Indian Economy Is Considered Finance Essay - Free Essay Example

Sample details Pages: 17 Words: 5173 Downloads: 8 Date added: 2017/06/26 Category Finance Essay Type Argumentative essay Did you like this example? Avadhani highlighted that after getting a success of mutual fund in portfolio management, brokers and investment consultants were professionally qualified to become portfolio managers in India. Portfolio management are define as, It is rare to find investors investing their entire savings in a single security. Instead, they tend to invest in a group of securities. Don’t waste time! Our writers will create an original "Indian Economy Is Considered Finance Essay" essay for you Create order Such a group of securities is called portfolio management (S. Kevin, 2006 pg.1). Portfolio Management Services completely supervised by the regulator of capital markets, SEBI (The Securities Exchange Board of India) rules (Avadhani, 2009). SEBI is a regulatory body in India. SEBI ensures that the securities market is fraud free market and therefore the main objective of SEBI is to verify that investors money is safe (Avadhani, 2009). In India, for holding a portfolio in Portfolio Management Services Company a minimum amount limitation is 5 lakhs ($ 0.5 million) until 1st march 2012 but now its increased by 25 lakhs ($ 2.5 million) that could be a massive amount for any of the middle class person (Official website of SEBI). There are numerous providers who offer a portfolio management service for example, Birla AMC, HSBC AMC, and Reliance AMC. Each company has minimum amount requirement for providing a portfolio management service like Birla AMC has minimum requirement is as Rs. 25 lakh ($ 2.5 million) While, HSBC AMC has minimum requirement is as 50 Lakh ($ 5 million) and Reliance AMC has minimum requirement is as Rs. 1 Crore ($10 million) (Beniwal, 2009). However, Arora (2006) conducted a study and she found that still in Indian capital market, wealth management and portfolio management services type of businesses are less preferable in compare to mutual fund. Today, Most of the Global consultants and experience d players like Citibank, Standard Chartered, and HSBC are aggressively attempting to capture Indian financial market. On the other side, most of the Indian banks and companies like; HDFC banks, Reliance, Axis bank, and Kotak have started to compete with them to acquire market share (Arora, 2006). The aim of this dissertation is a compare two-wealth management companies in context of offering a portfolio management services. This study selected two companies on the basis of the domestic company (Reliance Capital Ltd.) and the foreign company (HSBC Global asset under management Ltd.) in India during 2009 to 2011. Reliance Capital Ltd. is an Indias leading and fastest growing private sector. From February 2007 Reliance Capital Ltd. started an offering a portfolio management services in India. (Official website, Reliance capital ltd, 2008). While, HSBC Global asset under management Ltd. is one of the worlds largest bank and financial services organization in the world. In India, HSBC started offering portfolio management services business from 27th March 2006 (official website of HSBC Global asset management Ltd.). This dissertation will going to analyse that how the foreign company is different from the domestic company in terms of return of the portfolios, overall investment in PMS business and financial performance of the companies. This paper consists of the following sections, Chapter 1 introduces the main topics and principles of the paper. Chapter 2 reviews the literature gathered by researcher of the portfolio management. Chapter 3 states the research questions and the methodology used in this study. Chapter 4 presents findings from the secondary data analysis process. Chapter 5 provides in-depth discussions of the findings along with literature reviews; this chapter provide answers to the research questions posed in chapter 3. Chapter 6 is the final chapter, which concludes and provides recommendations for further research. CCHAPTER: 2 LITREATURE REVIEW 2.1 Introduction Since 1991, the Indian financial markets especially within the capital markets have gone through important changes. Indian capital market, institutional investments, derivatives and market intermediation has been affected from these changes (Arora, 2006). According to The Investment Commission (2008) Indian financial market is worlds third largest capitalist base within the world. Moreover, it has also saw rise in private sectors such as; foreign banks, insurance companies, mutual funds, venture capital and investment institutions. Today, in India there are 10,000 listed companies, 10,000 brokers, 500 foreign institutional investors, 150 merchant bankers, 400 depository participant, 40 mutual funds offering over 450 schemes, and 20 million investors across 23 stock exchanges (Millstein et.al 2005). In India, there are two main stock exchanges; one is Bombay stock exchange (BSE) and other is National stock exchange (NSE) and the rest of 21 are Regional stock exchanges. (The Investment Commission, 2008). However, Avadhani (2009) stated that after the success in mutual fund Indian investors are attracting to portfolio management services. This paper will use the term Portfolio management service, Return on offering portfolio, overall investment in PMS business and financial performance of Reliance and HSBC companies for offering a PMS. This literatures review is aimed to clear the concept of the Portfolio management services and what are the other factors that need to be considered for having a portfolio management service in India. Moreover, this section will give a brief idea that how to measure a financial performance of the investment companies. It will be helpful for investors, before making an investment decision in any particular investment company or investment bank. Finally the methodology applied when assessing a company. 2.2 Wealth Management Services in India An all-inclusive service to optimize, protect and mange the financial goal of an individual, household, or corporate. (Dun and Bradstreet, 2009, pg.2). A wealth management service is a relationship between client and wealth manager, in this relationship, the manager is taking care of the entire customers needs of his financial life (Jain and Jhala, 2012). Wealth management is perfect conceptualized as platform where, the wealth manager provides various services and products to his client (Dun and Bradstreet, 2009). However, Indian investors are looked wealth managers as trusted advisors rather than money manager (Dun and Bradstreet, 2007). It creates a challenge for the wealth managers in contexts of mixing all aspects of a customers financial life into a one umbrella right from estate getting to insurance. The approach, elements and intricacies however vary from every advisor during this area (Mody, 2007). Wealth management may be defined as four parts. Its involves analysis of the customers financial resources effectively to reach financial goals, helping to accomplish financial freedom, preserving the clients wealthy state and reaching this state (Dun and Bradstreet wealth management, 2009). However, Cooper and Worsham (2004) suggested that, the wealth manager needs all the background of his clients fiscal life as well as he needs all the full information regarding his nonfinancial goals, hopes preferences, values, needs, attitudes and fears of the client. Hence, Wealth management service is an on going process that involves keeping track of the clients desire and goals to create a portfolio for the customer and regularly monitoring and analysing the performance of the portfolio and investment (Dun and Bradstreet, 2009). 2.3 Growth of Wealth Management in India According to Gokhale et.al (2011), With a GDP growth rate hovering around the 9% mark and a strong future outlook, Indias growth story is associate more and more enticing marketplace for wealth management companies. In 2010, assets under wealth management for wealth sector (Mutual fund, Fixed Income, Equity) in India was USD 220 Billion which is expected to grow at around 33% YOY (year over year) over USD 502 Billion by 2013 (Doshi, 2011). Following chart clearly shows that from 2009 to 2012 growth of assets under wealth management is increasing gradually. Figure: 2.3.1 Growth of Asset under wealth management in year 2009-2013 (India) Source: Northbridge Capital Research Northbridge capital Research also expecting that, in 2013 a growth of asset under management will increase around 502 USD Billions (Doshi, 2011). Also, the individual wealth in India is increasing accordingly in 2009 in USD trillion it was 1.59, in 2010 it was 2 USD trillion, in 2011 it was 2.52 USD trillion and now in 2012-2013 it will around 3.18 USD trillion (Doshi, 2011). While according to Gokhale et.al (2011), still the proportion of wealthy individuals in India is very small as compared to developed markets. Moreover, according to Press trust of India (2008), in 2012 India will have one trillion dollars worth investable wealth. Also, Press trust of India mentioned that Indian wealth market would have a target size of 42 million households by 2012, as against just about 13 million in 2007. However, it is believed that growing and developing the wealth of client is an art (Unicon, 2010). To fulfil investors desire wealth management companies are offering a portfolio management services (Arora, 2006). Portfolio management service is sophisticated investment vehicles, which provide customizing investing into stocks, mutual fund, fixed deposited income, real estate, bond, unit trusts, guilt and future contract or other financial instruments to meet the particular investment objective (Unicon, 2010). All financial decision regarding portfolio like when to buy, what to buy, when to sell and what to sell etc. all these decisions are a form of management, called wealth management (Arora, 2006). However, for this research paper, it is necessary to understand that what is portfolio management theory and how it is applied in India. 2.5 The portfolio management theory To understand the portfolio management service in India, it is important that to understand that what is portfolio management theory. Markowitz introduces a Modern portfolio theory in 1952. Markowitz gave a small adage that, dont put all of your eggs in one basket from this adage he gave idea about diversify portfolio to world (Shipway, 2009). Markowitz (1952) highlighted that; the number of securities that investors own is doesnt matter but the correlation of those securities with each other that matters. Chhabra (2005) give a way of developing portfolios. He says that the optimum way to build a portfolio is to combine different assets classes. The construction of the portfolio is highly depends on the market risk, return and on the correlations of the asset classes (Chhabra, 2005). https://www.fxwords.com/images/words/efficient_frontier.JPG Source: fxwords.com Figure 2.5.1 Efficient Frontier When optimal portfolios, mapped on the risk-return plane, that form a curve called as the efficient frontier(Chhabra, 2005). Figure 2.5.1 illustrates the Markowitzs efficient frontier. However, from efficient frontier investors could select their preferred portfolio on the bases of individual risk return preferences. (Elton Gruber, 1997). To select Every investor finds the suitable point on this line based on his personal utility function, this helps in determining an optimum allocation between different asset classes like stocks, bonds, and cash (Chhabra, 2005). In order to achieve a really diversified portfolio, one should also diversify within each and every asset classes. For example: equity portfolios should be composed of a large number of minimally correlated stocks, bonds should be diversified in both across maturities and credit ratings (Chhabra, 2005). According to Markowitz (1952), diversification is helps in minimizing a non-systematic risk and diversification combined with the use of a utility function provides the investor with the right balance between risk and return in his portfolio. According to Merton (1987) to get advantages of diversification for decreasing risk is rely on the degree of statistical interdependence in between returns on available investments. However, it is also true that, across the world there are vast numbers of investors who are not well diversified. Zweig (1998) suggests that, it is easier to talk about constructing a diversified portfolio than to actually build one. This neglect of diversification is seen across all client segments, as well as affluent clients who have access to financial advisors, financially sophisticated investors, and participants of employer-sponsored retirement plans (CJoetzmann and Kumar, 2003). Although, what happens if investors dont have a well diversified portfolio? According to Chhabra (2005) because of the risk of undiversified portfolio, thousands of investors have been suffered within the Internet bubble with irrational exuberance. Several of their investments became worthless, as their technology pro portfolios sustained serious losses and never recovered (Shiller, 2001). The requirement of the individual investors is to impose totally different consideration rather than the averages of the market (Brunei, 2003). Kahneman and Tversky (1979) argue that approach of the efficient frontier is a fundamentally unsatisfactory because efficient frontier is using a market risk but its not thought for their impact on portfolio holder. They also stated that it is hard to identified a personal utility functions and have well documented flaws. 2.6 Risk management According to Chhabra (2005), in the ideal framework, risk is outlined as the volatility of the underlying portfolio because volatility is significant measure of market risk. Which is helpful to identify fluctuation in price of the portfolio for a specific period of time (Chhabra, 2005). However, modern portfolio theory have been giving a description of market risks but the same importance has not been given to the issues of personal risks (Fabozzi et. al. 2002). However, In Arora (2006) cited a work of Roy (1952) mentioned a particular importance on the safety first within the context of portfolio diversification. In last few decades, changes in the financial markets in the form of the options, principal protected funds and convertible bonds, has allowed to construct a portfolio with different individual risk tolerances (Chhabra, 2005). An ideal portfolio must be able to answer the following three very different dimensions of risk such as: personal risk, market risk and aspirational risk (Chhabra, 2005). Sources: Chhabra, 2005. Figure 2.6.1: Risk Dimensions Figure 2.6.1 shows three different dimensions of risks. Personal Risk: Investors must protect himself from personal risk. This means to protect himself from anxiety regarding a dramatic decrease in his lifestyle (Chhabra and Zaharoff, 2001). Market Risk: Investors need to take on market risk, in order to grow with his wealth segment and maintain his lifestyle. (Chhabra, 2001 cited work of Sharpe et al. 1998). Aspirational Risk: investors could take on aspirational risk if he desires to break away from his wealth segment and enhance his lifestyle (Chhabra, 2005). Modern Portfolio Theory identifies only the market risk and seeks to minimize it by optimal asset allocation (Chhabra, 2005). One of the most important decisions that a manager or an advisor needs to make is to allocate funds across different asset classes as asset allocation decision dictates the overall exposure to different systematic market risks and helps to reducing it in a certain extent (Mody, 2007 cited work of Bein and Wander, 2002). According to Chhabra (2005), personal risk, market risk and aspirational risk are helps in allocating risk in various different asset buckets. This is known as Risk Allocation. He also suggests that, it is important to enlighten the investor about the importance of risk as well as asset allocation in their portfolio. 2.7 Asset Allocation: An asset allocation service or a financial planner chooses the proportions of the assets in each asset class on the basis of the circumstances of the particular investor. This process is known as Asset allocation. By (Nuttall, 2000, pg.7) Brinson et al (1991) for example claim that around 91% of most portfolio returns can be relay on the asset allocation of the portfolio. The investor is often suggested that to get a comprehensive financial plan to address cash flow, estate planning, and other issues (Arora, 2006). The asset allocation process involves of concentrated stock positions and their diversification and readjustment of the asset allocation based on investors risk tolerance to minimize market risk (Chabbra, 2005). However, Arora (2006) stated in her study that, in Dynamic Asset allocation technique only considers the market portfolio (investment assets) while all assets and liabilities are ignored. According to Brentani (2004), At the point of asset allocation decision, the investor or fund manager must have to decide that what mix of assets will provide a balance risk and return portfolio. He also stated that, in assets allocation theory, High-risk assets allocation means the greatest long-term returns while low risk asset allocation means lower returns. In dynamic assets allocation strategy, when the market is rising and selling them if the market go falls so as to maintain the value of a portfolio at a particular level whereas maintaining the potential for higher returns (Modi, 2007). This technique of assets allocation is called as a portfolio insurance, or hedging (Brentani, 2004). There are various assets allocation strategies used by portfolio managers such as; Strategic Asset Allocation, Constant Weighting Asset Allocation, Tactical Asset Allocation, Dynamic Asset Allocation, Insured Asset Allocation, Integrated Asset Allocation (Mody, 2007). However, Brentani, (2004) stated that, which assets allocation should undertake at a fund Management Company would be largely depend on the culture of that company. Mody, (2007) cited work of Bergen, (2004) says that the all strategies of assets allocations are only general guidelines on how investors may use asset allocation as part of their core strategies; and choosing a single asset allocation strategy or a combination of the any two strategies of assets allocation is dependent on the investors goals, age, market expectations and risk tolerance. 2.8 Classification of Assets allocation Under the wealth allocation framework, each the asset types and also the role it plays within the portfolio determine the location of every asset into one of the three different risk buckets (Chhabra, 2005). Therefore, as rightly pointed out by the author, the same asset may be a part of different buckets for various individuals (Mody, 2007). An important purpose illustrated by Chhabra (2005) is that under this framework, the portfolio can often be mean variance inefficient that is, off the efficient frontier. FIGURE 2.8.1 Asset Classifications for Each Risk Bucket. Personal Risk Market Risk Aspirational Risk Protective assets Market Assets Aspirational assets Cash Equities Alternative Investments Home Purchase Fixed Income Investment real Estate Home Mortgage Cash (Reserved for Opportunistic Investments) Investment Concentration Safe Investments Strategic Investments Small Business Principal Protected Funds Concentrated Stock and Stock option positions Annuities to provide safe source of income Hedging Insurance Human Capital Source: Chhabra, A B (2005), Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors, The Journal of Wealth Management, Spring 2005, p. 11. As table 2.8.1 shows that, securities that provide some degree of principal protection take place within the personal risk category (Chhabra, 2005). For examples, cash, short Term government backed treasury bonds, inflation indexed bonds, principal protected funds, annuities of certain kinds and risk management instruments and strategies. Such financial instruments are a part of this personal risk category because they protect the value of the principal and are conservative investments, which help sustain the basic standard of living (Chhabra, 2005). Conventional securities are place within the market risk bucket, since they follow the market. For example, fund of hedge funds, commodities etc. belong to this category since they imitate the market risk return pattern. Executive stock options, concentrated stock positions, single manager hedge funds, leveraged investment real estate and call options are examples of investments which are placed in the aspirational risk bucket since thes e investments give an opportunity to significantly enhance capital and provide greater returns (Chhabra, 2005). On other hand, the wealth allocation framework recognizes three very different risk dimensions and seeks to optimize all three of them simultaneously (Chhabra, 2005). 2.8 Limitations of Portfolio Management Theory According to Curtis (2004), there are many issues in modern portfolio theory, especially when its applied to portfolio management services. Curtis (2004) also mentions that, modern portfolio theory is theoretical description of how capital markets operate but not a process for constructs investment portfolios. Modern portfolio theory assumes that all investors are always rational wealth maximizes, which is clearly incorrect because there are numerous events that occur that dont fall into the principles governed by the Modern Portfolio Theory, however are governed by totally different rules and can be understood solely by reference to totally different theories (Curtis, 2004). The Modern Portfolio Theory solely acknowledges market risk and seeks to minimize it by diversification. It does not incorporate safety and aspiration (Lopes and Oden, 1999). Due to these issues, when financial managers attempt to communicate with their clients about their portfolios using Modern portfolio const ructs, communication largely ceases (Curtis, 2004). 2.9 Portfolio Management Service in India From official website of SEBI, it is known that, portfolio management service was introduced on 7th January 1993 as formal investment vehicle in India. Before 1993 it was unregulated activity. With in one year SEBI highlighted importance of Portfolio management service in the Indian capital Market. In the year 2000, ICICI (Industrial Credit and Investment Corporation of India) was the first financial institutional participated to offer a portfolio service (from Citrus interactive official website). According to SEBI (official website), discretionary PMS product has declined by 40% while non-discretionary PMS product has rise by 26% until December 2010 to December 2011. In April 2012, total AUM of the portfolio management service industry has rise by 14.5 %. From the official website of the SEBI, Portfolio management service can be classified by three categories; Discretionary PMS, Non-discretionary PMS and advisory PMS. In Discretionary PMS, Portfolio manager is the one who take all the decision regarding the portfolio, In Non-discretionary PMS, portfolio manager is managing his clients portfolio according to his clients guidelines, and Finally, in advisory PMS, portfolio manager only suggests his investment suggestion to his client (Beniwal, 2009). In India, only AMCs (Asset Management Companies), Brokerage houses, Independent experts can offer a portfolio management service (Beniwal, 2009). To have portfolio management services investors need to know that how to measure a performance of that particular companies portfolio manager and portfolio. 2.10 Measure a portfolio performance According to Brentani (2004) to measure a portfolio performance, measuring a risk of the portfolio is important aspect. Sharpe (1966) introduced a measure for risk adjusted of investments performance that is known as sharp ratio. Sharp ratio is a famous to evaluate portfolio managers in the investment management industry (Bailey et.al 2012). According to Brentani (2004) sharp ratio is useful an estimate of total risk of portfolio to calculate an excess return to volatility. Higher a sharp ratio shows higher value of the particular portfolio. Another measurement to evaluate a performance of the portfolio managers is information ratio. Brentani (2004) stated that information ratio can be defined as the differences between the return of portfolio and selected a benchmark, divided by the tracking error. According to Blatt (2004) information ratio is useful for investors to determine that whether to hire or fire their portfolio managers. Moreover, Clark (2003) stated that information rati os shows that managed portfolio are beat a benchmark or not. Moreover, Grinold and Kahn (1995) stated that information ratio with 0.5 is good, with 0.75 is very good and with 1.00 is exceptional. Usually portfolio managers are trying to achieve a 1.00 information ratio. However, Clark (2003) also stated that information ratio can only tells that portfolio beat benchmark but it cannot say that why and how portfolio failed or not beat benchmark. 2.11 Introduction of Stock Exchange in India According to Bhatia (2009), stock exchange is a destination where the buyers and sellers meet to trade in shares in an organized manner. BSE (Bombay stock exchange) and NSE (National stock exchange) are the main stock exchanges of India. Also there are 21 Regional stock exchanges in India (The Investment Commission, 2008). 2.11.1 BSE (Bombay stock exchange) BSE was established in 1875 and also Asias first stock exchange and one of Indias leading exchanges groups. For 137 years, BSE has facilitated the growth of Indian corporate sector by giving it an efficient capital-raising platform. BSE offers an efficient and transparent place for trading in equity, debt, instruments, derivatives, and mutual funds. In BSE stock exchange, 5000 companies are listed which make BSE worlds No.1 exchange in terms of listed members. Total market capitalization of BSE is in USD Trillion 1.06 as of May 15, 2012. Also BSE is worlds fifth most active exchange in terms of number of transactions handled through its electronic trading system. In addition to that, BSE is also one of the worlds leading exchanges for index options trading. SENSEX is the most popular equity index and widely tracked stock market benchmark index of the BSE. It is traded internationally on the EUREX (European Derivatives Exchange Market) as well as In BRCS nations (Brazil, Russia, China and South Africa). (Sources: Bombay Stock Exchange official website). 2.11.2 NSE (National Stock Exchange) NSE was integrated as a tax paying company in November 1992. In 1993, NSE was given the status of a stock exchange under the act of 1956 securities contract (Regulations). In 1994, NSE began operations in the Wholesale debt Market (WDM) and also in the same year NSE began operation in Capital Market (Equity). In 1996, NSE was the first exchange in India to trade derivatives specifically on an equity index. NSE also has online trading system. Today the NSE is deals with online examinations and award certification. NSE has his all Comprising branches in all over India (official website NSE). NSE was introduced Indias first clearing corporation (National Securities Clearing Corporation Ltd.) and Indias first depository (National Securities Depository Ltd.). National Stock Exchange (NSE) is the worlds third largest exchange in the world. The NSE provides a platform for securities exchange from last 14 years. NSE mainly deals with equity, corporate debt, certificate of deposit, commercial paper, and central and state government securities. Owner of diverse financial and insurance establishment, NSE can be mainly divided into three segments: Wholesale debt, capital market (automatic screen-based dealing system), Futures and options (derivatives). IISL (Indian Index Services and Products Ltd.) Index service firm established by NSE. Also, there are various opened stock indices, including: SP CNX nifty, CNX Nifty Junior, CNX 100 (this is the total of SP CNX Nifty and CNX Nifty Junior), SP CNX 500 (this is equal to CNX 100 plus 400 major players across 72 industries), CNX Midcap (this replaced CNX Midcap 200 on 18 July 2005), SP CNX Defty, CNX IT, Bank IT (Sharma, 2008). 2.11.3. Stock Indices and their Returns during the 2009 to 2011 BSE (Bombay stock exchange) and NSE (National stock exchange) are the main stock exchanges of India (The Investment Commission, 2008). BSE Sensex index is the indicator of the health of Indian stock market. BSE Sensex is closely followed by a number of investors, promoters, market experts, brokers and several other stakeholders in India as well as in the world. BSE Sensex is an index of equity shares of Indias top 30 companies, which representing 12 major sectors in India. It is also believes that, from the movement of Sensex one can relatively know the strength and weakness of the BSE stock exchange (Vadlalmudi, 2009). However, there are others major index which is playing an significant role in BSE stock exchange such as BSE 500 and BSE Midcap. BSE 500 index has nearly 93% of the total market capitalization on BSE and its covers almost 20 major industries of the economy. BSE Midcap index is helpful to track the performance of the companies with relatively smaller market capitalizat ion (Official website of the BSE). In the National Stock Exchange of India, SP CNX Nifty index is a free float market capitalization index and it is the leading index for large companies (website: Bloomberg, 2013). However, SP CNX Nifty has a well-diversified 50 stock index accounting for 23 sectors of the Indian economy. SP CNX Nifty is useful for a various purposes such as benchmarking fund portfolios, index funds and index-based derivatives. SP CNX Nifty is main indicator of the NSE stock exchange (Chakrapani et.al 2011). Table 2.4.1 will shows that what was the overall return of the BSE Sensex, BSE 500, BSE Midcap and CP CNX Nifty in year 2009 to 2011. These are the Major indexes of the Indian stock markets. Stock Indices and their Returns Year BSE 500 BSE Midcap SP CNX NIFTY BSE SENSEX 2009 96.38% 130.23% 73.75% 80.53% 2010 7.48% 0.99% 11.10% 10.90% 2011 -9.11% -7.67% -9.20% -10.50% Table: 2.12.3.1 Stock Indices and their Return Source: From the official website of the SEBI (The Securities Exchange Board of India) by Annual reports of SEBI 2009 to 2011. 2.12 Financial analyzing by financial ratios Financial statements and different financial information are helpful for investors to evaluate a companys financial growth and performance (Way and Media, 2007). There are various tools for analyzing a financial performance of the companies. Investors are using financial ratios to measure a companys financial performance before creating an investment. Financial ratios reveal how a company is financed, how they used its resources, its ability to pay its debts and its ability to get profit. Ratios offer a glimpse of a companys position at a selected time, and are most helpful in comparison across a time periods and when comparing a same companies in the same sector (Robert et.al, 2007). According to James and Media, (2007) financial ratios highly useful to judge companies Profitability, Efficiency and Liquidity ratios. Profitability ratios are useful to know the profit earning capacity of the company for the sake of clear understanding (Rao, 2007). There are various ratios, which are used to measure the profitability of the company such as; Gross profit margin, Operating profit margin, Net profit margin, Cash flow margin, Return on Equity, Return on Asset, Return on Capital Employed etc. (Lopes, 2010). Inventory ratio, Cost of goods Sold, Fixed asset and turnover ratios are the major ratios of the efficiency ratios (Vp, 2010). All the above ratios are helpful to measure a companys performance. These ratios are also useful to compare two companies financial performance. However, for investment companies, only few ratios are usable for measure their financial performance, which is discussed in next part of this chapter. 2.14 Financial ratios for investment companies According to Damodaran (2009), financial services firms are different from non-financial firm. He also mentioned that PMSs main income comes from management and sales fees. There are various ratios that are used in investment companies. For example, ROE (return on equity), ROCE (return on capital employed), Sharp ratio, P/E ratio (price earning ratio), ROA (Return on Asset) and Earing price ratio etc. Stiroh and Rumble (2005) conducted a study in USA for financial holding companies in that study they used Return on Equity and Return on Asset for knowing a profitability. Mahajan et. al (2012) said in there study that ROE reflects that how well banks management is using the banks real investment resources to generate profits for their shareholders. Raza (2011) conducted a study in his study he used financial ratios like ROE and ROCE, Capital per share and Earning per share to compare seven investment banks in Pakistan for time period 2006 to 2009. 2.15 Return on Equity (ROE) and Return on Capital Employed (ROCE) Adams and Scott (2009) stated that ROE calculates how much money an investment company can create from what shareholders have invested in it. There are many analysts regard the ROE as the most important financial ratio for investors because ROE ratio is the most meaningful measurement about management performance (Bhm, 2008). Ahsan (2012) cited a work of (Rappaport, 1986), ROE is famous among investors because its links the income statement to the balance sheet. (Net profit/ Shareholders equity). According to Bhm (2008) stated that a higher a ROE indicates that company is more efficient to generate a profit. However, there is another ratio, which is also helpful to know the profitability of the company that is ROCE. This ratio is useful to measure profitability and it will show that how well the business is utilising its capital to generate a profit. However, there is basic difference between ROE and ROCE, in ROE net profit is after interest but before taxation while in ROCE net profit is before interest and taxation calculated (Shoesmith, 2004). In magazine of Outlook Profit (2008) it is stated that ROCE is not only useful to measure a profitability of the business but it also gives an clear picture that how good the management is in managing their capital. It also stated that high ROCE is a sign of successful growth of the company. To analysis of two Wealth Management Companies, in terms of providing a portfolio management service, not only depends on return of the particular offering portfolio. It also contents other factors like financial performance of that company, risk management, growth of overall investment in PMS business, tax saving, advisory fees, stock market value etc. However, next step of this study is research methodology, which is playing an important role of the any research. CCHAPTER: 3 Research Methodology CCHAPTER: 4 FINDINGS CCHAPTER: 5 DISSCUSSION