Asset Management

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Asset Management in India, AMC, Asset Management Company in India, Market Share of AMC in India

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CHAPTER 1 INVESTMENT ANALYSIS
Investment means employment of funds in a productive manner so as to create additional income. The word investment means many things to many persons. Investment in financial assets leads to further production and income. It is lending of funds for income and commitment of money for creation of assets, producing further income. Investment also means purchasing of securities, financial instruments or claims on future income. Investment is made out of income and savings credit or borrowings and out of wealth. It is a reward for waiting for money. There are two concepts of investment: 1) Economic Investment: The concept of economic investment means additions to the capital stock of the society. The capital stock of society is the goods which are used in the production of other goods. The term investment implies the formation of new and productive capital in the form of new construction and producer‘s durable instrument such as plant and machinery, inventories and human capital are also included in this concept. Thus, an investment, in economic terms, means an increase in building, equipment, and inventory.

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2) Financial Investment: This is an allocation of monetary resources to assets that are expected to yield some gain or return over a given period of time. It is a general or extended sense of the term. It means an exchange of financial claims such as shares and bonds, real estate, etc. in their view; investment is a commitment of funds to derive future income in the form of interest, dividends, rent premiums, pension benefits and the appreciation of the value of their principal capital. The economic and financial concepts of investment are related to each other because investment is a part of the savings of individuals which flow into the capital market either directly or through institutions. Thus, investment decisions and financial decisions interact with each other. Financial decisions are primarily concerned with the sources of money where as investment decisions are traditionally concerned with uses or budgeting of money. 1.1 MEANING OF SECURITY A security means a document that gives its owners a specific claim of ownership of a particular financial asset. Financial market provides facilities for buying and selling of financial claims and services. Thus, securities are the financial instruments which are bought and sold in the financial market for investment. The important financial instruments are shares, debentures, bonds, etc. other financial instruments are also known as Treasury bills, Mutual Fund Units, Fixed Deposits, Insurance Policies, Post Office Savings like National Savings certificates, Kisan Vikas Patras, public provident Funds etc. These securities are used by the investors for their investment. Some of these securities are transferable while some of them are not transferable.

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1.2 INVESTMENT AVENUES The alternative investment avenues for the investor are to be considered first so as to satisfy the above objectives of investors. The following categories of investors are open to investors as avenues for savings to flow in financial form: (a) Investment in Bank Deposits – Savings And Fixed Deposits: This is the most common form of investment for an average Indian and nearly 40% of funds in financial savings are used in this form these are least risky but the return is also low.

(b) Investment in P.O. Deposits, National Savings Certificates and other Postal Savings Schemes: Many people in villages and some urban areas are investors in these schemes due to lower risk of loss of money and greater security of funds. But returns are also lower than in Stocks & Shares.

(c) Insurance Schemes of LIC/GIC etc. and Provident and Pension Funds: About 2025% of financial savings of the household sector are put in these forms and P.F., Pension and other forms of contractual savings.

(d) Investment in Mutual Fund Schemes or UTI Schemes as and when announced : These are less risky than direct investment in stocks and shares as these enjoy the expert management by the Portfolio Manager or Professional experts. They also have the advantage of diversified Portfolio involving the reduction of risk and economies of scale reducing the cost of investment.

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(e) Investment in New Issues Market: A new entrant in the Stock Market should preferably invest in New Issues of existing and well reputed companies either in equity or debentures. Incidentally the instruments in which investment can be made in the new issues market are: 1. Equity issues through prospectus or rights announced by existing shareholders. 2. Preference shares with a fixed dividend either convertible into equity or not. 3. Debentures of various categories – convertible, fully convertible, partly convertible and non- convertible debentures. 4. P.S.U. Bonds – taxable or free-taxed with interest rates.

(f) Investment in gold, silver, precious metals and antiques. (g) Investment in real estates. (h) Investment in gilt-edged securities and securities of Government and Semi-Government organizations (e.g. Relief bonds, bonds of port trusts, treasury bills, etc.). The maturity period is varying generally upto10 to20 years. Gilt-edged securities market constitutes the largest segment of the Indian capital market. These are fully secured as they have government backing. Tax benefits are available to these securities.
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The following figure indicates alternative avenues for Investment:

National & Postal Savings Schemes Bank Deposits PF & PPF

Public Deposits

LIC Schemes

Investment Avenues
GOI Savings Bonds

UTI & Mutual Funds

Money Market Securities

Shares & Debentures

Real Estates

Gold and Silver

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1.3 NEW ISSUES MARKET – INVESTMENT DECISION Investors would prefer debentures if they are interested in a fixed income. They may go for convertible debentures, if they want to have both fixed income and likely capital appreciation in future. If they are risk taking and aim only at capital gains, then they may invest in equity shares. Of the new issues those of well established existing companies are least risky while those of new companies floated by little known new entrepreneurs are most risky. In choosing the new issues for investment decision, the investor has to read a copy of the prospectus and note the following: 1. Who are the promoters and their past record? 2. Products manufactured and demand for those products at home or abroad – the competitors and the share of each in the market. 3. Availability of inputs, raw – materials and accessories and the dependence on imports. 4. Project location and its advantages. 5. Prospects through projected earnings, net profits and dividend paying capacity, waiting period involved, etc. If the new issues belong to a company promoted by well – known Business Groups like Tatas, Birlas etc. they are less risky. The company should belong to an industry which is expanding and has good potential like drugs, chemicals, Telecom etc. the terms of offer should be attractive like conversion or immediate prospects of dividend etc.

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1.4 INVESTMENT STRATEGY Portfolio management can be practiced by following either an active or passive strategy. Active strategy is based on the assumption that it is possible to beat the market. This is done by selecting assets that are viewed as under priced or by changing the asset mix or proportion of fixed income securities and shares. Active strategy is carried out as follows: 1) Aggressive Security Management: Aggressive purchasing and selling of securities to achieve high yields from dividend interest and capital gains.

2) Speculation And Short Term Trading: The objective is to gain capital profits. The risk is high and the composition of portfolio is flexible. Success of active strategy depends on correct decisions as regard the timing of movement in the market as a whole, weight age of various securities in the portfolio and individual share selection. The passive strategy does not aim at outperforming the market. Unlike the active strategy. On the other hand the stocks could be randomly selected on the assumption of a perfectly efficient market. The objective is to include in the portfolio a large number of securities so as to reduce risks specific to individual securities. The characteristics of positive strategy are: 1. Long Term Investment Horizon 2. Little Portfolio Revisions Thus it is basically a buy and hold strategy. The strategy can be implemented by investing in securities so as to duplicate the portfolio of a market index which is called indexing.
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1.5 INVESTMENT AND SPECULATION ―Speculation is an activity, quite contrary to its literal meaning, in which a person assumes high risks, often without regard for the safety of his invested principal, to achieve large capital gains.‖ The time span in which the gain is sought to be made is usually very short. The investor sacrifices some money today in anticipation of a financial return in future. He indulges in a bit of speculation. There is an element of speculation involved in all investment decisions. However it does not mean that all investments are speculative by nature. Genuine investments are carefully thought out decisions. On the other hand, speculative investments are not carefully thought out decisions. They are based on tips and rumours. An investment can be distinguished from speculation in three ways – Risk, capital gain and time period. Investment involves limited risk while speculation is considered as an investment of funds with high risk. The purchase of a security for earning a stable return over a period of time is an investment whereas the primary motive is to earn high profits through price changes is termed as speculation. Thus, speculation involves buying a security at low price and selling at a high price to make a capital gain. The truth is that any investment is a speculation if the investor uses his judgement and forecast the probable course of events in order to reap the returns on his investment.

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1.6 ELEMENTS OF INVESTMENTS (a) Return: Investors buy or sell financial instruments in order to earn return on them. The return on investment is the reward to the investors. The return includes both current income and capital gains or losses, which arises by the increase or decrease of the security price. (b) Risk: Risk is the chance of loss due to variability of returns on an investment. In case of every investment, there is a chance of loss. It may be loss of interest, dividend or principal amount of investment. However, risk and return are inseparable. Return is a precise statistical term and it is measurable. But the risk is not precise statistical term. However, the risk can be quantified: The investment process should be considered in terms of both risk and return. (c) Time: Time is an important factor in investment. It offers several different courses of action. Time period depends on the attitude of the investor who follows a ‗buy and hold‘ policy. As time moves on, analysts believe that conditions may change and investors may revaluate expected return and risk for each investment.

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CHAPTER 2 ASSET MANAGEMENT
2.1 INTRODUCTION Definition of 'Asset Management' The management of a client's investments by a financial services company, usually an investment bank. The company will invest on behalf of its clients and give them access to a wide range of traditional and alternative product offerings that would not be to the average investor. An account at a financial institution that includes checking services, credit cards, debit cards, margin loans, the automatic sweep of cash balances into a money market fund, as well as brokerage services. Also known as an "asset management account" or a "central asset account" The expense of this service generally restricts it to high net-worth individuals, governments, corporations and financial intermediaries. This includes such products as equity, fixed income, real estate, agriculture and international investments. When individuals deposit money into the account, it is placed into a money market fund that offers a greater return that can be found in regular savings and checking accounts. The added benefit to individuals is that they can do all of their banking and investing at the same institution instead of having a bank and brokerage account at two different companies. These types of accounts came about with the passing of the Gramm-Leach-Bliley Act in 1997, which replaced the Glass-Steagall Act. The Glass-Steagall Act was created during the Great Depression and did not allow financial institutions to offer both banking and security services. Asset management is the professional management of various securities (shares, bonds and other securities) and assets (e.g., real estate) in order to meet specified investment goals for the benefit
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of the investors. Investors may be institutions (insurance companies, pension funds, corporations, charities, educational establishments etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or exchangetraded funds). The term asset management is often used to refer to the investment management of collective investments, while the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as money management or portfolio management often within the context of so-called "private banking". The provision of investment management services includes elements of financial statement analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff. Fund manager refers to both a firm that provides investment management services and an individual who directs fund management decisions. According to a report titled "Capturing Growth in Adverse Times: Global Asset Management 2012" published by Boston Consulting Group in October 2012, the professionally managed assets of the global asset management industry have remained flat-lined reaching US$58.3 trillion at year-end 2011, compared to US$58.8 trillion in 2007.

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2.2 INDUSTRY SCOPE The business of investment has several facets, the employment of professional fund managers, research (of individual assets and asset classes), dealing, settlement, marketing, internal auditing, and the preparation of reports for clients. The largest financial fund managers are firms that exhibit all the complexity their size demands. Apart from the people who bring in the money (marketers) and the people who direct investment (the fund managers), there are compliance staff (to ensure accord with legislative and regulatory constraints), internal auditors of various kinds (to examine internal systems and controls), financial controllers (to account for the institutions' own money and costs), computer experts, and "back office" employees (to track and record transactions and fund valuations for up to thousands of clients per institution). 2.3 KEY PROBLEMS OF RUNNING SUCH BUSINESSES Key problems include:


revenue is directly linked to market valuations, so a major fall in asset prices can cause a precipitous decline in revenues relative to costs;



above-average fund performance is difficult to sustain, and clients may not be patient during times of poor performance;

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successful fund managers are expensive and may be headhunted by competitors; above-average fund performance appears to be dependent on the unique skills of the fund manager; however, clients are loath to stake their investments on the ability of a few individuals- they would rather see firm-wide success, attributable to a single philosophy and internal discipline;

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Analysts who generate above-average returns often become sufficiently wealthy that they avoid corporate employment in favor of managing their personal portfolios.

2.4 REPRESENTING THE OWNERS OF SHARES Institutions often control huge shareholdings. In most cases they are acting as fiduciary agents rather than principals (direct owners). The owners of shares theoretically have great power to alter the companies via the voting rights the shares carry and the consequent ability to pressure managements, and if necessary out-vote them at annual and other meetings. In practice, the ultimate owners of shares often do not exercise the power they collectively hold (because the owners are many, each with small holdings); financial institutions (as agents) sometimes do. There is a general belief[by whom?] that shareholders – in this case, the institutions acting as agents—could and should exercise more active influence over the companies in which they hold shares (e.g., to hold managers to account, to ensure Boards effective functioning). Such action would add a pressure group to those (the regulators and the Board) overseeing management. However there is the problem of how the institution should exercise this power. One way is for the institution to decide, the other is for the institution to poll its beneficiaries. Assuming that the institution polls, should it then: (i) Vote the entire holding as directed by the majority of votes cast? (ii) Split the vote (where this is allowed) according to the proportions of the vote? (iii) Or respect the abstainers and only vote the respondents' holdings? The price signals generated by large active managers holding or not holding the stock may contribute to management change. For example, this is the case when a large active manager sells his position in a company, leading to (possibly) a decline in the stock price, but more

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importantly a loss of confidence by the markets in the management of the company, thus precipitating changes in the management team. Some institutions have been more vocal and active in pursuing such matters; for instance, some firms believe that there are investment advantages to accumulating substantial minority shareholdings (i.e. 10% or more) and putting pressure on management to implement significant changes in the business. In some cases, institutions with minority holdings work together to force management change. Perhaps more frequent is the sustained pressure that large institutions bring to bear on management teams through persuasive discourse and PR. On the other hand, some of the largest investment managers—such as BlackRock and Vanguard—advocate simply owning every company, reducing the incentive to influence management teams. A reason for this last strategy is that the investment manager prefers a closer, more open and honest relationship with a company's management team than would exist if they exercised control; allowing them to make a better investment decision. The national context in which shareholder representation considerations are set is variable and important. 2.5 SIZE OF THE GLOBAL FUND MANAGEMENT INDUSTRY Conventional assets under management of the global fund management industry increased by 10% in 2010, to $79.3 trillion. Pension assets accounted for $29.9 trillion of the total, with $24.7 trillion invested in mutual funds and $24.6 trillion in insurance funds. Together with alternative assets (sovereign wealth funds, hedge funds, private equity funds and exchange traded funds) and funds of wealthy individuals, assets of the global fund management industry totalled around

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$117 trillion. Growth in 2010 followed a 14% increase in the previous year and was due both to the recovery in equity markets during the year and an inflow of new funds. The US remained by far the biggest source of funds, accounting for around a half of conventional assets under management or some $36 trillion. The UK was the second largest centre in the world and by far the largest in Europe with around 8% of the global total.[1] 2.6 PHILOSOPHY, PROCESS AND PEOPLE The 3-P's (Philosophy, Process and People) are often used to describe the reasons why the manager is able to produce above average results.


Philosophy refers to the overarching beliefs of the investment organization. For example: (i) Does the manager buy growth or value shares, or a combination of the two (and why)? (ii) Do they believe in market timing (and on what evidence)? (iii) Do they rely on external research or do they employ a team of researchers? It is helpful if any and all of such fundamental beliefs are supported by proof-statements.



Process refers to the way in which the overall philosophy is implemented. For example: (i) Which universe of assets is explored before particular assets are chosen as suitable investments? (ii) How does the manager decide what to buy and when? (iii) How does the manager decide what to sell and when? (iv) Who takes the decisions and are they taken by committee? (v) What controls are in place to ensure that a rogue fund (one very different from others and from what is intended) cannot arise?



People refers to the staff, especially the fund managers. The questions are, Who are they? How are they selected? How old are they? Who reports to whom? How deep is the team (and do all the members understand the philosophy and process they are supposed to be using)?
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And most important of all, How long has the team been working together? This last question is vital because whatever performance record was presented at the outset of the relationship with the client may or may not relate to (have been produced by) a team that is still in place. If the team has changed greatly (high staff turnover or changes to the team), then arguably the performance record is completely unrelated to the existing team (of fund managers). 2.7 INVESTMENT MANAGERS AND PORTFOLIO STRUCTURES At the heart of the investment management industry are the managers who invest and divest client investments. A certified company investment advisor should conduct an assessment of each client's individual needs and risk profile. The advisor then recommends appropriate investments.  Asset allocation

The different asset class definitions are widely debated, but four common divisions are stocks, bonds, real-estate and commodities. The exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of money among asset classes will have a significant effect on the performance of the fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices).

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Long-term returns

It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of investment). For example, over very long holding periods (e.g. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are themselves more risky than cash.  Diversification

Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz (and many others). Effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio (individual holdings volatility), andcross-correlations between the returns.  Investment styles

There are a range of different styles of fund management that the institution can implement. For example, growth, value, growth at a reasonable price (GARP), market neutral, small capitalisation, indexed, etc. Each of these approaches has its distinctive features, adherents and, in any particular financial environment, distinctive risk characteristics. For example, there is evidence that growth styles (buying rapidly growing earnings) are especially effective when the

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companies able to generate such growth are scarce; conversely, when such growth is plentiful, then there is evidence that value styles tend to outperform the indices particularly successfully. 2.7 PERFORMANCE MEASUREMENT Fund performance is often thought to be the acid test of fund management, and in the institutional context, accurate measurement is a necessity. For that purpose, institutions measure the performance of each fund (and usually for internal purposes components of each fund) under their management, and performance is also measured by external firms that specialize in performance measurement. The leading performance measurement firms (e.g. Frank Russell in the USA or BI-SAM [1] in Europe) compile aggregate industry data, e.g., showing how funds in general performed against given indices and peer groups over various time periods. In a typical case (let us say an equity fund), then the calculation would be made (as far as the client is concerned) every quarter and would show a percentage change compared with the prior quarter (e.g., +4.6% total return in US dollars). This figure would be compared with other similar funds managed within the institution (for purposes of monitoring internal controls), with performance data for peer group funds, and with relevant indices (where available) or tailormade performance benchmarks where appropriate. The specialist performance measurement firms calculate quartile and decile data and close attention would be paid to the (percentile) ranking of any fund. Generally speaking, it is probably appropriate for an investment firm to persuade its clients to assess performance over longer periods (e.g., 3 to 5 years) to smooth out very short term fluctuations in performance and the influence of the business cycle. This can be difficult

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however and, industry wide, there is a serious preoccupation with short-term numbers and the effect on the relationship with clients (and resultant business risks for the institutions). An enduring problem is whether to measure before-tax or after-tax performance. After-tax measurement represents the benefit to the investor, but investors' tax positions may vary. Beforetax measurement can be misleading, especially in regimens that tax realised capital gains (and not unrealised). It is thus possible that successful active managers (measured before tax) may produce miserable after-tax results. One possible solution is to report the after-tax position of some standard taxpayer. 2.8 RISK-ADJUSTED PERFORMANCE MEASUREMENT Performance measurement should not be reduced to the evaluation of fund returns alone, but must also integrate other fund elements that would be of interest to investors, such as the measure of risk taken. Several other aspects are also part of performance measurement: evaluating if managers have succeeded in reaching their objective, i.e. if their return was sufficiently high to reward the risks taken; how they compare to their peers; and finally whether the portfolio management results were due to luck or the manager‘s skill. The need to answer all these questions has led to the development of more sophisticated performance measures, many of which originate in modern portfolio theory. Modern portfolio theory established the quantitative link that exists between portfolio risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964) highlighted the notion of rewarding risk and produced the first performance indicators, be they risk-adjusted ratios (Sharpe ratio, information ratio) or differential returns compared to benchmarks (alphas). The Sharpe ratio is the simplest and best known performance measure. It measures the return of a portfolio in excess of the risk-free rate, compared to the total risk of the portfolio. This measure is said to be absolute, as it does not refer
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to any benchmark, avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it does not allow the separation of the performance of the market in which the portfolio is invested from that of the manager. The information ratio is a more general form of the Sharpe ratio in which the risk-free asset is replaced by a benchmark portfolio. This measure is relative, as it evaluates portfolio performance in reference to a benchmark, making the result strongly dependent on this benchmark choice. Portfolio alpha is obtained by measuring the difference between the return of the portfolio and that of a benchmark portfolio. This measure appears to be the only reliable performance measure to evaluate active management. In fact, we have to distinguish between normal returns, provided by the fair reward for portfolio exposure to different risks, and obtained through passive management, from abnormal performance (or outperformance) due to the manager‘s skill (or luck), whether through market timing, stock picking, or good fortune. The first component is related to allocation and style investment choices, which may not be under the sole control of the manager, and depends on the economic context, while the second component is an evaluation of the success of the manager‘s decisions. Only the latter, measured by alpha, allows the evaluation of the manager‘s true performance (but then, only if you assume that any outperformance is due to skill and not luck). Portfolio return may be evaluated using factor models. The first model, proposed by Jensen (1968), relies on the CAPM and explains portfolio returns with the market index as the only factor. It quickly becomes clear, however, that one factor is not enough to explain the returns very well and that other factors have to be considered. Multi-factor models were developed as an alternative to the CAPM, allowing a better description of portfolio risks and a more accurate evaluation of a portfolio's performance. For example, Fama and French (1993) have highlighted
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two important factors that characterize a company's risk in addition to market risk. These factors are the book-to-market ratio and the company's size as measured by its market capitalization. Fama and French therefore proposed three-factor model to describe portfolio normal returns (Fama-French three-factor model). Carhart (1997) proposed to add momentum as a fourth factor to allow the short-term persistence of returns to be taken into account. Also of interest for performance measurement is Sharpe‘s (1992) style analysis model, in which factors are style indices. This model allows a custom benchmark for each portfolio to be developed, using the linear combination of style indices that best replicate portfolio style allocation, and leads to an accurate evaluation of portfolio alpha.

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CHAPTER 3 ASSEST ALLOCATION 3.1 INTRODUCTION The portfolio manager has to invest in these securities that form the optimal portfolio. Once a portfolio is selected the next step is the selection of the specific assets to be included in the portfolio. Assets in this respect means group of security or type of investment. While selecting the assets the portfolio manager has to make asset allocation. It is the process of dividing the funds among different asset class portfolios. 3.2 ASSET ALLOCATION

The different asset class definitions are widely debated, but four common divisions are stocks, bonds, real-estate and commodities. The exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for.

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Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of monies among asset classes will have a significant effect on the performance of the fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices). In order to achieve long term success, individual investors should concentrate on the allocation of their money among stocks, bonds and cash. Thus, the asset allocation decision is the most important determinant of investment performance. The basic long term objective of any investor should be to maximize his real overall return on initial investment after investment. To achieve this objective, the investor should look where the best bargains lie. Asset allocation means different things to different people. The portfolio manager has to complete the following stages before making asset allocation. 3.3 SECURITY SELECTION: This means identifying groups of securities in each asset class and decides the optimal portfolio. The following are the different asset classes: (1) Equity shares-new issues (2) Equity shares-old issues (3) Preference Shares (4) Debentures
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(5) PSU bonds (6) Government Securities (7) Company Fixed Deposits

Portfolio management is handling the fund on behalf of the company or institution in order to determine the suitable combination of different assets so that the total risk can be reduced to the minimum while the return can be achieved to the maximum extent. This is a tricky job which needs efficiency of high caliber. Therefore, the portfolio manager has to keep in mind the following factors while making asset allocation and design an efficient portfolio.

a) Liquidity or marketability b) Safety of investment c) Tax Saving d) Maximization of return e) Minimization of return f) Capital appreciation or gain g) Funds requirements

3.4 BASIS OF SELECTION OF EQUITY PORTFOLIO: A portfolio is a collection of securities. It is essential that every security be viewed in a portfolio context. It is logical that the expected return of a portfolio should depend on the expected return of each of the security contained in it. Moreover, the amounts invested in each security should also be important. There are two approaches to the selection of equity portfolio. One is technical analysis and the other is fundamental analysis. Technical analysis assumes that the price of a stock depends on supply and demand in the capital market. All financial and market information of given security is already reflected in the market price. Charts are drawn to identify price movements of
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a given security over a period of time. These charts enable us to predict the future movement of the security. The fundamental analysis includes the study of ratio analysis, past and present track record of the company, quality of management, government policies etc… an efficient portfolio manager can obviously give more weight to fundamental analysis than technical analysis. 3.5 DIVERSIFICATION Investing funds in a single security is advisable only if the secu rity‘s performance is rewarding. To reduce risk of a portfolio investors resort to diversification. Diversification means shifting form one security to another security. The maximum benefits of risk reduction can be achieved by just having of 10 to 15 carefully selected securities. Portfolio risk can be divided into two groups- diversible risk and non-diversible risk. Diversible risk arises from company‘s specific factors. Hence, such risk can be diversified by including stocks of other companies in the portfolio. Non-diversible risk arises from the influence of economy wide factors which affect returns of all companies; investors cannot avoid the risk arising from them. An investor should investigate the following factors about the stock to be included in his portfolio: (a) Earnings per share (b) Growth potential (c) Dividend and bonus records (d) Business, financial and market risks (e) Behavior of price-earnings ratio (f) High and low prices of the stock (g) Trend of share prices over the few months or weeks.

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Y

C

--------------------------------------- B HIGH RISK (SHARES) A (DEBENT) MEDIUM RISK O 3.6 Risk free (Bank Deposits) We can observe from the above diagram that the strategy of an investor should be at A, B or C respectively, depending upon his preferences and income requirements. If he takes some risk at B or C, the risk can be reduced if it is concerned with a specific company risk, but the market risk is outside his control. The risk can be reduced by a proper diversification of scripts in the portfolio. There may be a combination of A, B and C positions in his portfolio so that he can have a diversified risk-return pattern. This diversification can help to minimize risk and maximum the returns. X

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CHAPTER 4 ASSET MANAGEMENT COMPANIES IN INDIA The top asset management companies in India have been performing fairly well of late in spite of the condition of the mutual fund investors in the present economic scenario. During the 2011-12 fiscal the leading companies in this segment have, in fact, been profitable in their business operations.

HDFC Mutual Fund has been the biggest performer in 2011-12 fiscal, replacing Reliance Mutual Fund. In 2012, Reliance has earned an approximate net profit of INR 276 crore, while in 2011 the same figure had stood at INR 261 crore. This represents a growth of 5.6 percent on a year-on-year basis. In the same period HDFC Mutual Fund, which is the biggest of its kind in India, has gone up from INR 242 crore to INR 269 crore. ICICI Asset Management Company, which is the third biggest fund based organization in the country, saw a profit of 22.5 percent earning INR 88 crore in 2012 as opposed to INR 72 crore in 2011. However, Birla Sun Life AMC (Asset Management Company) saw a 30 percent dip in its profits in 2012. The CEO of Reliance AMC, Sundeep Sikka, states that the company has focused on retail customers from a long term view and this has contributed in a major way to its profitability. Even though retail acquisition is costly it yields profits in the long term. He opines that the company is in it for the long haul.

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As of March 31, 2012 the average worth of the assets being managed by 44 fund houses was estimated at INR 6,64,792 crore and 54 percent of the total amount was being controlled by the 5 leading companies. In all, the total worth of the assets under management went down by a bit more than 5 percent. The equity AUM (assets under management) also decreased by 6.7 percent at the same time.

Dhirendra Kumar, who operates as the CEO of Value Research, a firm that is engaged in tracking funds, has stated that the mutual fund business requires low capital and a company can keep making profits after attaining a sustainable figure. The AMCs also make greater profits with more equity assets. UTI ASSET MANAGEMENT The major shareowners of UTI Asset Management are State Bank of India, bank of Baroda, Punjab National Bank, and Life Insurance Corporation. It is the oldest provider of mutual fund services in India At the end of 2011-12 UTI's assets were valued at INR 11,387.9 million as opposed to INR 10,653.9 million. In the same year its aggregate revenue was INR 4,475.1 million and its profits were INR 1,340.9 million. The company has also performed well in terms of achievements like winning 8 prizes at the ICRA Mutual Fund Awards 2012 and the Star Fund House Of The Year DEBT Award in the same year.

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BIRLA SUN LIFE ASSET MANAGEMENT One of the leading asset management companies in India, Birla Sun Life Asset Management is a combined effort of the India based Aditya Birla Group and Sun Life Financial, which is one of the top insurers in Canada. Its products and services may be broken down into the following:     Wealth creation Savings Tax savings Regular income

RELIANCE GROUP Reliance Mutual Fund is owned by the Reliance Group and is one of the quickest growers in the segment. It is presently operative in 179 cities across India. On an average it manages assets worth INR 86,327 crores and has between 61 and 67 lakh investor portfolios.

In 2011-12 the consolidated gross income of Reliance Capital Asset Management Limited was INR 664,68,33,246 and its net profit in the same period was INR 246,09,43,867up from INR 236,18,48,818 in 2010-11. The balance carried to the balance sheet was INR 8271075316 compared to INR 5810154693 IN 2010-11. TATA GROUP Tata Mutual Fund enjoys the support of Tata Group, which is one of the premier brands in the country and presently caters to several lakh investors. It manages assets that are worth approximately INR 20,247 crores.

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In 2011-12 the total worth of the equities and liabilities of Tata Asset Management Company was INR 1,885,402,125 while in 2010-11 the figure read INR 1,674,312,573.

FRANKLIN TEMPLETON In India Franklin Templeton has been operating for more than 10 years. Its first office was launched here during 1996 as the Templeton Asset Management India Private Limited and its mutual fund business in India was started by introducing the Templeton India Growth Fund.

L&T FINANCE LIMITED The L&T Mutual Funds are issued by L&T Finance Limited that was set up as a NBFC (non banking finance corporation during November 1994. At present the organization also offers corporate and infrastructure finance, wealth management, loans, and general insurance services apart from mutual funds. SBI FUND SBI Mutual Fund has been one of the leading names in the business for the past two decades and half. The company is a combined enterprise of AMUNDI from France and the State Bank of India, one of the leading banks in India. At present the organization has at least 222 acceptance points in India. In 2011-12 the total income of SBI Mutual Funds was INR 24,758.25 lakh and its post tax profits amounted to INR 6,051.91 lakh. The net balance brought forward from the earlier year in 201112 was INR 18,017.54 lakh compared to INR 14,293.63 lakh in 2010-11.

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In the same period the asset management company's amount available for appropriation went up from INR 22,178.39 lakh to INR 24,069.45 lakh. Its balance to be carried forward also increased from INR 18,017.54 lakh to INR 20,093.80 lakh. DSP BLACKROCK DSP BlackRock mutual funds are offered by DSP BlackRock Investment Managers, which is one of the leading asset managers in the country. It is a combined venture of BlackRock and DSP Group. The latter is led by Hemendra Kothari, has been in the business for 145 years. It is also one of the entities that set up the Bombay Stock Exchange. BlackRock is the biggest publicly listed asset management organization of the world. It operates in South and North America, Australia, Europe, Middle East, Asia, and Africa. It has at least 9300 employees and has an investor base spanning corporate entities, union, public companies, and industry pension providers. At the end of the quarter that concluded after September 2012 DSP BlackRock had earned INR 1,334,776.61 lakh and its equity amounted to INR 1,014,833.57 lakh. HDFC ASSET MANAGEMENT COMPANY HDFC Mutual Fund is a product of the HDFC Asset Management Company Limited (AMC), which was set up on December 10, 1999 as per the Companies Act, 1956. Its headquarters are presently at Mumbai and it owns paid up capital worth INR 25.169 crore. In 2011-12 its pre-tax profit amounted to INR 381.49 crores compared to INR 355.78 at the end of 2010-11. In the same period its post tax profits grew from INR 242.11 crores to INR 269.14 crores, balance carried forward from the earlier year increased from INR 281.32 crores to INR
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404.16 crores, and balance carried forward to the balance sheet went up from INR 404.16 crores to INR 487.15 crores. RELIGARE ASSET MANAGEMENT COMPANY LIMITED Religare Mutual Fund is marketed by the Religare Asset Management Company Limited. At the end of the quarter that concluded after September 2012, the organization's average asset base is at least INR 126 billion. It caters to individual investors as well as institutions and corporate clients.

In 2011-12 Religare Mutual Fund earned INR 572,198 thousand in total income compared to INR 391,688 thousand in 2010-11. Its total expenses in the same period went down from INR 862,913 thousand to INR 550,364 thousand. ICICI PRUDENTIAL ASSET MANAGEMENT COMPANY LIMITED: The ICIC Prudential Mutual Fund is offered by ICICI Prudential Asset Management Company Limited. It is a joint venture of Prudential PLC, based in the UK, and ICICI Bank. The company was inaugurated during 1993 and is one of the biggest asset management entities in India.

It offers international advisory mandates, and portfolio management services along with mutual fund asset under management services. Its international advisory mandates are available in asset categories such as debt, real estate, and equity. The company has grown substantially in the last few years with operations in almost 150 areas and at least 700 employees. At the end of 2010-11 its equities and liabilities were worth INR 2152.2 million as opposed to INR 2,493.6 million after 2011-12. In the same period its assets went up to INR 1407.5 million
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from INR 1,263.4 million. The value of its current assets in the same time went up from INR 888.8 million to INR 1,086.1 million. Its total income in the period under consideration increased from INR 3,497.1 million to INR 3,507.7 million and its aggregate expenditure came down from INR 2,463.4 million to INR 2,222.5 million. The net profit after tax deductions also went up from INR 718.3 million to INR 880.6 million. KOTAK MAHINDRA ASSET MANAGEMENT COMPANY LIMITED Kotak Mahindra Asset Management Company Limited or KMAMCL is owned by Kotak Mahindra Bank Limited. The fund house has entered into collaboration with T Rowe Price for marketing funds on a global basis. The net worth of the group is INR 7911 crore and it has approximately 20 thousand employees who cater to the approximately 7 million customer accounts. The company's distribution network comprises 1716 branches, satellite offices, and franchisees in at least 470 towns and cities in India. SUNDARAM ASSET MANAGEMENT COMPANY LIMITED Sundaram Asset Management Company Limited was set up during 1996. The company is owned by Sundaram Finance, which is one of the oldest non banking financial companies of India. For the quarter that ended in September, the company had, on an average, managed assets worth INR 13,668.88 crore. It, along with SBI Mutual Fund is among the companies that are planning to buy mutual fund property worth INR 789 crore from Daiwa Asset Management India.

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The company also has offices in the following locations:        New York Dubai California Mauritius San Francisco Singapore London

4.1 MUTUAL FUND ASSET MONITOR From:
March 2013

To:

May

2003

Assets under management (Rs.Cr) Mutual Funds HDFC Mutual Fund Reliance Mutual Fund ICICI Prudential Mutual Fund Birla Sun Life Mutual Fund UTI Mutual Fund SBI Mutual Fund Franklin Templeton Mutual Fund IDFC Mutual Fund March 2013 June 2013 101,720 94,580 87,835 77,046 69,450 54,905 41,564 32,886 104,977 97,771 91,695 79,761 74,707 59,163 41,722 38,938 Change 3,257 3,191 3,860 2,714 5,256 4,258 158 6,052 % Change 3.20 3.37 4.39 3.52 7.57 7.75 0.38 18.40

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Mutual Funds Kotak Mahindra Mutual Fund DSP BlackRock Mutual Fund Tata Mutual Fund Deutsche Mutual Fund Sundaram Mutual Fund JPMorgan Mutual Fund Religare Invesco Mutual Fund L&T Mutual Fund Axis Mutual Fund Canara Robeco Mutual Fund Baroda Pioneer Mutual Fund LIC NOMURA Mutual Fund JM Financial Mutual Fund HSBC Mutual Fund IDBI Mutual Fund PRINCIPAL Mutual Fund Peerless Mutual Fund Taurus Mutual Fund Goldman Sachs Mutual Fund BNP Paribas Mutual Fund Mutual Funds

March 2013 June 2013 35,361 32,342 19,897 18,114 14,871 15,856 14,202 11,169 12,114 8,851 7,303 7,185 7,411 5,230 6,249 5,573 4,875 4,732 4,800 3,726 37,203 33,041 20,883 18,563 15,459 14,883 13,811 13,782 12,289 7,193 7,140 6,818 6,755 5,891 5,489 4,849 4,538 4,464 4,309 3,841

Change 1,842 699 986 449 588 -972 -391 2,612 175 -1,658 -163 -367 -657 661 -760 -725 -336 -267 -490 115 Change

% Change 5.21 2.16 4.95 2.48 3.95 -6.13 -2.75 23.39 1.44 -18.73 -2.23 -5.10 -8.86 12.63 -12.16 -13.01 -6.90 -5.65 -10.22 3.08 % Change

March 2013 June 2013

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Indiabulls Mutual Fund Morgan Stanley Mutual Fund Pramerica Mutual Fund Union KBC Mutual Fund PineBridge Mutual Fund ING Mutual Fund BOI AXA Mutual Fund Mirae Asset Mutual Fund Motilal Oswal Mutual Fund Quantum Mutual Fund Escorts Mutual Fund Sahara Mutual Fund Edelweiss Mutual Fund IIFL Mutual Fund Daiwa Mutual Fund

2,639 2,660 2,592 3,118 1,099 993 1,104 540 539 280 255 254 259 210 266

3,219 3,022 2,544 2,477 1,206 891 866 524 491 292 268 244 239 214 131

580 361 -48 -641 107 -102 -238 -16 -47 12 13 -10 -20 5 -135

21.97 13.59 -1.86 -20.55 9.75 -10.26 -21.54 -3.00 -8.76 4.23 5.01 -3.76 -7.62 2.18 -50.64

Total

816,657

846,563

29,906

3.53

BIBLIOGRAPHY

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Newspaper:  Economics Times

Magazine:  Business World

Websites:   http://www.moneycontrol.com http:// www.livemint.com http:// timesofindia.indiatimes.com http:// profit.ndtv.com http:// amfiindia.com http://business.mapsofindia.com/finance/top-asset-management-companies

 




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