return is completely risk free and so is the
34
-
7/29/2019 Portfolio Risk Analysis Project Report
35/100
principal amount. Only loss may take place in case of premature
encashment of the certificate.
TRENDS IN NSC INVESTMENTS
There has been a lot of change in the tax act as result NSC
investments have been affected to a large extent. As per the act
earlier the NSC investments were eligible for a rebate in income tax
upto an amount of Rs.70000/- u/s 88 of the Income Tax Act. But now all
the items that came under this section and section 80 (ccc) have been
consolidated under a single section 80 c. the difference here is that
now there is no tax rebate rather a deduction in the gross income
allowed upto an extent of Rs. 100000/-. Also the rate of interest has
been sustained at 8%. So all this has helped to boom up the
investment in these types of securities. The only dampener in this
regard is the declared intention of the Government to migrate to an
EET regime, that is, exempt the contributions from tax; and exempt
accumulations from tax and tax the withdrawals. This will mean that
investors may be taxed when they withdraw the amounts from these
schemes, in case this regime comes into effect.
35
-
7/29/2019 Portfolio Risk Analysis Project Report
36/100
POST OFFICE.
Post offices have been one of the major areas where we find a large
number of investors in India. Post offices offer a variety of schemes
and hence an investor has a large number of choices to invest. As a
part of the study only two schemes have been considered.
Monthly Income Scheme.
Kisan Vikas Patra.
The rest of the schemes have been left, as they are quite similar to the
schemes in the banks. The time deposit schemes as well as the
recurring deposit schemes are quite similar to what are available with
the banks.
MONTHLY INCOME SCHEME(MIS).
A monthly income scheme (MIS) provides for monthly payment of
interest income to investors. Here a lump sum amount has to invest
initially and then the interest is paid on a monthly basis. A single
individual can open the account or it can be a joint account. The
account can also be on the behalf of a minor.
Interest is paid at the rate of 8% p.a. plus a bonus of 10% bonus on thematurity after 6 years. But the interest can be withdrawn every month.
This gives the advantage of current earnings to the investors.
36
-
7/29/2019 Portfolio Risk Analysis Project Report
37/100
The minimum amount of deposit is of Rs. 1000/- while the maximum
amount is Rs.300000/- in case of single deposit and it is Rs.600000/- in
case of a joint deposit. The interest that is paid can either be
withdrawn on monthly basis or it can be directly credited to ones
savings account directly.
Premature encashment is allowed after one year after deduction of
3.5% of the principal. No such deduction is made if account if the
account is closed after 3 years but no bonus is paid in case of
premature closure if the account.
This scheme is taken to be a boon for the retired persons because itgives the benefits of a regular income; as well the principal amount is
totally safe. Also in the post maturity period the interest paid is that
according to the savings bank interest rate upto a period of two years
for the completed month.
RISK ANALYSIS OF MIS
The degree of risk involved in a MIS is nil. There is hardly any specific
risk that is there in form of investment. The only risk that is there
includes the market risk. Generally this type of investment is
considered to be risk free by the investors.
KISAN VIKAS PATRA.
These are also certificates that are purchased by the investors that are
available in different denominations. The Kisan Vikas Patra provides
interest income similar to bonds and provides better liquidity by virtue
of the exit option after two and half years from the date of allotment.
The instrument suits those looking for a safe investment without the
37
-
7/29/2019 Portfolio Risk Analysis Project Report
38/100
need for a regular income. Unlike many of the other PO scheme, the
Kisan Vikas Patra does not provide any tax relief to the investor.
This is a good option of investment for the retired people since they do
not have a taxable income and neither have very high liquidity needs.
Under this scheme the principal doubles in 8yrs and 7 months. And the
interest rate is 8.5% that is compounded annually.
38
-
7/29/2019 Portfolio Risk Analysis Project Report
39/100
INSURANCE.
Insurance is protection against loss or damage in which a number of
individuals agree to transfer risk by paying specified amounts of
money, called premiums. These premiums create a pool of money that
guarantees the individuals will be compensated for losses caused by
occurrences such as fire, accident, illness, or death. In case of life
insurance the subject matter of insurance is life.
Life insurance is also considered as one of the avenues of investment.
The reason is that in case of life insurance the claim is paid on death or
maturity whichever is earlier. Also certain tax leverages are also givenon the premium paid for such policies that are taken by the investors.
But now what is more popular amongst the investors is ULIP (Unit
Linked insurance Plan). In case of ULIP the premium that is paid by the
investor is used to purchase the unit of a mutual fund. So the investor
has the benefit of a mutual fund as well as insurance. Here for the first
few years the investor is suppose to pay an amount as premium. This
premium is used to purchase the units of a mutual fund. It also gives
an assurance of life during the period that has been decided. And the
life cover is given for the period. If during the period of the contract
there is no death then the entire amount is paid based upon the NAV of
the fund.
So these policies are not as risky as mutual funds rather they cover
some amount of the investors risk.
But due to the recent changes in the tax regime now these mutual
funds are in direct combat with these unit linked insurance plans.
39
-
7/29/2019 Portfolio Risk Analysis Project Report
40/100
MUTUAL FUNDS Vs. UNIT LINKED INSURANCE PLANS.
Mutual funds are better as the money withdrawal is allowed at any
point of time. Mutual funds look good in the short run even the money
withdrawal quick. Only the tax saving mutual funds has a lock in period
of three years. But in case of ULIPs the lock in can be of more than
three years also. So the mutual funds are more effective in the short
run while the ULIPs have an upper hand in the long term. In case ofULIPs part of the premium goes into risk cover for insurance and the
rest into investments. But the problem lies that in the initial stages the
cost insurance companies incur to get business is as high as 20% -
30% of the premium paid in the first year. But once these charges are
recovered the management expense amounts to only 1%. While
mutual funds have a regulation that their charges cannot be cannot
exceed 2.5% for the equity plans and 2.25% for the debt plans. And
this cost structure is maintained throughout the period of investment.
So all this makes ULIPs a better option in the long run. These linked
insurance plans also have a certain degree of flexibility they offer the
alteration in the distribution of premium between risk cover and
investment.
The price of life cover in ULIP is higher as compared to that in
conventional insurance. And in order to get a good benefit out of the
ULIP one has to maintain the investment in the same for a longer
duration. But still we find that most of the investors do not prefer
investing through ULIP
40
-
7/29/2019 Portfolio Risk Analysis Project Report
41/100
MUTUAL FUNDS
When any investment is made the investor desires returns to be
adequate. But in order to earn high returns he needs to take a lot of
risk and also adequately diversify his portfolio. In reality an individual is
not capable of analyzing all the risk factors and make wise investment
decision. So now we have a lot of mutual fund companies that are
entering the market and they are channelising the small investments
into the stock market and hence help even the small investors to enjoy
the returns of the stock market.
A mutual fund is an investment that pools the money from an
unlimited number of other investors. In return, the investors each own
shares of the fund. The fund's assets are invested according to an
investment objective into the fund's portfolio of investments. And then
the returns of the fund are accordingly shared among the investors.
So the mutual funds work in the following way:
41
INVESTORS POOL IN MONEY
IN FORM OF PURCHASE OF
ITS OF THE MUTUAL FUND
THE FUND MANAGER DECIDES
UPON THE PORTFOLIO OF THE
INVETSMENT IS MADE IN
THE PORTFOLIO AND
RETURNS ARE GENERATED
RETURNS ARE DISTRIBUTED
AMONG THE INVESTORS.
-
7/29/2019 Portfolio Risk Analysis Project Report
42/100
A Mutual Fund is a trust that pools the savings of a number of investors
who share a common financial goal. The money thus collected is then
invested in capital market instruments such as shares, debentures and
other securities. The income earned through these investments and
the capital appreciation realized are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund
is the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed basket of
securities at a relatively low cost.
If we analyze the advantages that a mutual fund offers the investors it
can be stated as follows:
Diversification: By owning shares in a mutual fund instead of
owning individual stocks or bonds, the risk is spread out. The
idea behind diversification is to invest in a large number of
assets so that a loss in any particular investment is minimized by
gains in others. Higher the number of securities in which the
investment is made lower is the amount of risk. Large mutual
funds typically own hundreds of different stocks in many
different industries. It wouldn't be possible for an investor to
build this kind of a portfolio with a small amount of money. The
best mutual funds design their portfolios so individual
investments will react differently to the same economic
conditions. For example, economic conditions like a rise in
interest rates may cause certain securities in a diversified
portfolio to decrease in value. Other securities in the portfolio will
respond to the same economic conditions by increasing in value.
When a portfolio is balanced in this way, the value of the overall
42
-
7/29/2019 Portfolio Risk Analysis Project Report
43/100
portfolio should gradually increase over time, even if some
securities lose value. One rule of investing that both large and
small investors should follow is asset diversification. Used to
manage risk, diversification involves the mixing of investments
within a portfolio. For example, by choosing to buy stocks in the
retail sector and offsetting them with stocks in the industrial
sector, the impact of the performance of any one security in the
portfolio can be reduced. To achieve a truly diversified portfolio,
an individual may have to buy stocks with different
capitalizations from different industries and bonds having
varying maturities from different issuers. And for an individual
investor this can be quite costly and difficult.
By purchasing mutual funds, investors are provided with the
immediate benefit of instant diversification and asset allocation
without the large amounts of cash needed to create individual
portfolios. But simply purchasing one mutual fund might not give
adequate diversification it should be seen that whether the
fund is sector or industry specific. For example, an oil and energy
mutual fund has a portfolio that includes investments made in
the oil and energy sector, but if energy prices fall, the portfolio
shall suffer. Here we have the example of Reliance Mutual Fund
that has a number of funds like the Banking Sector Fund, Power
Sector Fund.
Professional Management: When investment is made in a
mutual fund, investors get the benefit of a professional money
manager looking after their money. This manager will use the
money to buy and sell stocks that he or she has carefully
researched. So now the investor does not have to bother about
what to sell and what to buy this shall be done by a mutual
43
-
7/29/2019 Portfolio Risk Analysis Project Report
44/100
fund's money manager. Most mutual funds pay topflight
professionals to manage their investments. These managers
decide what securities the fund will buy and sell.
Divisibility: Many investors don't have the exact sums of money
to buy round lots of securities. They have small amounts
available with them that are not enough to buy shares in the
open market. So, instead of waiting until one has enough money
to buy higher-cost investments, one can enter the market with
the aid of mutual funds. Investments in mutual funds are made
generally in small amounts that range from Rs.500/- to Rs.5000/-.So it is not necessary to have huge sums of money to invest.
Low Costs: The cost of investment in mutual funds is
comparatively low as compared to what is incurred in
investments made directly into the market. Here the investor
enjoys economies of sale purchase and sale of securities. If only
one security is bought at a time, the transaction fees will be
relatively large. Mutual fund expenses are often no more than
1.5 percent of the investment. Expenses for Index Funds are less
than that, because index funds are not actively managed.
Instead, they automatically buy stock in companies that are
listed on a specific index. Other than this entry load and exit load
is also nominal. In most of the cases either of them is nil. At the
time of mutual fund IPOs and in case of SIPs the entry load is
always nil.
Mutual funds are able to take advantage of their buying and
selling size and thereby reduce transaction costs for investors. In
reality when a mutual fund is bought, the diversification takes
44
-
7/29/2019 Portfolio Risk Analysis Project Report
45/100
place without the numerous commission charges. This prevents
the commission charges from eating up a good chunk of the
savings. Also the investor does not have to pay if he changes his
portfolio composition. Mutual funds are able to make
transactions on a much larger scale that makes them cheaper.
Liquidity: Another advantage of mutual funds is the ability to
get in and out with relative ease. The investor can sell mutual
funds at any time, as they are as liquid as regular stocks. Both
the liquidity and smaller denominations of mutual funds provide
mutual fund investors the ability to make periodic investments
through monthly purchase plans while taking advantage of
money-cost averaging. It is very easy to exit from a mutual fund
one has to simply apply for redemption.
Return Potential: The return potential is very high in case of
mutual funds due to the diversification of the investment that ismade. The company shall pay at least some dividend to the
investor because the fund shall earn some amount of profit and
even if dividend is not paid the asset value appreciation shall add
to the capital of the investor. So the investor has dual benefit of
both recurring returns and capital earnings as well.
Transparency: Mutual fund companies maintain a lot of
transparency. They give a complete list of the portfolio in which
they shall invest. The dividend history and the returns that are
earned are also clearly stated in the fact sheets of the mutual
45
-
7/29/2019 Portfolio Risk Analysis Project Report
46/100
funds. So an investor is made well aware about where his money
is being invested and the real value of his investment.
Other Benefits: Mutual funds offer a large amount of flexibility
to the investors. An investor can easily switch from one option to
the other depending upon the changing requirements of the
investor. Also generally mutual fund companies have a number
of schemes running an investor can easily choose out of the
schemes of his choice. These schemes vary from sector specific
schemes to simply diversified portfolio. And these have varying
return prospects and an investor can select the schemeaccording to his requirement and risk appetite. Also these mutual
funds are well regulated by a lot of government regulations and
efforts are being made to formulate more regulations to protect
the interest of the investors.
TAX CONSIDERATIONS IN MUTUAL FUNDS.
Tax treatment is different in case of equity funds and debt funds. As
far as the income from mutual funds is considered they are in two
parts:
First includes the income from dividends and the second is incomein form of capital appreciation of the investment made.
An equity-based mutual fund is that mutual fund in which more than
50%of the investment is made in the equity market. In case of
equity based mutual fund dividend in the hands of the investor is
46
-
7/29/2019 Portfolio Risk Analysis Project Report
47/100
tax free and even the company is not liable to pay any dividend
distribution tax. The capital gains part is further taxed in two parts
long-term capital gains and short-term capital gains. Long-term
capital gains are those that are for more than one year. These types
of capital gains are now totally tax-free earlier it was 20%. While
short term capital gains are taxed to the extent of 10% of the gain.
This type of capital gain was earlier taxable to the extent of 30%of
the gain.
An example of the tax treatment is as follows:
Suppose an investment of Rs.10000/- in January 2005 and by
August 2005 the value of the investment rises to Rs.15000/-. The
amount of short-term gain would be Rs.5000/-.
Tax= 10%of 5000 and hence the net gain would be 5000-
500=Rs.4500.
A debt-based fund is one that invests the amount in debt and
government securities. These types of funds generally give an
assured to the investors. In case of debt based fund dividend
distribution tax has to be paid. This is a tax paid by the debt-
oriented funds before they distribute dividends to the unit holders.
Presently dividend distribution tax is 13.06%. Also in case of
taxation of capital gains in case of debt funds both long term and
short-term capital gains are taxable. Long-term capital gains tax is
that of 10% of the gain or 20% of the gain after taking benefit of
indexation. Short-term capital gains are taxable in the similar wayas they are in case of equity funds.
Systematic Investment Plan (SIP)
A systematic investment plan is just like a recurring deposit account
with a mutual fund. A monthly contribution is made in the mutual fund.
47
-
7/29/2019 Portfolio Risk Analysis Project Report
48/100
Units are purchased on a given date every month. This helps to avoid
risk of timing the market wrongly since investments are spread over
time at various NAV levels. This helps as it buys less units when the
market moves up and more units when the market moves down.
Hence it averages the cost of investment. SIP is a valuable tool of
financial planning. Another advantage is that there is no entry load in
case of SIP so the entire money invested is used for purchasing the
units of the funds.
MONTHNAV ON THEDATE
INVESTMENT UNITS ALLOTED
AVERAGECOST
AVERAGEPRICE
1 13.33 1000 75.02 13.33 13.33
2 13.41 1000 74.57 13.37 13.37
3 12.72 1000 78.62 13.15 13.154 13.56 1000 73.75 13.25 13.265 13.98 1000 71.53 13.39 13.4
6 15.17 1000 65.92 13.65 13.77 17.74 1000 56.37 14.12 14.27
8 18.98 1000 52.69 14.59 14.869 21.57 1000 46.36 15.13 15.61
10 24.11 1000 41.48 16.72 16.46
11 25.46 1000 39.28 16.28 17.28
12 27.23 1000 36.72 16.85 18.11
The above table shows how the averaging factor works in case of
SIP. The calculations are made in the following way:
Average Cost= Total Money Invested/No. Of Units.
Average Price(NAV)= Sum of all the NAVs / No. Of Months.
So we see that the average cost is low in case an investor opts forSIP. This type of an investment keeps an investor from any
botherations of the fluctuations in the market.
48
-
7/29/2019 Portfolio Risk Analysis Project Report
49/100
AVERAGING OF COST AND PRICE IN SIP
0
5
10
15
20
25
30
1 2 3 4 5 6 7 8 9 10 11 12
MONTHS
VALU
NAV ON THE
DATEAVERAGE
COSTAVERAGE
Another option that is quite similar to SIP is that Systematic Withdrawal
Plan. Under this option an investor is allowed to withdraw a fixed
amount each month and the units are adjusted according to the
prevailing NAV on the date of the withdrawal. In case of SWP there is
no exit load, hence it is one of the good options for the people who
have a fixed income need. But the mutual fund companies do notgenerally offer this type of a scheme.
TRENDS IN MUTUAL FUNDS
Last six years have been the most turbulent as well as exiting ones for
the industry. New players have come in, while others have decided to
close shop by either selling off or merging with others. Product
innovation is now pass with the game shifting to performance delivery
in fund management as well as service. Those directly associated with
the fund management industry like distributors, registrars and transfer
agents, and even the regulators have become more mature and
responsible.
49
-
7/29/2019 Portfolio Risk Analysis Project Report
50/100
The industry is also having a profound impact on financial markets.
While UTI has always been a dominant player on the bourses as well as
the debt markets, the new generation of private funds which have
gained substantial mass are now seen flexing their muscles. Fund
managers, by their selection criteria for stocks have forced corporate
governance on the industry. By rewarding honest and transparent
management with higher valuations, a system of risk-reward has been
created where the corporate sector is more transparent then before.
Presently the mutual fund companies are in the boom phase. Lot of
companies are entering the mutual fund market. A large number of
schemes are being launched to lure the investors. But the investors
need to very careful about their selection of the mutual funds. The
portfolio should be true to its label; investor should look for consistent
long-term results. A very high portfolio-churning ratio may also prove
harmful for the investor. An investor should understand his life cycle
and wealth management stage. Hence he should have a clear picture
of financial goals current wealth level future income and savings risk
appetite time horizon and tax situation.
It has been predicted that investors can expect 15% returns from
diversified equity mutual funds over next 10 years.
Mutual fund companies have been playing a major role in the stock
market in providing capital to the corporate. Nowadays most of the
mutual funds are equity based as returns are quite high in this area.
50
-
7/29/2019 Portfolio Risk Analysis Project Report
51/100
Trends in Transactions on Stock Exchanges by Mutual Funds
Equity (Rs in Crores) Debt (Rs in Crores)
Gross
Purchase
GrossSales
Net
Purchase/ Sales
Gross
Purchase
GrossSales
Net
Purchase/ Sales
Jan 2000-March2000. 11070.54 11492.19 -421.65 2764.72 1864.29 900.43April 2000-March 2001. 17375.78 20142.76 -2766.98 13512.17 8488.68 5023.49April 2001-March 2002. 12098.11 15893.99 -3795.88 33583.64 22624.42 10959.22April 2002-March 2003 14520.89 16587.59 -2066.70 46663.83 34059.41 12604.42April 2003-March 2004 36663.58 35355.67 1307.91 63169.93 40469.18 22700.75April 2004-March 2005 45045.25 44597.23 448.02 62186.46 45199.17 16987.29
April 2005. 4347.95 2883.04 1464.91 9568.20 4533.42 5034.78
May 2005. 7000.72 3660.61 3340.11 10687.90 5982.47 4705.43
June 2005. 4567.84 6384.63 -1816.79 10686.86 7089.49 3597.37July 2005 (ason 13th) 1788.80 2648.88 -860.08 4417.38 2670.84 1746.54Total (April'05 - July '05) 17705.31
15577.16 2128.15 35360.34
20276.22 15084.12
The table above shows that how active the mutual funds have been in
transacting in the stock exchange. Hence it is advisable for the
investors to use this opportunity and earn better returns out of theinvestment they make.
ROLE OF MUTUAL FUNDS IN AN INVESTORS PORTFOLIO.
Mutual funds are in individual investors way to enter the equity
market. These help the investor to give an equity flavor to their
portfolio without actually investing directly in the equity market.
Mutual funds provide market-linked returns that help the investor to
build a large corpus that would be ideal for a retired life. If investment
is made carefully in funds that have given a good result then the
51
-
7/29/2019 Portfolio Risk Analysis Project Report
52/100
investor is sure to benefit in the long run. It would be a better option
for the person to opt for SIP so that he can take the benefit of small
savings as well as enjoying the market returns. This option actually
averages the cost of investment. Even if the market is falling the
mutual fund holders have an advantage as at that point of time they
can purchase more units of the fund. Balancer funds are those funds
that invest partly in equity and partly in the debt so their return is also
moderate and quite beneficial.
With the inflation hovering around 5% - 6% poised for great heights
investing in avenues, which offer breakeven returns, exposes the
portfolio to inflation risk. Investment in equity either directly or throughthe mutual fund route provides an effective hedge mechanism against
such a potent threat.
Investing in the mutual fund IPOs is though an option that attracts the
investors but here the investor needs to careful in studying the stocks
in which the fund shall be invested.
The dividend paid by the mutual funds is also not very regular but at
times it is quite high.
A recent example is that of SBI Contra Fund that paid a dividend of
102% when it had an NAV of near about Rs.19.
In context of mutual funds it is very important to understand that past
performance is not the only indicator for the future performance. The
performance of a fund is highly unpredictable rather random. Funds
that have occupied top slots in the past need not remain to be so in
the future as well. So it is necessary to understand the basics of the
fund before investment is made; these include the portfolio of the fund
the investment manager and the strategy of the fund. And the most
important thing is ones own financial requirements, risk return profile
and the financial goals that need to be achieved in the long run. Thus
52
-
7/29/2019 Portfolio Risk Analysis Project Report
53/100
introspection of oneself and a close analysis of the fund are necessary
to build a winning portfolio and not exclusive reliance on the past.
STOCK MARKET.
Today the stock market is the most happening place in the Indian
economy. A sudden rise in the index has attracted a lot of investors in
to try their destiny in the stock market. This avenue of investment is
one of the most risky of all the options available. In this market an
investor may have to face extreme situations that is he may earn a
large amount in one go and may loose the same in another moment.
This depends a lot on the type of stocks that are held by the individual.
Some stocks are very aggressive; their response to the market
fluctuations is always greater than the change in the market.
Equities have the potential to increase in value over time and canprovide the portfolio with the growth necessary to reach long-term
investment goals. Equities are known to have outperformed all other
forms of investments in the long-term.
The rationale for investing in equity markets has never been clearer.
Investors must look to maximize their returns over the long term and
equity markets have traditionally been the best place to maximize
wealth over the long term. If the corporate governance practices
improve, then the interest of the entrepreneur and investor are aligned
which leads to long-term wealth creation.
SELECTING A STOCK.
53
-
7/29/2019 Portfolio Risk Analysis Project Report
54/100
There are many theories and techniques about how to choose a
winner, how to separate the wheat from the chaff. There are three
basic factors to look for while picking a stock:
The company itself
Its external environment
The behaviour of its stock
What happens to the company affects the price of its shares on the
stock market and, hence, the investment. An investor should never
invest in the stock of the company whose business he does not
understand.
So, knowing about companies is the first essential step in investment.
One needs to know the business a company is in, and how is it doing
both in absolute terms and in comparison to other companies in the
same business. To do that, it is required to look at the financial
performance of companies and pick up the star performers. As
investors there always is a need to have hope of growth in future.
We also need to look at the performance of the entire sector. The
reason being that the entire sector performance also affects the
performance of an individual stock. Were putting our money in
companies and we can get to know them by looking at their
performance. And this monitoring of the performance of the stock has
to be done on a regular basis.
INITIAL PUBLIC OFFER.
There is a category of investors who invest only in the initial public
offers made by the companies. A corporate may raise capital in the
primary market by way of an initial public offer, rights issue or private
54
-
7/29/2019 Portfolio Risk Analysis Project Report
55/100
placement. An Initial Public Offer (IPO) is the selling of securities to the
public in the primary market. It is the largest source of funds with long
or indefinite maturity for the company. This category of investors forms
a very small portion of the players in the stock market. As there has
been a large number of IPOs in the past few months under the book
building process of many companies. And most of these issues were
highly over subscribed. Some of the issues were that of Jindal Ploy
Films Limited, Provogue (India) Limited, Yes Bank Limited, SPL
Industries Limited, Syndicate Bank, Nectar Life Sciences Limited and
many more. Since the stock market is doing well these days a lot of
enthusiasm is seen amongst the investors to invest in shares and
stocks.Under the book building process the demand for the securities
proposed to be issued by a corporate body is elicited and built up and
the price for such securities is assessed for the determination of the
quantum of such securities to be issued by means of a notice, circular,
advertisement, document or information memoranda or offer
document. Price at which securities will be allotted is not known in case
of offer of shares through book building while in case of offer of shares
through normal public issue, price is known in advance to investor. In
case of Book Building, the demand can be known everyday as the book
is built. But in case of the public issue the demand is known at the
close of the issue.
DERIVATIVES MARKET.
Derivative is a product whose value is derived from the value of one or
more basic variables. The underlying product can be equity, forex,
commodity, or any other asset. A security derived from a debt
instrument, share, and loan whether secured or unsecured, risk
instrument or contract for difference or any other form of security is
55
-
7/29/2019 Portfolio Risk Analysis Project Report
56/100
called a derivative. The most common types of derivatives are
forwards, futures and options. Forwards are customized contracts
between two entities, where settlement takes place on a specific date
in the future at todays price. A futures contract is an agreement
between two parties to buy or sell an asset at a certain time in the
future at a certain price. Futures contract are special types of forward
contracts in the sense that the former are standardized exchange-
traded contracts.
Options are of two types calls and puts. Calls give the buyer a right but
not the obligation to but a given quantity of the underlying asset at a
given price on or before a given future date. Puts give the buyer a right
but not the obligation to sell a given quantity of the underlying asset ata given price on or before a given date. So there a large number of
investors who trade in the market on the daily basis. Such type of
trading yields short-term earnings. Generally the investor aims at high
return in the short term. But even the regular traders need to have an
adequately diversified portfolio in the market. All the sectors need to
be properly analyzed.
The various sectors need to be studied and then adequate
diversification needs to be made in the various sectors. The IT sector
has been leading the rally in the stock market. These stocks have been
the best performing stocks in the market but investing completely in
these stocks can be a threat. Other than these the banks also have
been performing well. So now the investor has to decide that how does
he wish to have his portfolio diversified. Now this year a boom in the
banking stocks was expected and so we see the banking index rising to
a large extent. So an equity portfolio needs to be designed with
adequate prudence. An investor should maintain certain moderate
stocks in his portfolio so as to control the effect of fluctuations in the
market.
56
-
7/29/2019 Portfolio Risk Analysis Project Report
57/100
If all the stocks in the portfolio are aggressive then any negative
change in the market can cause huge losses to the investor. One of the
best examples to quote here is the case of Reliance Industries Limited.
As soon as the there was a change in the structure of Reliance the
prices of its stocks boomed up.
TAX IMPLICATIONS OF INVESTING IN THE STOCK MARKET
There have been no changes on the dividend and capital gains
front.
The Securities Transaction Tax for day traders in the stock
market has been increased to 0.020 per cent against the existing0.015 per cent. The impact of this increment is going to be
minimal.
Trading in derivatives will no longer be treated as speculative
transactions for the purposes of income-tax. This will enable
more tax effective hedging of open positions.
Amendment to the Securities Contract Regulation Act to include
trading in securitised debt (including mortgage-backed debt).Considering the exponential growth of mortgages in the country
during the past two years, this move will lead to a lot of funds
being made available to housing finance institutions and enable
faster rollover of funds.
SEBI has been accorded the approval to set up the National
Institute of Securities Markets. It is hoped that this will lead to a
new breed of advisors which will ultimately be beneficial to the
investors. However, a holistic approach in advising incorporating
all types of financial products viz., insurance, mutual funds, and
so on, needs to be encouraged.
Withdrawal of tax benefit under Section 80 L. This will hasten the
migration of investors from bank accounts and fixed deposits to
57
-
7/29/2019 Portfolio Risk Analysis Project Report
58/100
liquid funds and short-term funds as bank interest will be taxable
but not dividends from liquid funds.
A pragmatic approach on the fringe benefit tax is the need of the hour.
The imposition of the above tax will certainly be passed back to theindividuals as most of the establishments work on a cost-to-company
(CTC) concept.
Hence, all the tax benefits stated earlier stand collapsed on account of
this one provision.
RESEARCH METHODOLOGY.
58
-
7/29/2019 Portfolio Risk Analysis Project Report
59/100
The aim of the study is to find out how an investor actually plans his
portfolio the various risks that are associated with investment and an
analysis of the risk perceptions of an investor. Hence in order to derive
certain substantial results from the study it is necessary to have direct
contact with the investor to that the actual position of and investors
mind can be derived.
Th