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GNDU QUESTION PAPERS 2021
BBA 6
th
SEMESTER
Paper-BBA-631 (Group C): SECURITY ANALYSIS AND PORTFOLIO
MANAGEMENT
Time Allowed: 3 Hours Maximum Marks: 50
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
1. Explain dierent factors aecng the valuaon of shares of a company.
2. Discuss the concept of risk. Dierenate between systemac and unsystemac risk.
3. Elaborate the dierent market theory. What are the shortcomings of this theory ?
4. Explain various charng methods used in technical analysis. What are their advantages
and disadvantages ?
5. Explain the concept of investment. What are the various stages involved in investment
process ?
6. What do you mean by mutual funds? Explain dierent types of mutual funds.
7. Explain the concept of porolio management. What process will you follow to
formulate a porolio strategy?
8. Explain SEBI guidelines on porolio management.
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GNDU Answer PAPERS 2021
BBA 6
th
SEMESTER
Paper-BBA-631 (Group C): SECURITY ANALYSIS AND PORTFOLIO
MANAGEMENT
Time Allowed: 3 Hours Maximum Marks: 50
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
1. Explain dierent factors aecng the valuaon of shares of a company.
Ans: What is Valuation of Shares?
Before we discuss the factors, first understand:
Valuation of shares means finding the true or fair value of a company’s shares.
It answers questions like:
• Is this share overpriced or underpriced?
• Should I buy, sell, or hold this share?
For example, if a share is selling at ₹500 but its real worth is ₹700, it is undervalued.
Factors Affecting Valuation of Shares
Many factors influence the value of shares. Let’s understand them one by one in an easy
way.
1. Earnings of the Company (Profitability)
The most important factor is how much profit the company earns.
If a company earns high profits:
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• Investors trust it more
• Share price increases
If profits are low or unstable:
• Share value decreases
Example:
A company making consistent profits every year will have a higher valuation.
2. Dividend Policy
A dividend is the part of profit given to shareholders.
Companies that give regular and high dividends:
• Attract more investors
• Increase share value
Companies that don’t give dividends:
• May still grow, but investors may hesitate
3. Growth Potential
Investors always look at the future.
Questions they ask:
• Will the company grow?
• Will profits increase in future?
If the answer is yes → Share value increases.
Example:
Tech companies often have high valuations because of future growth expectations.
4. Assets and Net Worth
The value of company assets also matters:
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• Land
• Buildings
• Machinery
• Investments
If a company has strong assets:
• Its share value becomes more stable
Net Worth = Total Assets – Liabilities
Higher net worth → Higher valuation.
5. Risk Factor
Every investment has risk.
High risk:
• Share price may fluctuate
• Investors demand higher returns
Low risk:
• Stable companies have steady valuations
Example:
Startups = High risk
Established companies = Lower risk
6. Market Conditions
The overall market situation affects share value.
In a booming market:
• Share prices rise
In a recession:
• Share prices fall
Factors include:
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• Economic conditions
• Inflation
• Interest rates
7. Industry Performance
The industry in which the company operates is also important.
If the industry is growing:
• Share valuation increases
If the industry is declining:
• Share value decreases
Example:
Renewable energy sector is growing → Higher valuations.
8. Management Quality
Good management plays a big role.
Efficient and honest management:
• Builds trust
• Improves company performance
Poor management:
• Reduces investor confidence
9. Demand and Supply of Shares
This is a basic economic factor.
High demand + Low supply → Price increases
Low demand + High supply → Price decreases
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10. Government Policies and Regulations
Government decisions affect companies.
Examples:
• Tax policies
• Import/export rules
• Business regulations
Positive policies → Increase valuation
Negative policies → Decrease valuation
Simple Diagram of Factors Affecting Share Valuation
Share Valuation
│
┌────────────────┼────────────────┐
│ │ │
Earnings Dividend Growth
│ │ │
Assets Risk Factor Market Conditions
│ │ │
Industry Management Demand & Supply
│
Government Policies
Easy Way to Remember
You can remember the factors using this simple idea:
“Profit + Future + Risk + Market = Share Value”
Conclusion
The valuation of shares is not based on just one factor—it is the result of many combined
influences.
• A profitable company with good growth, strong management, and favorable market
conditions will have high valuation.
• On the other hand, poor performance, high risk, and weak demand will lead to low
valuation.
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In simple terms:
Share valuation is like judging a student—not just by marks, but also by behavior, future
potential, and overall performance.
2. Discuss the concept of risk. Dierenate between systemac and unsystemac risk.
Ans: Concept of Risk
In finance and business, risk refers to the possibility that actual outcomes will differ from
expected outcomes. Simply put, it’s the chance of losing money or not achieving desired
results.
Think of it like crossing a busy road:
• You expect to reach the other side safely.
• But there’s a chance (risk) that something unexpected might happen.
In investments, risk means the uncertainty of returns. Every investor faces it, but the
type and level of risk can vary.
Types of Risk
Broadly, risks in investments are divided into two categories:
1. Systematic Risk
• Also called market risk.
• It affects the entire market or economy, not just one company.
• Example: Inflation, interest rate changes, recession, political instability.
• Key Point: Cannot be eliminated through diversification because it impacts all
businesses.
2. Unsystematic Risk
• Also called specific or company risk.
• It affects only a particular company or industry.
• Example: A strike in a factory, poor management decisions, or a product failure.
• Key Point: Can be reduced or eliminated through diversification (investing in
different companies or industries).
Differentiating Systematic and Unsystematic Risk
Aspect
Systematic Risk
Unsystematic Risk
Definition
Risk affecting the entire
market/economy
Risk affecting a specific company
or industry
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Examples
Inflation, recession, interest rate
changes, wars
Strikes, management errors,
product recalls
Control
Cannot be controlled or avoided
Can be reduced through
diversification
Impact
Broad, affects all investments
Narrow, affects only particular
investments
Other
Name
Market risk
Specific risk
Final Narrative
So, risk is the uncertainty of outcomes in business and investments. It is divided into
systematic risk, which affects the entire market and cannot be avoided, and unsystematic
risk, which affects specific companies or industries and can be reduced through
diversification.
3. Elaborate the dierent market theory. What are the shortcomings of this theory ?
Ans: What are Market Theories?
In economics, market theories explain how prices are decided and how buyers and sellers
behave in the market.
Imagine a simple situation:
You go to a market to buy apples .
• If apples are scarce, price goes up
• If there are too many apples, price goes down
This simple idea is the base of market theory.
Different economists have explained the market in different ways. These are called different
market theories.
1. Classical Market Theory
This is one of the oldest theories.
Main Idea:
Markets work automatically without government interference.
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This theory is mainly associated with economists like Adam Smith.
Key Features:
• Based on “Laissez-faire” (no government control)
• Prices are decided by demand and supply
• Economy moves towards full employment automatically
Simple Diagram (Demand & Supply)
Where demand and supply meet = Equilibrium Price
2. Neoclassical Market Theory
This theory improved the classical ideas.
Main Idea:
People make decisions based on rational thinking and utility (satisfaction).
Key Features:
• Consumers aim to maximize satisfaction
• Producers aim to maximize profit
• Prices depend on marginal utility and cost
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Example:
You buy a cold drink in summer because it gives you satisfaction.
3. Keynesian Market Theory
Developed by John Maynard Keynes during the Great Depression.
Main Idea:
Markets do not always work perfectly on their own.
Key Features:
• Government must intervene in the economy
• Focus on demand (aggregate demand)
• Supports public spending to increase employment
Example:
If people are not spending money, businesses suffer.
Government can increase spending to boost the economy.
4. Modern Market Theory
This combines ideas from different theories.
Main Idea:
Markets are influenced by:
• Technology
• Globalization
• Consumer behavior
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Key Features:
• Imperfect competition exists
• Information is not always perfect
• Market failures can occur
Example:
Big companies like online platforms influence prices and demand.
Shortcomings of Market Theories
Now let’s understand the limitations (weaknesses) of these theories in a simple way.
1. Unrealistic Assumptions
Most theories assume:
• Perfect competition
• Perfect information
• Rational behavior
But in real life:
• People are emotional
• Information is incomplete
2. Ignoring Inequality
Market theories assume everyone has equal power.
Reality:
• Rich people have more buying power
• Poor people struggle even for basic needs
3. Market Failures
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Markets do not always work efficiently.
Examples:
• Pollution (negative externality)
• Public goods like roads and defense
Market alone cannot handle these properly.
4. Unemployment Issues
Classical theory assumes full employment.
But:
• In real life, unemployment exists
• Keynes showed that markets may fail to create jobs
5. Overdependence on Demand & Supply
Theories mainly focus on price mechanism.
But ignore:
• Social factors
• Cultural influences
• Government policies
6. Lack of Human Behavior Understanding
People are not always rational.
Example:
• Buying expensive brands for status
• Emotional spending
7. Monopoly and Imperfect Competition
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Modern markets have:
• Big corporations
• Limited competition
This breaks the basic assumption of many theories.
Simple Summary Diagram
Market Theories
|
-----------------------------
| | | |
Classical Neoclassical Keynesian Modern
| | | |
Free Market Utility Govt Role Mixed Approach
Conclusion
Market theories help us understand how the economy works.
They explain:
• How prices are decided
• How buyers and sellers behave
Each theory gives a different perspective:
• Classical → Free market
• Neoclassical → Rational decisions
• Keynesian → Government role
• Modern → Real-world complexity
However, these theories are not perfect.
They often:
• Ignore real-life complexities
• Assume ideal conditions
• Fail to address inequality and market failures
So, in today’s world, economists use a combination of theories rather than relying on
just one.
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4. Explain various charng methods used in technical analysis. What are their advantages
and disadvantages ?
Ans: Charting Methods in Technical Analysis
Technical analysis is all about studying price movements and patterns to predict future
trends in financial markets. One of the most powerful tools in this field is charting methods.
Charts visually represent price data over time, helping traders and investors make decisions.
Major Charting Methods
1. Line Chart
• Description: The simplest chart. It connects closing prices over a period with a
straight line.
• Advantages:
o Easy to understand for beginners.
o Shows overall trend clearly.
o Useful for long-term analysis.
• Disadvantages:
o Ignores details like opening, high, and low prices.
o Not suitable for short-term traders who need more information.
2. Bar Chart
• Description: Each bar represents one period (day, week, etc.) and shows opening,
closing, high, and low prices.
• Advantages:
o Provides more detail than line charts.
o Helps identify volatility and price ranges.
• Disadvantages:
o Can look cluttered for beginners.
o Harder to interpret quickly compared to line charts.
3. Candlestick Chart
• Description: Similar to bar charts but more visual. Each “candle” shows opening,
closing, high, and low prices. The body of the candle is shaded depending on
whether the price rose or fell.
• Advantages:
o Easy to spot patterns (like Doji, Hammer, Engulfing).
o Very popular among traders worldwide.
o Combines detail with visual clarity.
• Disadvantages:
o Requires practice to interpret correctly.
o Can be overwhelming with too many candles.
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4. Point and Figure Chart
• Description: Focuses only on price movements, ignoring time. Uses Xs and Os to
represent rises and falls.
• Advantages:
o Filters out “noise” from minor price changes.
o Highlights clear trends and reversals.
• Disadvantages:
o Less common, so fewer traders use it.
o Ignores time, which some investors find important.
5. Renko Chart
• Description: Built using bricks that represent fixed price movements. Time is not
considered.
• Advantages:
o Excellent for identifying strong trends.
o Removes small fluctuations, making charts cleaner.
• Disadvantages:
o Ignores time factor.
o May miss short-term opportunities.
6. Heikin-Ashi Chart
• Description: A modified candlestick chart that averages price data to smooth out
trends.
• Advantages:
o Makes trends easier to spot.
o Reduces market noise.
• Disadvantages:
o Less precise because it uses averages.
o Not ideal for traders who need exact price points.
7. Area Chart
• Description: Similar to line charts but the area under the line is shaded.
• Advantages:
o Visually appealing and easy to read.
o Good for showing cumulative trends.
• Disadvantages:
o Like line charts, lacks detailed price information.
Advantages of Charting Methods
• Visual Clarity: Charts make complex data easy to understand.
• Trend Identification: Helps traders spot upward, downward, or sideways trends.
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• Pattern Recognition: Candlestick and bar charts reveal patterns that signal reversals
or continuations.
• Decision Support: Charts guide entry and exit points for trades.
• Flexibility: Different charts suit different trading styles (short-term vs. long-term).
Disadvantages of Charting Methods
• Subjectivity: Different traders may interpret the same chart differently.
• Over-Reliance: Charts don’t guarantee future outcomes—they only show
probabilities.
• Complexity: Advanced charts like candlesticks or Renko require practice to master.
• Noise: Some charts show too much detail, making it hard to focus on key trends.
• Ignores Fundamentals: Charts focus on price and volume, not company performance
or economic conditions.
Relatable Example
Imagine two traders analyzing the same stock:
• One uses a line chart and sees a simple upward trend.
• Another uses a candlestick chart and notices a “Doji” pattern, signaling possible
reversal.
Both are correct in their own way, but their decisions may differ because of the charting
method chosen.
Final Narrative
So, charting methods in technical analysis are like different lenses through which traders
view the market. Line charts give simplicity, bar and candlestick charts provide detail, while
Renko and Heikin-Ashi charts filter noise to highlight trends. Each method has its
advantages (clarity, trend spotting, decision support) and disadvantages (subjectivity,
complexity, ignoring fundamentals).
5. Explain the concept of investment. What are the various stages involved in investment
process ?
Ans: What is Investment?
Investment means putting your money into something today with the expectation of
earning profit or returns in the future.
It could be:
• Buying shares (stocks)
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• Depositing money in a bank (FD/RD)
• Investing in mutual funds
• Buying property or gold
• Starting a small business
In simple words:
“Investment = Money used today to earn more money tomorrow.”
Why do people invest?
People invest for different reasons:
• To grow wealth over time
• To beat inflation (price rise)
• To achieve future goals (education, house, retirement)
• To earn regular income
For example, if you invest ₹10,000 today and it becomes ₹15,000 in a few years, that extra
₹5,000 is your return.
Investment Process: Step-by-Step Journey
Investment is not just randomly putting money anywhere. It is a planned process, like
following steps in a journey.
Diagram of Investment Process
1. Set Financial Goals
↓
2. Analyze Risk & Return
↓
3. Choose Investment Options
↓
4. Build Portfolio
↓
5. Monitor & Review
1. Setting Financial Goals
This is the first and most important step.
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Before investing, ask yourself:
• Why am I investing?
• For how long?
• How much money do I need?
Examples:
• Saving for a bike in 2 years
• Planning for higher education
• Retirement planning
Without a clear goal, investment becomes directionless.
2. Analyzing Risk and Return
Every investment has two sides:
• Return → How much profit you can earn
• Risk → Chance of losing money
For example:
• Fixed Deposit → Low risk, low return
• Shares → High risk, high return
You must decide:
• Are you comfortable taking risks?
• Or do you want safe and stable returns?
This depends on your age, income, and mindset.
3. Choosing Investment Options
Now comes the decision stage.
You choose where to invest based on:
• Your goals
• Your risk capacity
• Market conditions
Common options:
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• Bank deposits
• Mutual funds
• Stock market
• Real estate
• Gold
Smart investors don’t put all money in one place.
4. Building a Portfolio
A portfolio means a mix of different investments.
Example:
• 40% in mutual funds
• 30% in fixed deposits
• 20% in stocks
• 10% in gold
This helps reduce risk.
If one investment performs poorly, others can balance it.
This is called diversification.
5. Monitoring and Review
Investment is not a “set and forget” activity.
You must:
• Check performance regularly
• Adjust according to changes
• Replace poor-performing investments
Example:
• If a stock is falling continuously, you may sell it
• If your goal is near, you may shift to safer options
Review ensures your investment stays on the right track.
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Conclusion
Investment is like planting a tree .
• You plant (invest money)
• You nurture (monitor and manage)
• Over time, it grows and gives fruits (returns)
6. What do you mean by mutual funds? Explain dierent types of mutual funds.
Ans: What are Mutual Funds?
A mutual fund is an investment vehicle that pools money from many investors and invests it
in a diversified portfolio of stocks, bonds, or other securities.
Think of it like this:
• Imagine you and your friends want to buy expensive fruits from different orchards.
Instead of each person buying separately, you all contribute money, and a manager
buys a basket containing a mix of fruits.
• Everyone gets a share of the basket, and the manager ensures it’s balanced and
valuable.
Similarly, mutual funds allow small investors to enjoy diversification and professional
management without needing huge amounts of money.
Key Features of Mutual Funds
1. Pooling of Resources – Many investors contribute money.
2. Professional Management – Fund managers make investment decisions.
3. Diversification – Money is spread across different securities to reduce risk.
4. Liquidity – Investors can redeem their units easily.
5. Regulation – In India, mutual funds are regulated by SEBI (Securities and Exchange
Board of India).
Types of Mutual Funds
Mutual funds can be classified in several ways. Let’s break them down in a simple narrative.
1. Based on Structure
• Open-Ended Funds
o Investors can buy or sell units anytime.
o Example: Most equity funds.
o Advantage: High liquidity.
o Disadvantage: Prices fluctuate daily.
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• Close-Ended Funds
o Units can be bought only during the initial offer period. Redemption happens
at maturity.
o Example: Fixed-term funds.
o Advantage: Stability for fund managers.
o Disadvantage: Less flexibility for investors.
2. Based on Investment Objective
• Equity Funds
o Invest mainly in stocks.
o Advantage: High returns potential.
o Disadvantage: High risk due to market volatility.
• Debt Funds
o Invest in bonds, debentures, and fixed-income securities.
o Advantage: Safer, steady returns.
o Disadvantage: Lower returns compared to equity.
• Balanced or Hybrid Funds
o Mix of equity and debt.
o Advantage: Balance between risk and return.
o Disadvantage: May not maximize returns in booming markets.
3. Based on Risk Profile
• High-Risk Funds – Equity-oriented, suitable for aggressive investors.
• Low-Risk Funds – Debt-oriented, suitable for conservative investors.
• Medium-Risk Funds – Balanced funds, suitable for moderate investors.
4. Based on Asset Class
• Money Market Funds
o Invest in short-term instruments like treasury bills.
o Advantage: Very safe, good for parking surplus money.
o Disadvantage: Returns are modest.
• Index Funds
o Replicate a stock market index (like Nifty or Sensex).
o Advantage: Low cost, simple strategy.
o Disadvantage: No chance of outperforming the market.
• Sectoral Funds
o Invest in specific sectors (IT, pharma, banking).
o Advantage: High returns if the sector performs well.
o Disadvantage: Risky if the sector declines.
5. Based on Tax Benefits
• ELSS (Equity Linked Savings Scheme)
o Equity funds with tax benefits under Section 80C of the Income Tax Act.
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o Advantage: Dual benefit—tax saving + wealth creation.
o Disadvantage: Lock-in period of 3 years.
Advantages of Mutual Funds
1. Diversification reduces risk.
2. Professional fund managers handle investments.
3. Affordable—small investors can participate.
4. Liquidity—easy to buy and sell units.
5. Transparency—regular updates and disclosures.
Disadvantages of Mutual Funds
1. Market risk—returns are not guaranteed.
2. Management fees reduce profits.
3. Over-diversification may dilute returns.
4. Some funds have lock-in periods.
Relatable Example
Imagine Ramesh, a young professional:
• He invests ₹5,000 monthly in an equity mutual fund for long-term wealth creation.
• He also puts ₹2,000 in a debt fund for safety.
• During tax season, he invests in ELSS to save taxes.
This mix gives him growth, safety, and tax benefits—all through mutual funds.
Final Narrative
So, mutual funds are investment vehicles that pool money from many investors and invest
in diversified portfolios. They come in different types—open-ended, close-ended, equity,
debt, balanced, money market, index, sectoral, and tax-saving funds.
The advantages include diversification, professional management, affordability, and
liquidity, while the disadvantages include market risk, fees, and lock-in periods.
7. Explain the concept of porolio management. What process will you follow to
formulate a porolio strategy?
Ans: Imagine you have some money and you don’t want to keep it in just one place. Instead,
you divide it—some in savings, some in gold, some in stocks, maybe a little in real estate.
Why? Because if one option fails, the others can protect you.
This simple idea is exactly what portfolio management is all about.
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What is Portfolio Management?
Portfolio management is the art and science of selecting and managing a group of
investments (like stocks, bonds, mutual funds, etc.) to achieve your financial goals while
minimizing risk.
A “portfolio” simply means a collection of investments.
So, portfolio management is about:
• Choosing the right investments
• Balancing risk and return
• Monitoring and adjusting over time
In simple words:
“Don’t put all your eggs in one basket—spread them wisely.”
Objectives of Portfolio Management
Portfolio management is not random—it is done with clear goals in mind:
1. Maximize Returns – Earn good profits on investments
2. Minimize Risk – Avoid heavy losses
3. Ensure Safety of Capital – Protect your original money
4. Maintain Liquidity – Ability to convert investments into cash
5. Achieve Financial Goals – Like buying a house, education, retirement
Types of Portfolio Management
To understand better, here are the main types:
1. Active Portfolio Management
• The manager frequently buys and sells investments
• Tries to beat the market
2. Passive Portfolio Management
• Investments are made for long-term
• Follows market trends (like index funds)
3. Discretionary Management
• Manager takes decisions on behalf of the investor
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4. Non-Discretionary Management
• Manager only advises; investor decides
Process of Portfolio Management (Step-by-Step)
Now let’s understand the process of formulating a portfolio strategy in a simple flow.
Portfolio Management Process Diagram
1. Setting Investment Objectives
↓
2. Risk Assessment & Profile
↓
3. Asset Allocation
↓
4. Security Selection
↓
5. Portfolio Construction
↓
6. Monitoring & Review
↓
7. Revision & Rebalancing
Step-by-Step Explanation
1. Setting Investment Objectives
This is the starting point.
Ask questions like:
• Why am I investing? (retirement, education, wealth creation)
• What is my time horizon?
Example: A student may invest for future savings, while a retired person invests for
regular income.
2. Risk Assessment (Risk Profile)
Every person has a different ability to take risk:
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• Low risk – prefers safety
• Medium risk – balanced approach
• High risk – willing to take chances for higher returns
Your age, income, and financial situation affect your risk level.
3. Asset Allocation
This is the most important step.
You decide how much money goes into:
• Stocks
• Bonds
• Gold
• Real estate
Example:
• Young investor → more in stocks
• Older investor → more in bonds
4. Security Selection
Now you choose specific investments:
• Which company stocks?
• Which mutual funds?
This requires analysis of:
• Company performance
• Market trends
5. Portfolio Construction
Here, you actually build your portfolio by investing money according to your plan.
The aim is:
• Proper diversification
• Balance between risk and return
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6. Monitoring and Review
Investment is not a “set and forget” activity.
You must:
• Track performance regularly
• Compare with goals
Markets change, so your portfolio must be watched.
7. Revision and Rebalancing
Over time, your portfolio may go out of balance.
Example:
If stocks grow too much, they may become risky.
So you:
• Sell some assets
• Buy others
This keeps your portfolio aligned with your goals.
Why Portfolio Management is Important
• Reduces risk through diversification
• Helps achieve financial stability
• Improves decision-making
• Ensures disciplined investing
Conclusion
Portfolio management is like planning a journey. You decide where you want to go (goals),
choose the best route (investment strategy), and keep checking your path (monitoring).
A good portfolio is not about luck—it is about planning, balance, and regular adjustment.
In today’s world, where financial markets are constantly changing, portfolio management
helps individuals grow their wealth safely and smartly.
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8. Explain SEBI guidelines on porolio management.
Ans: Concept of Portfolio Management under SEBI
Portfolio management means managing a client’s investments in securities to achieve
specific financial goals. SEBI (Securities and Exchange Board of India) regulates portfolio
managers in India through the SEBI (Portfolio Managers) Regulations, 2020, updated
through circulars and master guidelines. The aim is to protect investors, ensure fair
practices, and maintain market integrity.
Key SEBI Guidelines on Portfolio Management
1. Eligibility and Registration
• Portfolio managers must be registered with SEBI.
• They must have a minimum net worth of ₹5 crore to operate.
• Only qualified professionals with relevant experience can manage portfolios.
2. Minimum Investment Requirement
• Clients must invest at least ₹50 lakh in portfolio management services (PMS).
• This ensures only serious investors participate, reducing risks for small retail
investors.
3. Agreement with Clients
• A written agreement must be signed between the portfolio manager and client.
• It should clearly state investment objectives, fees, risk factors, and reporting
frequency.
4. Disclosure and Transparency
• Portfolio managers must provide detailed disclosure documents to clients before
signing agreements.
• These documents include past performance, risk factors, fees, and conflict-of-
interest policies.
5. Custody of Securities
• Securities and funds of clients must be kept with a SEBI-registered custodian.
• This prevents misuse or misappropriation of client assets.
6. Segregation of Accounts
• Portfolio managers must keep client accounts separate from their own funds.
• This ensures clarity and prevents mixing of personal and client investments.
7. Reporting and Audit
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• Portfolio managers must send quarterly reports to clients detailing portfolio
performance, transactions, and fees.
• Annual audits are mandatory to ensure compliance.
8. Risk Management
• Managers must follow SEBI’s risk management framework, including limits on
leverage and exposure.
• They must act in the best interest of clients and avoid speculative practices.
9. Fee Structure
• Fees can be charged as a fixed amount or performance-linked.
• SEBI requires clear disclosure of fee structures to avoid hidden charges.
10. Code of Conduct
• Portfolio managers must act honestly, fairly, and in the best interest of clients.
• They must avoid misleading statements and maintain confidentiality.
Advantages of SEBI Guidelines
• Investor Protection: Safeguards against fraud and mismanagement.
• Transparency: Clear disclosures build trust.
• Professionalism: Only qualified managers can operate.
• Accountability: Regular reporting ensures clients stay informed.
• Market Stability: Prevents reckless speculation and misuse of funds.
Challenges and Limitations
• High minimum investment (₹50 lakh) excludes small investors.
• Compliance costs may be heavy for smaller portfolio managers.
• Performance depends on market conditions—regulations cannot eliminate
investment risks.
Relatable Example
Imagine Ramesh invests ₹1 crore in a PMS:
• SEBI ensures his money is kept with a custodian, not mixed with the manager’s
funds.
• He receives quarterly reports showing gains, losses, and fees.
• If the manager misuses funds, SEBI regulations provide a legal framework for action.
This shows how SEBI guidelines protect investors while allowing professional managers
to operate.
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Final Narrative
So, SEBI’s guidelines on portfolio management are designed to balance investor protection
with professional freedom. They cover registration, minimum investment, disclosures,
custody, reporting, and risk management. While they ensure transparency and
accountability, the high entry barrier means PMS is mainly for high-net-worth individuals.
“This paper has been carefully prepared for educaonal purposes. If you noce any
mistakes or have suggesons, feel free to share your feedback.”
