Page 253 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes
Table 12.1
Securities Returns

1. Call Money Average returns 15%
2. Bills 13 to 14%
3. Treasury Bills 10%
4. Govt. Bonds 11.5%
5. Public Sector Bonds 13%

6. Company Debentures 15% to 16.5% (yield to maturity)
7. Dividend/Return on equity shares 2-3%
8. Capital Gains Uncertain

The expected returns from a mutual fund are higher than what is provided by bills, treasury bills,
government or PS bonds. Hence mutual funds concentrate on NCDs, equities and to some extent,
call money, which provide good returns along with liquidity. While buying these securities, the
fund manager takes into consideration the following norms for each kind of security.

Non-convertible Debentures

1. Asset Cover or Security Cover: A company must maintain a minimum asset cover. This
cover is calculated on the basis of secured borrowings and debentures charged to fixed
assets, whereby fixed assets should be in general more than one time of the total such
existing borrowings and debentures secured by equitable mortgage on fixed assets. The
movable fixed assets are generally excluded from the calculations.

2. Interest Cover: PBIDT (profit before interest, depreciation and taxes) should be around
two times the existing interest liability plus the interest liability on the proposed
debentures so as to protect the payment of interest on the debentures. This cover is to be
calculated on the basis of the average of the preceding three years profit figures.
3. Company must have paid dividend for the last three or minimum two preceding years.

4. Net worth of the company should be around `1 crore.
Small variations in the above norms are accepted provided the company is otherwise very
sound and the rate of return is higher than normal.

12.6.1 Portfolio Revision

There are two broad aspects of portfolio management, namely, effective investment planning
and constant review and revision of investment.
Constant review and revision of investment requires:

1. Continuous monitoring of the quality management of the companies in which investment
has already been made.
2. Continuous financial analysis and trend analysis of the companies’ balance sheets/profit
and loss account to choose sound companies and off-load investment made in companies
where the performance is slackening.
3. Continuous analysis of the securities market trends.

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