SUMMER INTERNERSHIP PROJECT REPORT AT

SUMMER INTERNERSHIP PROJECT REPORT ON

Investment decision and portfolio management

SUBMITTED BY BHUPENDRA SINGH NATHAWAT

POST GRADUATE DIPLOMA IN MANAGEMENT FROM: M.S.RAMAIAH INSTITUTE OF MANAGEMENT BANGALORE

C - SCHEME, JAIPUR INTERNSS DECLARATION

I hereby declare that the Project Report conducted at ANAND RATHI FINACIAL SERVICES PVT LTD. Under the guidance of. Submitted in Partial fulfillment of the requirements for the certificate of Summer internship programme It is my original work and the same has not been submitted for the award of any other Degree/Diploma/Fellowship or other similar titles or prizes

Place: JAIPUR Date: BHUPENDRA SINGH NATHAWAT

SUMMARY
Indian Stock market has undergone tremendous changes over the years. Investment in Mutual Funds has become a major alternative among Investors. The project has been carried out to have an overview of Mutual Fund Industry and to understand investors perception about Mutual Funds in the context of their trading preference, explore investors risk perception & find out their preference over Top Mutual funds. The methodology used was data collection using Schedule. Secondary data was collected from Internet and Books. Primary Data was collected through survey among existing clients along with the other investors. The procedure adopted to select sample was simple random sampling. The research design is analytical in nature. A questionnaire was prepared and distributed to Investors. The investors profile is based on the results of a questionnaire that the Investors completed. The Sample consists of 100 investors from various brokers premises. The target customers were Investors who are trading in the stock market. The area of survey was restricted to people residing in Varanasi. COMPANY PROFILE ORGANIZATION HISTORY Company Profile Milestones AR Core Strengths Management Team

About Anand Rathi AnandRathi shares and stock brokers ltd. (AR) is a leading full service securities firm providing theentire gamut of financial services. The firm, founded in 1994 by Mr. Anand Rathi, today has a pan India presence as well as an international presence through offices in Dubai and Bangkok. AR provides a breadth of financial and advisory services including wealth management, investment banking, corporate advisory, brokerage & distribution of equities, commodities, mutual funds and insurance, structured products - all of which are supported by powerful research teams. The firm's philosophy is entirely client centric, with a clear focus on providing long term value addition to clients, while maintaining the highest standards of excellence, ethics and professionalism. The entire firm activities are divided across distinct client groups: Individuals, Private Clients, Corporate and Institutions and was recently ranked by Asia Money 2006 poll amongst South Asia's top 5 wealth managers for the ultra-rich. In year 2007 Citigroup Venture Capital International joined the group as a financial partner. Equity & Derivatives Brokerage AnandRathi shares and stock brokers ltd. provides end-to-end equity solutions to institutional and individual investors. Consistent delivery of high quality advice on individual stocks, sector trends and investment strategy has established us a competent and reliable research unit across the country. Clients can trade through us online on BSE and NSE for both equities and derivatives. They are supported by dedicated sales & trading teams in our trading desks across the country. Research and investment ideas can be accessed by clients either through their designated dealers, email, web or SMS

Milestones of Anand rathi

1994: Started activities in consulting and Institutional equity sales with staff of 15 1995: Set up a research desk and empanelled with major institutional investors 1997: Introduced investment banking businesses. Retail brokerage services launched 1999: Lead managed first IPO and executed first M & A deal 2001: Initiated Wealth Management Services 2002: Retail business expansion recommences with ownership model 2003: Wealth Management assets cross Rs 1500 crores. Insurance broking launched Launch of Wealth Management services in Dubai. Retail Branch network exceeds 50 2004: Commodities brokerage and real estate services introduced, Wealth Management assets cross Rs 3000 crores, Institutional equities business relaunched and senior research team put in place, Retail Branch network expands across 100 locations within India. 2005: Real Estate Private Equity Fund Launched, Retail Branch network expands across 200 locations within India. 2006: AR Middle East, WOS acquires membership of Dubai Gold & Commodity Exchange (DGCX) , Ranked amongst South Asia's top 5 wealth managers for the ultra-rich by Asia Money 2006 poll, Ranked 6th in FY2006 for All India Broker Performance in equity distribution in the High Net worth Individuals (HNI) Category, Ranked 9th in the Retail Category having more than 5% market share, Completes its presence in all States across the country with offices at 300+ locations within India

2007:Citigroup Venture Capital International picks up 19.9% equity stake , Retail customer base crosses 100 thousand, Establishes presence in over 350 locations

AR Core Strengths Breadth of Services

In line with its client-centric philosophy, the firm offers to its clients the entire spectrum of financial services ranging from brokerage services in equities and commodities, distribution of mutual funds, IPOs and insurance products, real estate, investment banking, merger and acquisitions, corporate finance and corporate advisory. Clients deal with a relationship manager who leverages and brings together the product specialists from across the firm to create an optimum solution to the client needs.

Management Team
AR brings together a highly professional core management team that comprises of individuals with extensive business as well as industry experience.

In-Depth Research
Our research expertise is at the core of the value proposition that we offer to our clients. Research teams across the firm continuously track various markets and products. The aim is however common - to go far deeper than others, to deliver incisive insights and ideas and be accountable for results.

Management Team
The senior Management comprises a diverse talent pool that brings together rich experience from across industry as well as financial services. Mr. Anand Rathi - Group Chairman Chartered Accountant Past President, BSE Held several Senior Management positions with one of India's largest industrial groups Mr. Pradeep Gupta - Vice Chairman Plus 17 years of experience in Financial Services

Mr. Amit Rathi - Managing Director Chartered Accountant & MBA Plus 11 years of experience in Financial Services

ACQUISITION:
ANZ Grind lays ACQUISITION:

ANZ Grind lays: $ 1.34 bn from August 2000.

Hong Kong Consumer Bank : $ 1.32 bn Thailand Nakornthan Bank: $ 320 million Indonesians Bank Per-Mata: $ 366 million from Oct. 2004. Korea First Bank: $ 3.3 bn from Apr. 2005. Standard Chartered PLC is listed on both the London Stock Exchange and the Stock Exchange of Hong Kong and is in the top 25 FTSE-100 companies, by market capitalization. Top 100 companies list, no other bank present except Bank of Americas position 69th and position of standard chartered bank is 74th.

Offices of ANANDRATHI SHARES AND STOCK BROKERS LTD. are in 197 cities across 28 states & it has also branches in Dubai & Bangkok with more than 44000 employees. It has daily turnover in excess of Rs.4bn. It has 1, 00,000+ clients nationwide. It is also leading distributor of IPOs.

In India where ANANDRATHI SHARES AND STOCK BROKERS LTD. is present in 21 STATES: Andhra Pradesh Assam Bihar Chhattisgarh Delhi Goa Gujarat Haryana Jammu & Kashmir Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Orissa Punjab Rajasthan TAMIL NADU UTTARANCHAL UTTAR PRADESH WEST BENGAL

LIST OF PRODUCTS :
Demat Accounts Mutual Funds Derivatives Commodities Bonds Trading Account Insurance Fixed deposits

MISSION
To be India's first Multinational providing complete financial services solution across the globe.

VISION
Providing integrated financial care driven by the relationship of trust and confidence.

INVESTMENT DECISION AND PORTFOLIO MANAGEMENT

INTRODUCTION Investment in share markets are influenced by the analysis & reasoning which help in predicting the market to some extent. Over the past years a number of technical & theories for analysis have evolved, these combined with modern technology guides the investor. The big players in the market, like Foreign Institutional Investors, Mutual Funds, etc. have the expertise for various analytical tools & make use of them. The small investors are not in a position to benefit from the market the way Mutual Funds can do. Generally a small investors investments are based on market sentiments, inside information, through grapevine, tips & intuition. The small investors depend on brokers and brokerage house for his investments.

Portfolio management or investment helps investors in effective and efficient management of their investment to achieve this goal. The rapid growth of capital markets in India has opened up new investment avenues for investors.The stock markets have become attractive investment options for the common man.But the need is to be able to effectively and efficiently manage investments in order to keep maximum returns with minimum risk.Hence this study on PORTFOLIO MANAGEMENT & INVESTMENT DECISION to examine the role process and merits of effective investment management and decision.

PORTFOLIO MANAGEMENT
PORTFOLIO: A portfolio is a collection of securities since it is really desirable to invest the entire funds of an individual or an institution or a single security, it is essential that every security be viewed in a portfolio context. Thus it seems logical that the expected return of the portfolio. Portfolio analysis considers the determine of future risk and return in holding various blends of individual securities Portfolio expected return is a weighted average of the expected return of the individual securities but portfolio variance, in short contrast, can be something reduced portfolio risk is because risk depends greatly on the covariance among returns of individual securities. Portfolios, which are combination of securities, may or may not take on the aggregate characteristics of their individual parts. Since portfolios expected return is a weighted average of the expected return of its securities, the contribution of each security the portfolios expected returns depends on its expected returns and its proportionate share of the initial portfolios market value. It follows that an investor who simply wants the greatest possible expected return should hold one security; the one which is considered to have a greatest expected return. Very few investors do this, and very few investment advisors would counsel such and extreme policy instead, investors should diversify, meaning that their portfolio should include more than one security.

OBJECTIVES OF PORTFOLIO MANAGEMENT:

The main objective of portfolio management is to maximize the returns from the investment and to minimize the risk involved in investment. Moreover, risk in price or inflation erodes the value of money and hence investment must provide a protection against inflation. Secondary objectives: The following are the other ancillary objectives: Regular return. Stable income. Appreciation of capital. More liquidity. Safety of investment. Tax benefits. Portfolio management services helps investors to make a wise choice between alternative investments with pit any post trading hassles this service renders optimum returns to the investors by proper selection of continuous change of one plan to another plane with in the same scheme, any portfolio management must specify the objectives like maximum returns, and risk capital appreciation, safety etc in their offer.

1.1 Types of investors

There is wide diversity among investors, depending on their investment styles, mandates, horizons, and assets under management. Primarily, investors are either individuals, in that they invest for themselves or institutions, where they invest on behalf of others. Risk appetites and return requirements greatly vary across investor classes and are key determinants of the investing styles and strategies followed as also the constraints faced. A quick look at the broad groups of investors in the market illustrates the point.

1.1.1 Individuals
While in terms of numbers, individuals comprise the single largest group in most markets, the size of the portfolio of each investor is usually quite small. Individuals differ across their risk appetite and return requirements. Those averse to risk in their portfolios would be inclined towards safe investments like Government securities and bank deposits, while others may be risk takers who would like to invest and / or speculate in the equity markets. Requirements of individuals also evolve according to their life-cycle positioning. For example, in India, an individualin the 25-35 years age group may plan for purchase of a house and vehicle, an individual belonging to the age group of 35-45 years may plan for childrens education and childrenmarriage, an individual in his or her fifties would be planning for post-retirement life. The investment portfolio then changes depending on the capital needed for these requirements.

1.1.2 Institutions
Institutional investors comprise the largest active group in the financial markets. As mentioned earlier, institutions are representative organizations, i.e., they invest capital on behalf of others, like individuals or other institutions. Assets under management are generally large and managed professionally by fund managers. Examples of such organizations are mutual funds, pension funds, insurance companies, hedge funds, endowment funds, banks, private equity and venture capital firms and other financial institutions.

The Indian financial markets are also witnessing active participation by institutions with foreign institutional investors, domestic mutual funds, and domestic insurance companies comprising the three major groups, owning more than a third of the shareholding in listed companies, with the Government and promoters another 50%. Over the years the share of institutions has risen in share ownership of companies.

1.1.2.1 Mutual funds

Individuals are usually constrained either by resources or by limits to their knowledge of the investment outlook of various financial assets (or both) and the difficulty of keeping abreast of changes taking place in a rapidly changing economic environment. Given the small portfolio size to manage, it may not be optimal for an individual to spend his or her time analyzing various possible investment strategies and devise investment plans and strategies accordingly. Instead, they could rely on professionals who possess the necessary expertise to manage their funds within a broad, pre-specified plan. Mutual funds pool investors money and invest according to pre-specified, broad parameters. These funds are managed and operated by professionals whose remunerations are linked to the performance of the funds. The profit or capital gain from the funds, after paying the management fees and commission is distributed among the individual investors in proportion to their holdings in the fund. Mutual funds vary greatly, depending on their investment objectives, the set of asset classes they invest in, and the overall strategy they adopt towards investments.

1.1.2.2 Pension funds

Pension funds are created (either by employers or employee unions) to manage the retirement funds of the employees of companies or the Government. Funds are contributed by the employers and employees during the working life of the employees and the objective is to provide benefits to the employees post their retirement. The management of pension funds may be in-house or through some financial intermediary. Pension funds of large organizations are usually very large and form a substantial investor group for various financial instruments.

1.1.2.3 Endowment funds

Endowment funds are generally non-profit organizations that manage funds to generate a steady return to help them fulfill their investment objectives. Endowment funds are usually initiated by a non-refundable capital contribution. The contributor generally specifies the purpose (specific or general) and appoints trustees to manage the funds. Such funds are usually managed by charitable organizations, educational organization, nonGovernment organizations, etc. The investment policy of endowment funds needs to be approved by the trustees of the funds.

1.1.2.4 Insurance companies (Life and Non-life)

Insurance companies, both life and non-life, hold large portfolios from premiums contributed by policyholders to policies that these companies underwrite. There are many different kinds of insurance polices and the premiums differ accordingly. For example, unlike term insurance, assurance or endowment policies ensure a return of capital to the policyholder on maturity, along with the death benefits. The premium for such poliices may be higher than term policies. The investment strategy of insurance companies depends on actuarial estimates of timing and amount of future claims. Insurance companies are generally conservative in their attitude towards risks and their asset investments are geared towards meeting current cash flow needs as well as meeting perceived future liabilities.

1.1.2.5 Banks
Assets of banks consist mainly of loans to businesses and consumers and their liabilities comprise of various forms of deposits from consumers. Their main source of income is from what is called as the interest rate spread, which is the difference between the lending rate (rate at which banks earn) and the deposit rate (rate at which banks pay). Banks generally do not lend 100% of their deposits. They are statutorily required to maintain a certain portion of the deposits as cash and another portion in the form of liquid and safe assets (generally Government securities), which yield a lower rate of return.

These requirements, known as the Cash Reserve Ratio (CRR ratio) and Statutory Liquidity Ratio (SLR ratio) in India, are stipulated by the Reserve Bank of India and banks need to adhere to them. In addition to the broad categories mentioned above, investors in the markets are also classified based on the objectives with which they trade. Under this classification, there are hedgers, speculators and arbitrageurs. Hedgers invest to provide a cover for risks on a portfolio they already hold, speculators take additional risks to earn supernormal returns and arbitrageurs take simultaneous positions (say in two equivalent assets or same asset in two different markets etc.) to earn riskless profits arising out of the price differential if they exist. Another category of investors include day-traders who trade in order to profit from intra-day price changes. They generally take a position at the beginning of the trading session and square off their position later during the day, ensuring that they do not carry any open position in the socalled cash markets, they also invest in derivatives, instruments that derive their value from the underlying securities.

1.2 Constraints
Portfolio management is usually a constrained optimization exercise: Every investor has some constraint (limits) within which she wants the portfolio to lie, typical examples being the risk profile, the time horizon, the choice of securities, optimal use of tax rules etc. The professional portfolio advisor or manager also needs to consider the constraint set of the investors while designing the portfolio; besides having some constraints of his or her own, like liquidity, market risk, cash levels mandated across certain asset classes etc. We provide a quick outline of the various constraints and limitations that are faced by the broad categories of investors mentioned above.

1.2.1 Liquidity
In investment decisions, liquidity refers to the marketability of the asset, i.e., the ability and ease of an asset to be converted into cash and vice versa. It is generally measured across two different parameters, viz., (i) market breadth, which measures the cost of transacting a given volume of the security, this is also referred to as the impact cost; and (ii) market depth, which measures the units that can be traded for a given price impact, simply put, the size of the transaction needed to bring about a unit change in the price. Adequate liquidity is usually characterized by high levels of trading activity. High demand and supply of the security would generally result in low impact costs of trading and reduce liquidity risk.

1.2.2 Investment horizons

The investment horizon refers to the length of time for which an investor expects to remain invested in a particular security or portfolio, before realizing the returns. Knowing the investment horizon helps in security selection in that it gives an idea about investors income needs and desired risk exposure. In general, investors with shorter investment horizons prefer assets with low risk, like fixed-income securities, whereas for longer investment horizons investors look at riskier assets like equities. Riskadjusted returns for equity are generally found to be higher for longer investment horizon, but lower in case of short investment horizons, largely due to the high volatility in the equity markets. Further, certain securities require commitment to invest for a certain minimum investment period, for example in India, the Post Office savings or Government small-saving schemes like the National Savings Certificate (NSC) have a minimum maturity of 3-6 years. Investment horizon also facilitates in making a decision between investing in a liquid or relatively illiquid investment. If an investor wants to invest for a longer period, liquidity costs may not be a significant factor, whereas if the investment horizon is a short period (say 1 month) then the impact cost (liquidity) becomes significant as it could form a meaningful component of the expected return.

1.2.3 Taxation
The investment decision is also affected by the taxation laws of the land. Investors are always concerned with the net and not gross returns and therefore tax-free investments or investments subject to lower tax rate may trade at a premium as compared to investments with taxable returns. The following example will give a better understanding of the concept: Table 1.1: Asset Type Expected Return Net Return A 10% taxable bonds (30% tax) 10% 10%*(1-0.3) = 7% B 8% tax-free bonds 8% 8% Although asset A carries a higher coupon rate, the net return for the investors would be higher for asset B and hence asset B would trade at a premium as compared to asset A. In some cases taxation benefits on certain types of income are available on specific investments. Such taxation benefits should also be considered before deciding the investment portfolio.

1.3 Goals of Investors

There are specific needs for all types of investors. For individual investors, retirement, childrens marriage / education, housing etc. are major event triggers that cause an increase in the demands for funds. An investment decision will depend on the investors plans for the above needs. Similarly, there are certain specific needs for institutional investors also. For example, for a pension fund the investment policy will depend on the average age of the plans participants. In addition to the few mentioned here, there are other constraints like the level of requisite knowledge (investors may not be aware of certain financial instruments and their pricing), investment size (e.g., small investors may not be able to invest in Certificate of Deposits), regulatory provisions (country may impose restriction on investments in foreign countries) etc. which also serve to outline the investment choices faced by investors.

Factors affecting investment decisions in portfolio management

Risk Tolerance

Risk refers to the volatility of portfolios value. The amount of risk the investor is willing to take on is an extremely important factor. While some people do become more risk averse as they get older; a conservative investor remains risk averse over his life-cycle. An aggressive investor generally dares to take risk throughout his life. If an investor is risk averse and he takes too much risk, he usually panic when confronted with unexpected losses and abandon their investment plans mid-stream and suffers huge losses.

Return Needs

This refers to whether the investor needs to emphasize growth or income. Most younger investors who are accumulating savings will want returns that tend to emphasize growth and higher total returns, which primarily are provided by equity shares. Retirees who depend on their investment portfolio for part of their annual income will want consistent annual payouts, such as those from bonds and dividend-paying stocks. Of course, many individuals may want a blending of the two some current income, but also some growth. Investment Time HorizonThe time horizon starts when the investment portfolio is implemented and ends when the investor will need to take the money out. The length of time you will be investing is important because it can directly affect your ability to reduce risk. Longer time horizons allow you to take on greater risks with a greater total return potential because some of that risk can be reduced by investing across different market environments.

If the time horizon is short, the investor has greater liquidity needs some attractive opportunities of earning higher return has to be sacrificed and the result is reduced in return. Time horizons tend to vary over the life-cycle. Younger investors who are only accumulating savings for retirement have long time horizons, and no real liquidity needs except for short-term emergencies. However, younger investors who are also saving for a specific event, such as the purchase of a house or a childs education, may have greater liquidity needs. Similarly, investors who are planning to retire, and those who are in retirement and living on their investment income, have greater liquidity needs.

RATIOS USED IN INVESTMENT DECISIONS

Before discussing valuation ratios, it's worthwhile to briefly review some concepts that are integral to the interpretation and calculation of the most commonly used per share indicators.

PER SHARE DATA

Per-share data can involve any number of items in a company's financial position. In corporate financial reporting - such as the annual report, Forms 10-K and 10-Q (annual and quarterly reports, respectively, to the SEC) - most per-share data can be found in these statements, including earnings and dividends. Additional per-share items (which are often reported by investment research services) also include sales (revenue), earnings growth and cash flow. To calculate sales, earnings and cash flow per share, a weighted average of the number of shares outstanding is used. For book value per share, the fiscal yearend number of shares is used. Investors can rely on companies and investment research services to report earnings per share on this basis.

In the case of earnings per share, a distinction is made

between basic and diluted income per share. In the case of the latter, companies with outstanding warrants, stock options, and convertible preferred shares and bonds would report diluted earnings per share in addition to their basic earnings per share. The concept behind this treatment is that if converted to common shares, all these convertible securities would increase a company's shares outstanding. While it is unlikely for any or all of these items to be exchanged for common stock in their entirety at the same time, conservative accounting conventions dictate that this potential dilution (an increase in a company's shares outstanding) be reported. Therefore, earnings per share come in two varieties - basic and diluted (also referred to as fully diluted). An investor should carefully consider the diluted share amount if it differs significantly from the basic share amount. A company's share price could suffer if a large number of the option holders of its convertible securities decide to switch to stock. For example, let's say that XYZ Corp. currently has one million shares outstanding, one million in convertible options outstanding (assumes each option gives the right to buy one share), and the company's earnings per share are $3. If all the options were exercised (converted), there would be two million shares outstanding. In this extreme example, XYZ's earnings per share would drop from $3 to $1.50 and its share place would plummet. While it is not very common, when companies sell off and/or shut down a component of their operations, their earnings per share (both basic and diluted) will be reported with an additional qualification, which is presented as being based on continuing and discontinued operations. The absolute dollar amounts for earnings, sales, cash flow and book value are worthwhile for investors to review on a year-to-year basis. However, in order for this data to be used in calculating investment valuations, these dollar amounts must be converted to a per-share basis and compared to a stock's current price.

It is this comparison that gives rise to the common use of the expression "multiple" when referring to the relationship of a company's stock price

(per share) to its per-share metrics of earnings, sales, cash flow and book value. These so-called valuation ratios provide investors with an estimation, albeit a simplistic one, of whether a stock price is too high, reasonable, or a bargain as an investment opportunity. Lastly, it is very important to once again to remind investors that while some financial ratios have general rules (or a broad application), in most instances it is a prudent practice to look at a company's historical performance and use peer company/industry comparisons to put any given company's ratio in perspective. This is particularly true of investment valuation ratios.

PRICE/EARNING RATIO
The price/earnings ratio (P/E) is the best known of the investment valuation indicators. The P/E ratio has its imperfections, but it is nevertheless the most widely reported and used valuation by investment professionals and the investing public. The financial reporting of both companies and investment research services use a basic earnings per share (EPS) figure divided into the current stock price to calculate the P/E multiple (i.e. how many times a stock is trading (its price) per each dollar of EPS). It's not surprising that estimated EPS figures are often very optimistic during bull markets, while reflecting pessimism during bear markets. Also, as a matter of historical record, it's no secret that the accuracy of stock analyst earnings estimates should be looked at skeptically by investors. Nevertheless, analyst estimates and opinions based on forward-looking projections of a company's earnings do play a role in Wall Street's stockpricing considerations. Historically, the average P/E ratio for the broad market has been around 15, although it can fluctuate significantly depending on economic and market conditions. The ratio will also vary widely among different companies and industries.

Formula:

Components:

The dollar amount in the numerator is the closing stock price for Zimmer Holdings as of December 31, 2005 as reported in the financial press or over the Internet in online quotes. In the denominator, the EPS figure is calculated by dividing the company's reported net earnings (income statement) by the weighted average number of common shares outstanding (income statement) to obtain the $2.96 EPS figure. By simply dividing, the equation gives us the P/E ratio that indicates (as of Zimmer Holdings' 2005 fiscal yearend) its stock (at $67.44) was trading at 22.8-times the company's basic net earnings of $2.96 per share. This means that investors would be paying $22.80 for every dollar of Zimmer Holdings' earnings.

Variations:
The basic formula for calculating the P/E ratio is fairly standard. There is never a problem with the numerator - an investor can obtain a current closing stock price from various sources, and they'll all generate the same dollar figure, which, of course, is a per-share number.

However, there are a number of variations in the numbers used for the EPS figure in the denominator. The most commonly used EPS dollar figures include the following:

Basic earnings per share - based on the past 12 months as of the most recent reported quarterly net income. In investment research materials, this period is often identified as trailing twelve months (TTM). As noted previously, diluted earnings per share could also be used, but this is not a common practice. The term "trailing P/E" is used to identify a P/E ratio calculated on this basis. Estimated basic earnings per share - based on a forward 12-month projection as of the most recent quarter. This EPS calculation is not a "hard number", but rather an estimate generated by investment research analysts. The term, estimated P/E ratio, is used to identify a P/E ratio calculated on this basis. The Value Line Investment Survey's combination approach - This well-known and respected independent stock research firm has popularized a P/E ratio that uses six months of actual trailing EPS and six months of forward, or estimated, EPS as its earnings per share component in this ratio. Cash Earnings Per Share - Some businesses will report cash earnings per share, which uses operating cash flow instead of net income to calculate EPS. Other Earnings Per Share - Often referred to as "headline EPS", "whisper numbers", and "pro forma", these other earnings per shares metrics are all based on assumptions due to special circumstances. While the intention here is to highlight the impact of some particular operating aspect of a company that is not part of its conventional financial reporting, investors should remember that the reliability of these forms of EPS is questionable.

Commentary: A stock with a high P/E ratio suggests that investors are expecting higher earnings growth in the future compared to the overall market, as investors are paying more for today's earnings in anticipation of future earnings growth. Hence, as a generalization, stocks with this characteristic are considered to be growth stocks.

Conversely, a stock with a low P/E ratio suggests that investors have more modest expectations for its future growth compared to the market as a whole.

The growth investor views high P/E ratio stocks as attractive buys and low P/E stocks as flawed, unattractive prospects. Value investors are not inclined to buy growth stocks at what they consider to be overpriced values, preferring instead to buy what they see as underappreciated and undervalued stocks, at a bargain price, which, over time, will hopefully perform well. Note: Though this indicator gets a lot of investor attention, there is an important problem that arises with this valuation indicator and investors should avoid basing an investment decision solely on this measure. The ratio's denominator (earnings per share) is based on accounting conventions related to a determination of earnings that is susceptible to assumptions, interpretations and management manipulation. This means that the quality of the P/E ratio is only as good as the quality of the underlying earnings number. Whatever the limitations of the P/E ratio, the investment community makes extensive use of this valuation metric. It will appear in most stock quote presentations on an updated basis, i.e., the latest 12-months earnings (based on the most recent reported quarter) divided by the current stock price. Investors considering a stock purchase should then compare this current P/E ratio against the stock's long-term (three to five years) historical record. This information is readily available in Value Line or S&P stock reports, as well as from most financial websites, such as Yahoo!Financeand MarketWatch. It's also worthwhile to look at the current P/E ratio for the overall market (S&P 500), the company's industry segment, and two or three direct competitor companies. This comparative exercise can help investors evaluate the P/E of their prospective stock purchase as being in a high, low or moderate price range.

DIVIDED YIELD METHOD

A stock's dividend yield is expressed as an annual percentage and is calculated as the company's annual cash dividend per share divided by the current price of the stock. The dividend yield is found in the stock quotes of dividend-paying companies. Investors should note that stock quotes record the per share dollar amount of a company's latest quarterly declared dividend. This quarterly dollar amount is annualized and compared to the current stock price to generate the per annum dividend yield, which represents an expected return. Income investors value a dividend-paying stock, while growth investors have little interest in dividends, preferring to capture large capital gains. Whatever your investing style, it is a matter of historical record that dividend-paying stocks have performed better than non-paying-dividend stocks over the long term. Formula:

Components:

BASIC PRINCIPLES OF PORTFOLIO MANAGEMENT:There are two basic principles for effective portfolio management which are given below:1. Effective investment planning for the investment in securities by considering the following factorsa. Fiscal,financial and monetary policies of the Govt.of India and the Reserve Bank of India. b. Industrial and economic environment and its impact on industry Prospect in terms of prospective technological changes, competition in the market, capacity utilization with industry and demand prospects etc. II. Constant review of investment: Its require to review the investment in securities and to continue the selling and purchasing of investment in more profitable manner. For this purpose they have to carry the following analysis: a. To assess the quality of the management of the companies in which investment has been made or proposed to be made. b. To assess the financial and trend analysis of companies balance sheet and profit&loss Accounts to identify the optimum capital structure and better performance for the purpose of withholding the investment from poor companies. c. To analysis the sec urity market and its trend in continuous basis to arrive at a conclusion as to whether the securities already in possession should be disinvested and new securities be purchased. If so the timing for investment or dis-investment is also revealed.

ACTIVITIES IN PORTFOLIO MANAGEMENT:-

A. There are three major activities involved in an efficient portfolio management which are as follows:a. Identification of assets or securities, allocation of investment and also identifying the classes of assets for the purpose of investment. b. They have to decide the major weights, proportion of different assets in the portfolio by taking in to consideration the related risk factors. c. Finally they select the security within the asset classes as identify. The above activities are directed to achieve the sole purpose to maximize return and minimize risk in the investment even if there are unlimited risk in the market. Let us have a look on the composite risk involve in the market during operation:I. Interest rate risk: This arises due to variability in the interest rates from time to time. A changes in the interest rates establishes an inverse relationship in the price of the security i.e. price of securities trends to move inversely with change in rate of interest. Long term securities shows greater variability in compare to short term securities by this risk. II. Purchasing power risk: It is also known as inflation risk and the inflation affect the purchasing power adversely. Inflation rates vary over time and changes unexpectedly causing erosion in the value of real return and expected return. Thus purchasing power risk is more in inflationary conditions especially in respect of bond and fixed income securities. It is not desirable to invest in such securities during inflationary situations. Purchasing power risk is however less in flexible income securities like equity shares or common stock where rise in dividend income off-sets increase in the rate of inflation and provides advantage of capital gain. III. Business risk: Business risk arises from sale and purchase of securities affected by business cycles, technological changes etc. Business cycles affect all types of securities viz. there is cheerful movement in boom due to bullish trend in stock price where as bearish trend in depression brings down fall in the prices of all types of securities. Therefore securities bearing flexible income affected more than the fixed rated securities during depression due to decline in their market price. IV. Financial Risk: This arises due to changes in the capital structure of the

company. It is also known as leveraged risk and expressed in the terms of debt-equity ratio. Excess of debt over equity in the capital structure of a company indicates that the company is highly geared even if the per capital earnings(EPS) of such company may be more. Because highly dependence on borrowings exposes to the risk of winding up for its inability to honour its commitments towards lenders and creditors. So the investors should be aware of this risk and portfolio manager should also be very careful. By taking in to accounts of all the above factors, investment decision in portfolio management are taken as followings:

B. INVESTMENT DECISION:
By a certain sum of funds, the investment decision are basically depends upon the following factors:I. Objectives of investment portfolio: This is a crucial point which a Finance Manager must consider. There can be many objectives of making an investment. The manager of a provident fund portfolio has to look for security and may be satisfied with none too high a return, where as an aggressive investment company be willing to take high risk in order to have high capital appreciation. How the objectives can affect in investment decision can be seen from the fact that the Unit Trust of India has two major schemes : Its capital units are meant for those who wish to have a good capital appreciation and a moderate return, where as the ordinary unit are meant to provide a steady return only. The investment manager under both the scheme will invest the money of the Trust in different kinds of shares and securities. So it is obvious that the objectives must be clearly defined before an investment decision is taken. II. Selection of investment: Having defined the objectives of the investment, the next decision is to decide the kind of investment to be selected. The decision what to buy has to be seen in the context of the following:a. There is a wide variety of investments available in market i.e. Equity shares, preference share, debentures, convertible bond, Govt.securities and bond, capital units etc. Out of these what types of securities to be purchased .

b. What should be the proportion of investment in fixed interest dividend securities and variable dividend bearing securities. The fixed one ensure a definite return and thus a lower risk but the return is usually not as higher as that from the variable dividend bearing shares. c. If the investment is decided in shares or debentures, then the industries showed a potential in growth should be taken in first line. Industry-wiseanalysis is important since various industries are not at the same level from the investment point of view. It is important to recognized that at a particular point of time, a particular industry may have a better growth potential than other industries. For example, there was a time when jute industry was in great favour because of its growth potential and high profitability ,the industry is no longer at this point of time as a growth oriented industry. d. Once industries with high growth potential have been identified, the next step is to select the particular companies, in whose shares or securities investments are to be made. To identify the industries, which have a high growth potential the following techniques/approaches may be taken in to consideration:a. Statistical analysis of past performance: A statistical analysis of the immediate past performance of the share price indices of various industries and changes there in related to the general price index of shares of all industries should be made. The Reserve Bank of India index numbers of security prices published every month in its bulletin may be taken to represent the behaviour of share prices of various industries in the last fiew years. The related changes in the price index of each industry as compare with the changes in the average price index of the shares of all industries would show those industries which are having a higher growth potential in the past fiew years. It may be noted that a Industry may not remaining a growth Industry for all the time. So we have to make an assessment of the various Industries keeping in view the present potentiality also to finalized the list of Industries in which we will try to spread our investment.

b. Assessing the intrinsic value of an Industry/Company:After identifying the Industry, we have to assess the various factors which influence the value of a particular share. Those factors generally relate to the strengths and weaknesses of the company under consideration, Characteristics of the industry within which the company fails and the national and international economic scene. The major objective of the analysis is to determine the relative quality and the quantity of the security. It is also to be seen that the security is good at current market prices. This approach is known as intrinsic value approach. Industry analysis can help to assess the nature of demand of a particular product, Cost structure of the industry and other economic and Govt. constraints on the same. An appraisal of the particular industries prospect is essential and the basic profitability of any company is depends upon the economic prospect of the industry to which it belongs. 2. Growth record: Three growth indicators may be looked in to i.e. Price earnings ratio, Percentage growth rate of earnings per annum and Percentage growth rate of net block of the company in the past few years should be examined. 3. Financial analysis: By the help of Financial analysis we can understand the financial solvency and liquidity, the efficiency, the profitability and the financial and operating leverage of the company in which the fund are used. 4. Pattern of existing stock holding: This analysis would show the stake of Various parties associate with the company. An interesting case in this regard is that of the Punjab National Bank in which the L.I.C. and other financial institutions had substantial holdings. When the bank was nationalized, the residual company proposed a scheme whereby those shareholders, who wish to opt out, could received a certain amount as compensation in cash. It was only at the instant and bargaining strength of institutional investors that the compensation offered to the shareholders, who wish to opt out of the company, was raised considerably.

5. Marketability of the shares: Mere listing of a share on the stock exchange does not automatically mean that the share can be sold and purchase. There may be inactive shares with no transaction for long period. So we have to examined the speculative interest of such scrip, extent of public holding and the particular stock exchange where it is traded. Fundamental analysis thus is basically an examination of the economics and financial aspects of a company with the aim of estimating future earnings and dividend prospect. So after having analyzed of all the relevant information we have to decide whether we should buy or sell the securities.

II. Timing of Purchases:The timing of dealings in the securities, specially shares is of crucial importance, because after correctly identifying the companies one may lose money if the timing is bad due to wide fluctuation in the price of shares of that companies. The decision regarding timing of purchases is particularly difficult because of certain psychological factors. It is obvious that if a person wishes to make any gains, he should buy cheap and sell dear, i.e. buy when the share are selling at a low price and sell when they are at a higher price. But in practical it is a difficult task. When the prices are rising in the market i.e. there is bull phase, everybody joins in buying without any delay because every day the prices touch a new high. Later when the bear face starts, prices tumble down everyday and everybody starts counting the losses. The ordinary investor regretted such situation by thinking why he did not sell his shares in previous day and ultimately sell at a lower price. This kind of investment decision is entirely devoid of any sense of timing. There are various theories and technique to deal with the portfolio management, some of their concept are discuss shortly hereunder:Dow Jones theory: According to this theory of Charles H. Dow , purchase should be made when bull trend started i.e. when price of the share are on the rise and sells them when they are on the fall i.e. at the time when bearish trend started.

Randam walk theory: Basically stock prices can never be predicted because they are not a result of any underlying factors but are mere statistical ups and downs. This hypothesis is known as Randam walk hypothesis. In the Laymans language it may be said that prices on the stock exchange behave exactly the way a drunk would behave while walking in a blind lane, i.e. up and down, with an unsteady way going in any direction he likes, bending on the side once and on the other side the second time. Capital Assets Pricing Model(CAPM): CAPM provides a conceptual framework for evaluating any investment decision. It is used to estimate the expected return of any portfolio with the following formula: E(Rp) = Rf+Bp(E(Rm)-Rf) Where, E(Rp) = Expected return of the portfolio Rf = Risk free rate of return Bp = Beta portfolio i.e. market sensitivity index E(Rm)= Expected return on market portfolio (E(Rm)-Rf)= Market risk premium The above model of portfolio management can be used effectively to:*Estimate the required rate of return to investors on companys common stock. **Evalute risky investment projects involving real Assets. ***Explain why the use of borrowed fund increases the risk and increases the rate of return. ****Reduce the risk of the firm by diversifying its project portfolio. Moving Average: It refers to the mean of the closing price which changes constantly and moves ahead in time, there by encompasses the most recent days and deletes the old one.

CONCLUSION
From the above discussion it is clear that portfolio functioning is based on market risk, so one can get the help from the professional portfolio manager or the Merchant banker if required before investment. Because applicability of practical knowledge through technical analysis can help an investor to reduce risk. In other words Security prices are determined by money manager and home managers, students and strikers, doctors and dog catchers, lawyers and landscapers, the wealthy and the wanting. This breadth of market participants guarantees an element of unpredictability and excitement. If we were all totally logical and could separate our emotions from our investment decisions then, the determination of price based on future earnings would work magnificently. And since we would all have the same completely logical expectations, price would only change when quarterly reports or relevant news was released. I believe the future is only the past again, entered through another gate Sir Arthur wing Pinero. 1893. If price are based on investors expectations, then knowing what a security should sell for become less important than knowing what other investors expect it to sell for. There are two times of a mans life when he should not speculate; when he cant afford it and when he can Mark Twin,1897. A Casino make money on a roulette wheel , not by knowing what number will come up next, but by slightly improving their odds with the addition of a 0 and 00. Yet many investors buy securities without attempting to control the odds. If we believe that this dealings is not a Gambling we have to start up it with intelligent way. Through it is basically a future estimation or expectation , one should know the standard norms and related rules for lowering the risk.