Easy2Siksha.com
GNDU QUESTION PAPERS 2023
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.
SECTION-A
1 Why is return an important consideraon for investment ? How do stascal methods
help in measuring return on investment ?
II. Discuss the dierent approaches in valuaon of equity shares.
SECTION-B
III. What do you mean by industry analysis? What are the factors which need to be
considered while having industry analysis?
IV. What is Capital Asset Pricing Model (CAPM)? Explain the main assumpons of CAPM.
What are the limitaons of CAPM?
SECTION-C
V. Describe the features of an investment programme. What steps should an investor
follow to make an investment?
Easy2Siksha.com
VI. What do you mean by porolio management? What are the dierences between
porolio management and mutual fund ?
SECTION-D
VII. Do you think that the eect of a combinaon of securies can bring about a balanced
porolio ? Discuss.
VIII. What do you mean by porolio management scheme ? What are the features of
porolio management scheme ?
GNDU Answer PAPERS 2023
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.
SECTION-A
1 Why is return an important consideraon for investment ? How do stascal methods
help in measuring return on investment ?
Ans: Why is “Return” Important in Investment?
Imagine you invest ₹10,000 in something—maybe shares, a business, or even a fixed
deposit. After one year, it becomes ₹11,000. That extra ₹1,000 is your return.
Easy2Siksha.com
In simple terms, return is the reward you get for investing your money.
Now the big question is—why is this so important?
1. It shows whether your investment is worth it
Return helps you understand if your money is growing or not. If your investment gives a
good return, it means your decision was right. If not, you may need to rethink.
For example:
• Investment A gives 5% return
• Investment B gives 12% return
Obviously, Investment B looks more attractive.
2. Helps compare different options
There are many places to invest—stocks, mutual funds, gold, real estate, etc. Return helps
you compare them.
Without return, choosing an investment would be like buying something without knowing
its price.
3. Compensates for time and risk
When you invest, you are:
• Giving up current spending
• Taking a risk (especially in stocks)
So, you expect a return as compensation for:
• Waiting (time value of money)
• Taking risk
Higher risk investments usually aim for higher returns.
4. Helps in achieving financial goals
Whether it’s:
Easy2Siksha.com
• Buying a house
• Funding education
• Retirement planning
You need returns to grow your money and reach those goals.
5. Measures performance
Return acts like a “report card” for your investment.
If your portfolio gives consistent returns, it means your strategy is working well.
How Do Statistical Methods Help in Measuring Return?
Now let’s move to the second part—this is where things become a little technical, but don’t
worry, we’ll keep it simple.
Statistical methods help us measure, analyze, and understand returns properly instead of
just guessing.
1. Average Return (Mean)
This is the most basic method.
It tells us the average performance of an investment over time.
For example:
Year 1: 10%
Year 2: 15%
Year 3: 5%
Average return = (10 + 15 + 5) / 3 = 10%
Simple and easy
But it ignores fluctuations (risk)
2. Standard Deviation (Risk Measurement)
Not all returns are stable. Some go up and down a lot.
Easy2Siksha.com
Standard deviation tells us how much returns vary.
• Low deviation = stable returns
• High deviation = risky investment
Example:
• Fixed deposit → low risk
• Stock market → high risk
So, statistical methods don’t just measure return—they also measure risk along with return.
3. Variance
Variance is closely related to standard deviation.
It measures the spread of returns.
It helps investors understand how far returns deviate from the average.
4. Rate of Return Calculation
There are formulas to calculate return properly:
Simple Return:
This gives percentage return.
Example:
₹10,000 → ₹12,000
Return = 20%
5. Compound Annual Growth Rate (CAGR)
Sometimes returns are over multiple years.
CAGR tells us the average yearly growth rate.
Easy2Siksha.com
It is more accurate because it considers compounding.
6. Probability and Expected Return
Statistical methods also help predict future returns.
Expected Return = Probability × Possible Returns
Example:
• 50% chance of 10% return
• 50% chance of 20% return
Expected return = 15%
This helps investors make better decisions.
7. Risk-Return Analysis
Statistics helps answer a key question:
“Is the return worth the risk?”
For example:
• Investment A: 10% return with low risk
• Investment B: 12% return with very high risk
You might choose A depending on your comfort level.
Final Understanding
• Return is the main reason people invest money. Without return, there is no benefit
in investing.
• It helps in comparing options, measuring performance, and achieving financial goals.
• Statistical methods act like tools that:
o Calculate returns accurately
o Measure risk
o Predict future performance
o Help in better decision-making
Easy2Siksha.com
II. Discuss the dierent approaches in valuaon of equity shares.
Ans: Why Do We Value Equity Shares?
Imagine you’re buying a house. You wouldn’t just pay whatever price the seller asks—you’d
look at the location, size, future potential, and compare it with other houses. Similarly,
when investors buy shares of a company, they want to know: Is this share worth the price?
Valuation helps answer that.
Equity shares represent ownership in a company. Their value depends on how much profit
the company can generate, how stable it is, and how attractive it looks compared to other
investments. Different approaches exist because there’s no single “perfect” way to measure
value—each method highlights a different aspect.
Approaches to Valuation of Equity Shares
1. Net Asset Value (NAV) Method
This is like checking the company’s balance sheet. You add up all the assets (like buildings,
machinery, cash) and subtract liabilities (like loans). The remainder is the company’s net
worth. Divide this by the number of shares, and you get the value per share.
• Strength: Simple and straightforward.
• Limitation: It ignores future earning potential. A company with few assets but high
growth prospects may look undervalued here.
Example: A real estate company with lots of land will show high NAV, even if profits are low.
2. Earnings Capitalization Method
Here, the focus is on profits. You take the company’s expected annual earnings and divide
them by a capitalization rate (which reflects the risk and return expected by investors).
Value per share
Expected Earnings
Capitalization Rate
• Strength: Captures profitability.
• Limitation: Assumes earnings remain stable, which may not be realistic.
Example: If a company earns ₹10 per share and investors expect a 10% return, the value is
₹100 per share.
3. Dividend Discount Model (DDM)
Easy2Siksha.com
This method values shares based on future dividends. Since shareholders ultimately invest
for returns, dividends are key. The idea is: today’s share value equals the present value of all
future dividends.
• Strength: Useful for companies that pay regular dividends.
• Limitation: Not suitable for firms that reinvest profits instead of paying dividends.
Example: Banks often use this model since they pay consistent dividends.
4. Price-Earnings (P/E) Ratio Method
This is a market-based approach. You multiply the company’s earnings per share (EPS) by
the industry’s average P/E ratio.
Value per share EPS P/E Ratio
• Strength: Reflects market sentiment and industry standards.
• Limitation: P/E ratios fluctuate with market moods.
Example: If EPS is ₹20 and the industry P/E is 15, the share value is ₹300.
5. Market Price Method
Sometimes, the simplest way is to look at the current trading price in the stock market. This
reflects what buyers and sellers are willing to pay right now.
• Strength: Real-time and practical.
• Limitation: Market prices can be volatile and influenced by speculation.
6. Discounted Cash Flow (DCF) Method
This is considered one of the most comprehensive methods. It estimates the company’s
future cash flows and discounts them back to present value using a discount rate.
• Strength: Considers long-term growth and future potential.
• Limitation: Requires assumptions about future cash flows, which can be uncertain.
Example: Tech startups are often valued using DCF because their current profits may be low,
but future potential is huge.
7. Fair Value Method
This combines multiple approaches—like NAV, earnings capitalization, and market price—to
arrive at a balanced figure. It’s often used when no single method gives a clear picture.
Framing the Bigger Picture
So, which method is “best”? The truth is, it depends.
Easy2Siksha.com
• For stable, dividend-paying companies → Dividend Discount Model works well.
• For asset-heavy firms → NAV method is useful.
• For growth-oriented firms → DCF is more realistic.
• For quick market checks → P/E ratio or market price method is handy.
In practice, analysts often use a mix of methods to cross-check results.
Final Takeaway
Valuation of equity shares is like looking at a diamond from different angles. Each
approach—NAV, earnings capitalization, dividend discount, P/E ratio, market price, DCF, and
fair value—shows a different facet. No single method is perfect, but together they help
investors and companies understand the true worth of a share.
SECTION-B
III. What do you mean by industry analysis? What are the factors which need to be
considered while having industry analysis?
Ans: What is Industry Analysis?
Industry analysis is the process of studying and understanding a particular industry before
starting or investing in a business. It helps you evaluate the overall environment,
competition, opportunities, and risks in that industry.
In simple words:
Industry analysis = Knowing everything important about the market you want to enter.
It answers questions like:
• How big is the industry?
• Is it growing or declining?
• Who are the main players?
• What are the chances of success?
Why is Industry Analysis Important?
Think of it like checking the weather before going on a trip. If you know it's going to rain,
you carry an umbrella. Similarly, industry analysis helps businesses:
• Make better decisions
Easy2Siksha.com
• Avoid risks
• Identify opportunities
• Understand competitors
• Plan strategies effectively
Without industry analysis, starting a business is like walking in the dark.
Factors to Consider in Industry Analysis
Now let’s understand the key factors that must be considered while doing industry analysis.
I’ll explain them in a simple and relatable way.
1. Industry Size and Growth
This tells you:
• How big is the market?
• Is it expanding or shrinking?
Example:
The online shopping industry is growing rapidly, while traditional DVD rental businesses
have declined.
✔ A growing industry = more opportunities
A declining industry = higher risk
2. Demand and Customer Behavior
You must understand:
• Who are your customers?
• What do they want?
• How often do they buy?
Example:
People today prefer fast delivery and online payments, so businesses must adapt.
Understanding customer needs helps you:
• Design better products
• Improve customer satisfaction
Easy2Siksha.com
3. Competition Level
Ask yourself:
• How many competitors are there?
• Are they strong or weak?
• What are their strengths?
Example:
If you open a tea stall in a place where 10 tea stalls already exist, competition will be tough.
✔ High competition = difficult entry
✔ Low competition = easier opportunity
4. Cost Structure and Profitability
You need to analyze:
• Cost of production
• Pricing of products
• Profit margins
Example:
If raw materials are expensive, profits may be low.
This helps you understand whether the business is financially viable or not.
5. Technology and Innovation
Technology plays a big role in today’s industries.
Ask:
• What technology is used?
• Is it changing quickly?
Example:
The mobile industry changes fast with new features every year.
✔ Advanced technology = better efficiency
Outdated technology = loss of competitiveness
Easy2Siksha.com
6. Government Policies and Regulations
Every industry is affected by rules and laws.
Consider:
• Taxes
• Licenses
• Government restrictions
Example:
Food businesses must follow safety regulations.
Ignoring these can lead to:
• Legal problems
• Business shutdowns
7. Barriers to Entry
This means how easy or difficult it is to enter the industry.
Types of barriers:
• High investment
• Strong brand loyalty
• Government restrictions
Example:
Starting an airline is very difficult due to huge investment and regulations.
✔ High barriers = less competition
✔ Low barriers = more competition
8. Supplier and Buyer Power
You should understand:
• Do suppliers control prices?
• Do customers have many choices?
Example:
If there are few suppliers, they can charge higher prices.
Easy2Siksha.com
✔ Strong suppliers = higher costs
✔ Strong buyers = pressure to reduce prices
9. Economic Conditions
The overall economy affects industries.
Consider:
• Inflation
• Employment levels
• Income of people
Example:
During economic slowdown, people spend less on luxury items.
10. Future Trends and Opportunities
Always look ahead:
• What changes are coming?
• What new opportunities exist?
Example:
Electric vehicles are the future, so investing in that industry may be beneficial.
Conclusion
Industry analysis is like doing homework before starting a business. It gives you a clear
picture of:
• Where you are entering
• What challenges you may face
• What opportunities you can grab
A smart businessperson always studies the industry before making any decision. It reduces
risk and increases the chances of success.
Easy2Siksha.com
IV. What is Capital Asset Pricing Model (CAPM)? Explain the main assumpons of CAPM.
What are the limitaons of CAPM?
Ans: What is CAPM?
Imagine you’re deciding whether to invest in a company’s shares. You want to know: How
much return should I expect, given the risk I’m taking? That’s exactly what the Capital Asset
Pricing Model (CAPM) helps answer.
CAPM is a financial model that links the expected return of an investment to its risk. It says
that investors should be rewarded in two ways:
1. Risk-free return – the basic return you’d get from a completely safe investment (like
government bonds).
2. Risk premium – extra return for taking on risk, depending on how much the
investment moves with the overall market.
The formula looks like this:
Where:
•
= expected return on the investment
•
= risk-free rate
•
= beta (a measure of how risky the investment is compared to the market)
•
= expected return of the market
In simple terms: CAPM says the return you expect equals the safe return plus extra
compensation for risk.
Main Assumptions of CAPM
For CAPM to work, it relies on several assumptions. Let’s break them down like a story:
1. Investors are Rational
It assumes investors make logical decisions, always aiming to maximize returns while
minimizing risk. In reality, emotions often play a role, but the model assumes rationality.
2. Perfect Capital Market
CAPM assumes there are no transaction costs, taxes, or restrictions. Everyone has equal
access to information, and securities are infinitely divisible. Basically, the market is
“perfect.”
3. Single Period Investment Horizon
Easy2Siksha.com
It assumes investors plan for one period (say, one year) and make decisions based on that
horizon. Real investors often think long-term, but CAPM simplifies it.
4. Risk-Free Borrowing and Lending
Investors can borrow or lend unlimited amounts at the risk-free rate. This means they can
adjust their portfolios easily. In reality, borrowing costs are higher than lending returns.
5. Homogeneous Expectations
All investors see the same information and expect the same returns, risks, and correlations.
In practice, people interpret data differently, but CAPM assumes everyone agrees.
6. Market Portfolio
CAPM assumes investors hold a “market portfolio” that includes all risky assets in
proportion to their market value. This portfolio represents the entire market.
7. Beta as the Only Risk Measure
CAPM assumes that the only relevant risk is systematic risk (market-related risk), measured
by beta. It ignores unsystematic risk (company-specific risk), assuming it can be diversified
away.
Limitations of CAPM
Now, let’s look at the weaknesses. CAPM is elegant, but reality is messier.
1. Unrealistic Assumptions
Markets aren’t perfect. There are taxes, transaction costs, and unequal access to
information. Investors aren’t always rational—they can be emotional or speculative.
2. Risk-Free Rate Problem
In practice, finding a truly risk-free asset is tricky. Government bonds are often used, but
they still carry inflation and interest rate risks.
3. Beta Isn’t Everything
CAPM relies heavily on beta, but beta only measures market risk. It ignores other risks like
liquidity risk, political risk, or sudden shocks. Many studies show that beta alone doesn’t
fully explain returns.
4. Estimating Inputs is Difficult
Expected market return, risk-free rate, and beta are all estimates. Small errors in these
inputs can lead to big differences in calculated returns.
Easy2Siksha.com
5. Empirical Evidence
Research has shown that CAPM doesn’t always match real-world data. Sometimes, stocks
with low beta outperform expectations, and high-beta stocks underperform.
6. Single Period Limitation
Investors usually think long-term, but CAPM assumes a single period. This makes it less
practical for real-world portfolio management.
Final Takeaway
• CAPM Definition: A model that links expected return to risk, using the risk-free rate
and beta.
• Assumptions: Rational investors, perfect markets, risk-free borrowing/lending,
homogeneous expectations, market portfolio, and beta as the only risk measure.
• Limitations: Unrealistic assumptions, difficulty in estimating inputs, beta’s narrow
focus, lack of long-term perspective, and mismatch with real-world evidence.
In short: CAPM is a powerful theoretical tool, but it should be used with caution. It’s a
starting point for understanding risk and return, not the final word.
SECTION-C
V. Describe the features of an investment programme. What steps should an investor
follow to make an investment?
Ans: Investment Programme: Meaning and Features
Imagine you are planting a tree . You don’t just throw seeds randomly—you choose the
right place, water it regularly, protect it, and wait patiently.
An investment programme works in the same way. It is a planned approach to investing
money so that it grows safely and steadily over time.
Key Features of an Investment Programme
1. Clear Objectives
Every investment should start with a goal.
Ask yourself:
• Do I want to buy a house?
Easy2Siksha.com
• Save for retirement?
• Pay for education?
Without a goal, investing is like traveling without a destination.
2. Balance Between Risk and Return
Higher returns usually come with higher risk.
• Low risk → Fixed deposits, government bonds
• High risk → Stocks, crypto
A good investment programme finds a balance according to your comfort level.
3. Diversification (Don’t Put All Eggs in One Basket)
This is one of the most important features.
Instead of investing all money in one place:
• Some in stocks
• Some in bonds
• Some in gold or property
This reduces risk if one investment fails.
4. Liquidity
Liquidity means how easily you can convert your investment into cash.
• Savings account → Highly liquid
• Real estate → Less liquid
A good investment plan always keeps some money easily accessible.
5. Time Horizon
Every investment has a time period.
• Short-term (0–3 years)
Easy2Siksha.com
• Medium-term (3–7 years)
• Long-term (7+ years)
Long-term investments usually give better returns.
6. Flexibility
Life changes, and so should your investment plan.
A good programme allows:
• Adjustments
• Switching investments
• Increasing or decreasing contributions
7. Safety of Capital
Safety means protecting your original money.
Some investments are:
• Very safe (government bonds)
• Moderately safe (mutual funds)
• Risky (stocks)
A balanced programme protects your capital while still allowing growth.
8. Regular Income (Optional)
Some investors prefer steady income:
• Dividends
• Interest
• Rent
This is especially important for retired people.
Steps an Investor Should Follow
Now let’s understand the process step-by-step—like a roadmap .
Easy2Siksha.com
Step 1: Know Your Financial Situation
Before investing, understand:
• Your income
• Expenses
• Savings
• Debts
Example: If you earn ₹30,000 and spend ₹25,000, you can invest ₹5,000.
Step 2: Set Clear Goals
Decide what you are investing for:
• Short-term: Buying a phone
• Medium-term: Buying a car
• Long-term: Retirement
Each goal needs a different investment strategy.
Step 3: Understand Your Risk Capacity
Ask yourself:
• Can I handle loss?
• Do I prefer safe returns or higher gains?
A student may take more risk than a retired person.
Step 4: Create a Budget for Investment
Decide how much you will invest regularly.
Rule:
“Invest first, spend later.”
Even small amounts like ₹500/month can grow over time.
Step 5: Choose Investment Options
Easy2Siksha.com
Select suitable instruments such as:
• Fixed Deposits
• Mutual Funds
• Stocks
• Gold
• Real Estate
Choose based on:
• Risk
• Time
• Goal
Step 6: Diversify Your Investments
Don’t invest everything in one place.
Example:
• 40% in mutual funds
• 30% in fixed deposits
• 20% in gold
• 10% in stocks
This reduces overall risk.
Step 7: Start Investing (Execution)
Open accounts if needed:
• Bank account
• Demat account
• Mutual fund account
Then start investing regularly.
Step 8: Monitor Your Investments
Keep checking:
• Are you getting expected returns?
Easy2Siksha.com
• Is any investment underperforming?
But don’t panic with short-term ups and downs.
Step 9: Review and Adjust
Life changes—so update your plan:
• Increase investment when income grows
• Reduce risk as you age
Step 10: Stay Patient and Disciplined
This is the most important step.
Investment is not a quick-rich scheme.
It requires:
• Patience
• Consistency
• Discipline
“Time in the market is more important than timing the market.”
Final Understanding
An investment programme is not just about putting money somewhere—it is a well-
planned strategy that balances risk, return, safety, and future goals.
By following the right steps:
1. Understand your finances
2. Set goals
3. Choose wisely
4. Diversify
5. Monitor regularly
You can build a strong financial future.
Easy2Siksha.com
VI. What do you mean by porolio management? What are the dierences between
porolio management and mutual fund ?
Ans: What is Portfolio Management?
Imagine you have some savings. Instead of putting all your money into one company’s
shares, you decide to spread it across different options—stocks, bonds, real estate, maybe
even gold. This collection of investments is called a portfolio. Managing it wisely is what we
call portfolio management.
Definition
Portfolio management is the art and science of selecting and overseeing a mix of
investments to achieve specific financial goals while balancing risk and return. It’s about
answering questions like:
• How much risk am I willing to take?
• Should I invest more in stocks or bonds?
• How do I adjust my investments as markets change?
Key Elements of Portfolio Management
1. Diversification – “Don’t put all your eggs in one basket.” Spread investments to
reduce risk.
2. Risk-Return Balance – Aim for the best possible return without taking on more risk
than you can handle.
3. Continuous Monitoring – Markets change, so portfolios must be reviewed and
adjusted regularly.
4. Goal Orientation – Portfolios are built around investor goals (retirement, education,
wealth growth, etc.).
Example: A young investor might prefer more stocks (higher risk, higher return), while a
retiree may prefer bonds (lower risk, stable income).
Types of Portfolio Management
1. Active Portfolio Management – Constantly buying and selling to beat the market.
2. Passive Portfolio Management – Investing in index funds or stable assets, aiming to
match the market.
3. Discretionary Portfolio Management – A professional manager makes all decisions
for the investor.
4. Non-Discretionary Portfolio Management – The manager only advises; the investor
makes the final call.
What is a Mutual Fund?
Easy2Siksha.com
Now, let’s shift gears. A mutual fund is like a ready-made portfolio managed by
professionals. Instead of you picking individual stocks or bonds, you invest in a fund, and the
fund manager does the work. Your money is pooled with other investors, and the manager
invests it across different securities.
Features of Mutual Funds
• Managed by professionals.
• Pooling of money from many investors.
• Diversification built-in.
• Easy to access (you can buy units like shares).
Example: If you invest ₹10,000 in a mutual fund, your money is combined with thousands of
others, and the fund manager invests it in a mix of stocks and bonds. You own “units” of the
fund, and your returns depend on how the overall fund performs.
Differences Between Portfolio Management and Mutual Funds
Let’s compare them side by side to make it crystal clear:
Aspect
Portfolio Management
Mutual Fund
Control
Customized to individual investor’s
needs; investor may have direct say
Standardized; managed by fund
managers for all investors
Investment
Style
Tailor-made portfolios (stocks,
bonds, real estate, etc.)
Predefined schemes (equity
funds, debt funds, hybrid funds)
Risk
Depends on investor’s choices and
manager’s strategy
Risk spread across many
investors; relatively lower
Cost
Higher fees (especially for
discretionary management)
Lower cost compared to
personalized portfolio services
Accessibility
Usually for high-net-worth
individuals
Open to all investors, even with
small amounts
Flexibility
Highly flexible; portfolio can be
adjusted anytime
Limited flexibility; investors
choose from available schemes
Transparency
Investor sees exact holdings
Investors see fund performance,
not individual securities
Connecting the Two Concepts
Think of portfolio management as custom tailoring—a suit made exactly to your
measurements. Mutual funds are more like ready-made clothing—designed to fit most
people reasonably well. Both serve the purpose of investment, but one is highly
personalized while the other is standardized and accessible.
Final Takeaway
Easy2Siksha.com
• Portfolio management is about creating and managing a personalized mix of
investments to meet specific goals. It requires expertise, monitoring, and often
higher costs.
• Mutual funds are pooled investments managed by professionals, offering
diversification and accessibility to everyday investors.
In short: Portfolio management is best for those who want customized strategies and can
afford professional services, while mutual funds are ideal for regular investors who want
simplicity, diversification, and professional management without the hassle of making every
decision themselves.
SECTION-D
VII. Do you think that the eect of a combinaon of securies can bring about a balanced
porolio ? Discuss.
Ans: Understanding the Basic Idea
Imagine you have ₹10,000 to invest. You have two options:
• Put all your money into one company’s stock
• Or divide your money into different types of investments like stocks, bonds, mutual
funds, etc.
If you choose only one stock, your entire future depends on that single company. If it
performs well, great! But if it performs badly, you could lose a lot.
Now think about the second option—spreading your money across different investments.
Even if one investment performs poorly, others may perform well and balance your losses.
This simple idea is called combining securities, and the result is known as a balanced
portfolio.
What is a Balanced Portfolio?
A balanced portfolio means a mix of different financial securities (like stocks, bonds,
debentures, etc.) that helps:
• Reduce risk
• Maintain stable returns
• Protect your investment from big losses
Easy2Siksha.com
In short, it’s like “not putting all your eggs in one basket.”
Why Combining Securities Works
Let’s understand this through a real-life analogy.
Example: Food Plate
If your entire meal is only spicy food, it might upset your stomach. But if you combine:
• Spicy food
• Sweet dish
• Salad
• Roti
Your meal becomes balanced and enjoyable.
Similarly, in investments:
• Stocks = High risk, high return
• Bonds = Low risk, stable return
• Mutual funds = Moderate risk
When combined, they create a balanced financial “meal.”
Concept of Risk and Return
Every investment has two important aspects:
• Risk → Chance of losing money
• Return → Profit you earn
Now, here’s the interesting part:
Different securities behave differently under the same market conditions.
• When stock markets fall, bonds may remain stable
• When stocks rise, bonds may give lower returns
So, when you combine them, they offset each other’s risk.
This is the core idea behind a balanced portfolio.
Easy2Siksha.com
Diversification: The Key Principle
The technical term for combining securities is Diversification.
What does diversification do?
• Reduces overall risk
• Smoothens returns
• Protects against uncertainty
Example:
Suppose you invest:
• ₹5,000 in stocks
• ₹3,000 in bonds
• ₹2,000 in gold
If stocks fall, gold or bonds may rise, helping you avoid big losses.
This balance is the effect of combining securities.
Types of Risks Reduced
A combination of securities mainly reduces:
1. Unsystematic Risk (Company-specific risk)
• Example: A company performs badly
• Solution: Invest in multiple companies
2. Market Fluctuation Risk (to some extent)
• Different assets react differently to market changes
So, diversification helps in controlling these risks.
Role of Correlation
Here’s a simple but powerful idea:
• If two investments move in the same direction, risk remains high
• If they move in opposite directions, risk reduces
Easy2Siksha.com
This relationship is called correlation.
A balanced portfolio includes securities with low or negative correlation.
Advantages of a Balanced Portfolio
1. Risk Reduction
Loss in one investment is compensated by gains in another.
2. Stable Returns
You don’t face extreme ups and downs.
3. Better Financial Planning
Helps in achieving long-term goals safely.
4. Protection Against Uncertainty
Economic changes affect different assets differently.
Limitations (Important for Discussion)
Even though combining securities is beneficial, it has some limitations:
1. Cannot Eliminate All Risk
Market-wide risks (like recession) affect all securities.
2. Requires Knowledge
Choosing the right mix needs understanding of markets.
3. Over-diversification
Too many investments can reduce returns and make management difficult.
Final Conclusion (Answer to the Question)
Yes, the combination of securities can definitely bring about a balanced portfolio.
Easy2Siksha.com
By mixing different types of investments, an investor can:
• Reduce risk
• Achieve stable returns
• Protect against uncertainties
However, the key lies in proper selection and balance. Simply combining securities is not
enough—they must be carefully chosen based on risk, return, and correlation.
VIII. What do you mean by porolio management scheme ? What are the features of
porolio management scheme ?
Ans: What Do You Mean by Portfolio Management Scheme?
Imagine you have a significant amount of money to invest—say ₹25 lakhs. You want your
money to grow, but you don’t have the time or expertise to constantly track the stock
market, analyze companies, or rebalance your investments. This is where a Portfolio
Management Scheme (PMS) comes in.
A PMS is a professional service offered by financial institutions or portfolio managers. They
design and manage a customized portfolio of investments (like stocks, bonds, and other
securities) on behalf of the investor. Unlike mutual funds, which pool money from many
investors into one common portfolio, PMS creates a personalized portfolio tailored to your
financial goals, risk appetite, and preferences.
In short: PMS is a tailor-made investment service where experts manage your money
individually, just like a personal financial coach.
Features of Portfolio Management Scheme
Let’s break down the key features of PMS in a way that feels intuitive:
1. Personalized Investment Strategy
Unlike mutual funds, PMS doesn’t follow a “one-size-fits-all” approach. The portfolio
manager designs a unique investment plan for each client, based on their goals (wealth
creation, retirement planning, tax efficiency, etc.) and risk tolerance.
Example: A young investor may get a portfolio heavy in equities, while a retiree may get a
safer mix of bonds and dividend-paying stocks.
2. Professional Management
Easy2Siksha.com
Your money is managed by experienced professionals who analyze markets, study
companies, and make informed decisions. This saves you from the stress of daily
monitoring.
3. Transparency
PMS provides detailed reports about your portfolio—what stocks you own, how they’re
performing, and what changes are being made. You can see exactly where your money is
invested.
4. Flexibility
Investors can set preferences. For example, you may tell your manager to avoid certain
industries (like tobacco or gambling) or focus more on technology stocks. This flexibility
makes PMS highly customizable.
5. Ownership of Securities
In PMS, the securities are bought in your name. You directly own the shares, unlike mutual
funds where you own “units” of the pooled fund. This gives you more control and clarity.
6. Minimum Investment Requirement
PMS is usually meant for high-net-worth individuals (HNIs). In India, the minimum
investment is ₹50 lakhs. This makes it less accessible to small investors compared to mutual
funds.
7. Types of PMS
There are mainly two types:
• Discretionary PMS: The manager takes all decisions on your behalf.
• Non-Discretionary PMS: The manager advises, but you make the final call.
8. Risk and Return
Since PMS portfolios are customized, they can be riskier than mutual funds. But they also
have the potential for higher returns because managers can take concentrated positions in
promising stocks.
9. Regulation
In India, PMS is regulated by SEBI (Securities and Exchange Board of India). This ensures
investor protection and transparency.
10. Cost Structure
PMS usually charges higher fees compared to mutual funds. Fees may include:
Easy2Siksha.com
• Management fee (fixed percentage of assets).
• Performance fee (based on profits earned).
Example to Make It Relatable
Think of PMS like hiring a personal chef. Instead of eating from a buffet (mutual fund), you
tell the chef your tastes, allergies, and preferences. The chef then prepares meals just for
you. Similarly, in PMS, the portfolio manager designs an investment plan specifically for your
financial appetite.
Final Takeaway
• Portfolio Management Scheme (PMS) is a professional service where experts
manage an investor’s portfolio individually.
• It is personalized, transparent, flexible, and professionally managed, but requires a
high minimum investment and comes with higher costs.
• PMS is ideal for high-net-worth individuals who want customized strategies and
direct ownership of securities.
In short: PMS is like a tailor-made suit—designed to fit your exact needs, while mutual funds
are more like ready-made clothing, suitable for the masses.
“This paper has been carefully prepared for educaonal purposes. If you noce any
mistakes or have suggesons, feel free to share your feedback.”
