As the various avenues for better returns in India are slowly dwindling due to various global scenarios as well as due to domestic government policies, more and more people are turning towards stock market for better returns. This poses a challenge to the fund managers when they have to construct a portfolio, which maximizes return and minimizes risk. This has become more and more challenging in the recent years as the investors are also becoming more knowledgeable. Timely and correct investment decision on the part of the investor requires an in-depth knowledge of the stock that he intends to procure and the theories behind portfolio management. This chapter mainly focuses on construction of an optimal portfolio comprising of top pharmaceutical companies and FMCG companies in India. Sharpe ratio return analysis is the tool that is used to construct the optimal portfolio. Monthly returns data of last 10 years of the said companies are regressed against monthly return data of Nifty for better comparison.
TopIntroduction
We Indians have a very high propensity towards saving money rather than investing. There is a stark difference between Investing and Saving. When a part of income is put in a safe place, where it is considered to be risk-free, for example money deposited in a saving bank account, it is called saving. But the money does not grow in value over time. But when the money is put at work where it grows in value over time and generates higher return than normal, it is called investing. Investing involves committing ones money to a financial product involving risk proportion to expected returns. Portfolio management requires both emotional as well as analytical intelligence. It also involves matching goals to investment, allocating assets for institutions and individuals and having the right balance between and risk and return. Management of portfolio is the determination of opportunities and strengths, threats and weaknesses, involved in debt equity ratio, international or domestic, safety vs. growth and many such choices that are to be taken to achieve the maximum return for a risk level.
Individual securities and assets bundled and combined together form a portfolio. Normative approach is provided by the portfolio theory to investors who then take a decision to make their investment in assets or securities under risk. Investors are considered to be rational, and risk averse which means that the investors do not invest their all the wealth in few or single assets but they hold well diversified portfolios. If these risk-averse investors are offered additional risk premium, they are willing to include risky assets also. SIM was proposed by Sharpe. This model can help an investor to determine optimum portfolio within a class of assets. Markowitz has proposed MPT which takes into consideration many estimates. Single Index Model is an improvement over that Model. (Luskin, J. 2017) notes that historically when stocks are compared to bonds, the former contributes more return and volatility to portfolios. It is observed that optimum portfolio is chosen by a typical decision maker to maximise expected utility of his portfolio return (profit) (Thalheimer, R., & Ali, M. M., 1979).
Efficient diversification of investment portfolio has been done by Dr. Harry Markowitz by mainly using equity issues. If portfolio returns attain minimum variance along with expected rate of return desired by investor then it is known to be efficient diversification (Cheng, P. L., 1962). The author notes that there has been lot of focus exclusively on financial assets like corporate stocks in the recent research of investments (Bosch, J. C., 1986). Managing decisions are mostly made with in uncertain and risky environment. There are lot of reasons like existence of conflicting tendencies, lack of precise and complete information, unforeseen circumstances and so forth (Emelichev, V., Korotkov, V., & Nikulin, Y., 2014).