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INTRODUCTION
DEFINATION
NEED OF PORTFOLIO AND PORTFOLIO MANAGEMENT
GOALS OF PORTFOLIO MANAGEMENT
OBJECTIVE OF PORTFOLIO MANAGEMEBT
BASIC OBJECTVE
SUBSIDRY OBJECTIVE
SCOPE OF PORTFOLIO MANAGEMENT
STEPSOF PORTFOLIO MANAGEMENT
SEPECIFICATION OF INVESMENTS OBJECTIVES
AND CONSTRAINTS
SELECTION OF ASSET MIX
FORMULATION OF PORTFOLIO STRATEGY
SELESTION OF SECURITY
PORTFOLIO EXECUTION
PORTFOLIO REVISION
PORTFOLIO EVALUTION
ASPECTS OF PORTFOLIO MANAGEMENT
TYPES OF RISK IN PORTFOLIO MANAEMENT
SYSTEMATIC RISK
UNSYSTEMATIC RISK
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BIBLOGRAPHY
INTRODUCTION
As per definition of SEBI Portfolio means a collection of securities owned by an investor. It
represents the total holdings of securities belonging to any person". It comprises of different
types of assets and securities
In finance, a portfolio is an appropriate mix or collection of investments held by an institution or
an individual.
Holding a portfolio is a part of an investment and risk-limiting strategy called diversification. By
owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets
in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate,
futures contracts, production facilities, or any other item that is expected to retain its value.
In building up an investment portfolio a financial institution will typically conduct its own
investment analysis, whilst a private individual may make use of the services of a financial
advisor or a financial institution which offers portfolio management services.
Portfolio Management
Portfolio management refers to the management or administration of a portfolio of securities to
protect and enhance the value of the underlying investment. It is the management of various
securities (shares, bonds etc) and other assets (e.g. real estate), to meet specified investment
goals for the benefit of the investors. It helps to reduce risk without sacrificing returns. It
involves a proper investment decision with regards to what to buy and sell. It involves proper
money management. It is also known as Investment Management
Portfolio management involves deciding what assets to include in the portfolio, given the goals
of the portfolio owner and changing economic conditions. Selection involves deciding what
assets to purchase, how many to purchase, when to purchase them, and what assets to divest.
These decisions always involve some sort of performance measurement, most typically expected
return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the
return). Typically the expected return from portfolios of different asset bundles is compared.
The unique goals and circumstances of the investor must also be considered. Some investors are
more risk averse than others.
Mutual funds have developed particular techniques to optimize their portfolio holdings.
The art and science of making decisions about investment mix and policy, matching investments
to objectives, asset allocation for individuals and institutions, and balancing risk against
performance
.
Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice
of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs
encountered in the attempt to maximize return at a given appetite for risk.
Portfolio management involves maintaining a proper combination of securities which comprise
the investors portfolio in a manner that they give maximum return with minimum risk. This
requires framing of proper investment policy. Investment policy means formation of guidelines
for allocation of available funds among the various types of securities including variation in such
proportion under changing environment. This requires proper mix between different securities in
a manner that it can maximize the return with minimum risk to the investor. Broadly speaking
investors are those individuals who save money and invest in the market in order to get return
over it. They are not much educated, expert and they do not have time to carry out detailed study.
They have their business life, family life as well as social life and the time left out is very much
limited to study for investment purpose. On the other hand institutional investors are companies,
mutual funds, banks and insurance company who have surplus fund which needs to be invested
profitably. These investors have time and resources to carry out detailed research for the purpose
of investing.
DEFINATION
PORTFOLIO:
As per definition of SEBI Portfolio means a collection of securities owned by an investor.
It represents the total holdings of securities belonging to any person".
PORTFOLIO MANAGEMENT:
The process of managing the assets of a mutual fund, including choosing and
monitoring appropriate investments and allocating funds accordingly.
versus long-term; and across various markets, business arenas and technologies. Typical methods
used to reveal balance include bubble diagrams, histograms and pie charts.
3. Business Strategy Alignment
Ensure that the portfolio of projects reflects the companys product innovation strategy and that
the breakdown of spending aligns with the companys strategic priorities. The three main
approaches are: top-down (strategic buckets); bottom-up (effective gate keeping and decision
criteria) and top-down and bottom-up (strategic check).
4. Pipeline Balance
Obtain the right number of projects to achieve the best balance between the pipeline resource
demands and the resources available. The goal is to avoid pipeline gridlock (too many projects
with too few resources) at any given time. A typical approach is to use a rank ordered priority list
or a resource supply and demand assessment.
5. Sufficiency
Ensure the revenue (or profit) goals set out in the product innovation strategy are achievable
given the projects currently underway. Typically this is conducted via a financial analysis of the
pipelines potential future value.
review of economic and industry trends. Liquidity of the investment is most important, which
may not be neglected by any investor/portfolio manager.
An investment is to be liquid, it must has termination and marketable facility any time.
PROCESS/STEPS
OF PORTFOLIO
PORTFOLIO
PROCESS
/STEPS OF
MANAGEMENT
Specification of Investment objective and
Constraints
Selection of Asset Mixes
Selection of Asset Mix
Formulation of Portfolio Strategy
Formulation of Portfolio
Strategy
Selection of Securities
Selection of Securities
Portfolio Execution
Portfolio Execution
Portfolio Revision
Portfolio Revision
Portfolio Evaluation
1.
The first step in the portfolio management process is to specify the investment policy that
consists of investment objectives, constraints and preferences of investor. The investment
policy can be explained as follows:
Specification of investment objectives can be done in following two ways:
Maximize the expected rate of return, subject to the risk exposure being held within a
certain limit (the risk tolerance level).
Minimize the risk exposure, without sacrificing a certain expected rate of return (the
target rate of return).
An investor should start by defining how much risk he can bear or how much he can afford to
lose, rather than specifying how much money he wants to make. The risk he wants to bear
depends on two factors:
a) Financial situation
b) Temperament
To assess financial situation one must take into consideration position of the wealth, major
expenses, earning capacity, etc and a careful and realistic appraisal of the assets, expenses
and earnings forms a base to define the risk tolerance.
After appraisal of the financial situation assess the temperamental tolerance of risk. Risk
tolerance level is set either by ones financial situation or financial temperament whichever is
lower, so it is necessary to understand financial temperament objectively. One must realize
that risk tolerance cannot be defined too rigorously or precisely. For practical purposes it is
enough to define it as low, medium or high. This will serve as a valuable guide in taking an
investment decision. It will provide a useful perspective and will prevent from being a victim
of the waves and manias that tend to sweep the market from time to time.
Constraints and Preferences:
Liquidity:
Liquidity refers to the speed with which an asset can be sold, without suffering any loss
to its actual market price. For example, money market instruments are the most liquid
assets, whereas antiques are among the least liquid.
Investment horizon:
The investment horizon is the time when the investment or part of it is planned to
liquidate to meet a specific need. For example, the investment horizon for ten years to
fund the childs college education. The investment horizon has an important bearing on
the choice of assets.
Taxes:
The post tax return from an investment matters a lot. Tax considerations therefore have
an important bearing on investment decisions. So, it is very important to review the tax
shelters available and to incorporate the same in the investment decisions.
Regulations:
While individual investors are generally not constrained much by laws and regulations,
institutional investors have to conform to various regulations. For example, mutual funds
in India are not allowed to hold more than 10 percent of equity shares of a public limited
company.
Unique circumstances:
Almost every investor faces unique circumstances. For example, an endowment fund
may be prevented from investing in the securities of companies making alcoholic and
tobacco products.
2. SELECTION OF ASSET MIXES:
Based on the objectives and constraints, selection of assets is done. Selection of assets
refers to the amount of portfolio to be invested in each of the following asset categories:
Cash:
The first major economic asset that an individual plan to invest in is his or her own house.
Their savings are likely to be in the form of bank deposits and money market mutual fund
schemes. Referred to broadly as cash, these instruments have appeal, as they are safe
and liquid.
Bonds:
Bonds or debentures represent long-term debt instruments. They are generally of private
sector companies, public sector bonds, gilt-edged securities, RBI saving bonds, national
saving certificates, Kisan Vikas Patras, bank deposits, public provident fund, post office
savings, etc.
Stocks:
Stocks include equity shares and units/shares of equity schemes of mutual funds. It
includes income shares, growth shares, blue chip shares, etc.
Real estate:
The most important asset for individual investors is generally a residential house. In
addition to this, the more affluent investors are likely to be interested in other types of
real estate, like commercial property, agricultural land, semi-urban land, etc.
Precious objects and others:
Precious objects are items that are generally small in size but highly valuable in monetary
terms. It includes gold and silver, precious stones, art objects, etc. Other assets includes like
that of financial derivatives, insurance, etc.
3. FORMULATION OF PORTFOLIO STRATEGY:
After selection of asset mix, formulation of appropriate portfolio strategy is required. There
are two types of portfolio strategies, active portfolio strategy and passive portfolio strategy.
ACTIVE PORTFOLIO STRATEGY:
Most investment professionals follow an active portfolio strategy and aggressive investors
who strive to earn superior returns after adjustment for risk. The four principal vectors of an
active strategy are:
1. Market Timing
2. Sector Rotation
3. Security Selection
4. Use of a specialized concept
1. Market timing:
Market timing is based on an explicit or implicit forecast of general market movements. The
advocates of market timing employ a variety of tools like business cycle analysis, advancedecline analysis, moving average analysis, and econometric models. The forecast of the
general market movement derived with the help of one or more of these tools are tempered
by the subjective judgment of the investor. Often, of course, the investor may go largely by
his market sense.
2. Sector Rotation:
The concept of sector rotation can be applied to stocks as well as bonds. It is however, used
more commonly with respect to stock component of portfolio where it essentially involves
shifting the weightings for various industrial sectors based on their assessed outlook. For
example if it is assumed that cement and pharmaceutical sectors would do well compared to
other sectors in the forthcoming period, one may overweight these sectors, relative to their
position in market portfolio. With respect to bonds, sector rotation implies a shift in the
composition of the bond portfolio in terms of quality, coupon rate, term to maturity and so
on. For example, if there is a rise in the interest rates, there may be shift in long term bonds
to medium term or even short-term bonds. But we should remember that a long-term bond is
more sensitive to interest rate variation compared to a short-term bond.
3. Security Selection:
Security selection involves a search for under priced securities. If an investor resort to active
stock selection, he may employ fundamental and or technical analysis to identify stocks that
seems to promise superior returns and overweight the stock component of his portfolio on
them. Likewise, stocks that are perceived to be unattractive will be under weighted relative to
their position in the market portfolio. As far as bonds are concerned, security selection calls
for choosing bonds that offer the highest yield to maturity at a given level of risk.
4. Use of a specialized Investment Concept:
A fourth possible approach to achieve superior returns is to employ a specialized concept or
philosophy, particularly with respect to investment in stocks. As Charles D. Ellis words says,
a possible way to enhance returns is to develop a profound and valid insight into the forces
that drive a particular group of companies or industries and systematically exploit that
investment insight or concept
PASSIVE PORTFOLIO STRATEGY:
The passive strategy rests on the tenet that the capital market is fairly efficient with respect to
the available information. The passive strategy is implemented according to the following
two guidelines:
1. Create a well-diversified portfolio at a predetermined level of risk.
2. Hold the portfolio relatively unchanged over time, unless it becomes inadequately
diversified or inconsistent with the investors risk-return preferences.
4. SELECTION OF SECURITIES:
The following factors should be taken into consideration while selecting the fixed income
avenues:
SELECTION OF BONDS (fixed income avenues)
Yield to maturity: The yield to maturity for a fixed income avenue represents the rate of return
earned by the investors if he invests in the fixed income avenue and holds it till its maturity.
Risk of default:
To assess the risk of default on a bond, one may look at the credit rating of the bond. If no
credit rating is available, examine relevant financial ratios (like debt-to-equity ratio, times
interest earned ratio, and earning power) of the firm and assess the general prospects of the
industry to which the firm belongs
Tax Shield:
In yesteryears, several fixed income avenues offered tax shield, now very few do so.
Liquidity:
If the fixed income avenue can be converted wholly or substantially into cash at a fairly short
notice, it possesses liquidity of a high order.
SELECTION OF STOCK (Equity shares)
Three board approaches are employed for the selection of equity shares:
Technical analysis looks at price behavior and volume data to determine whether the
share will move up or down or remain trend less.
Fundamental analysis focuses on fundamental factors like the earnings level, growth
prospects, and risk exposure to establish the intrinsic value of a share. The
recommendation to buy, hold, or sell is based on a comparison of the intrinsic value
and the prevailing market price.
Random selection approach is based on the premise that the market is efficient and
securities are properly priced.
5. PORTFOLIO EXECUTION:
The next step is to implement the portfolio plan by buying or selling specified
securities in given amounts. This is the phase of portfolio execution which is
often glossed over in portfolio management literature. However, it is an
important practical step that has a significant bearing on the investment results.
In the execution stage, three decision need to be made, if the percentage
holdings of various asset classes are currently different from the desired
holdings.
6. PORTFOLIO REVISION:
In the entire process of portfolio management, portfolio revision is as important stage as
portfolio selection. Portfolio revision involves changing the existing mix of securities. This
may be effected either by changing the securities currently included in the portfolio or by
altering the proportion of funds invested in the securities. New securities may be added to the
portfolio or some existing securities may be removed from the portfolio. Thus it leads to
purchase and sale of securities. The objective of portfolio revision is similar to the objective
of selection i.e. maximizing the return for a given level of risk or minimizing the risk for a
given level of return.
The need for portfolio revision has aroused due to changes in the financial markets since
creation of portfolio. It has aroused because of many factors like availability of additional
funds for investment, change in the risk attitude, change investment goals, the need to
liquidate a part of the portfolio to provide funds for some alternative uses. The portfolio
needs to be revised to accommodate the changes in the investors position.
1. Business Risk
UNSYSTEMATIC
RISK
2. Internal Risk
3. Financial Risk
SYSTEMATIC RISK
Systematic risk refers to that portion of variation in return caused by factors that affect
the price of all securities. It cannot be avoided. It relates to economic trends with effect to
the whole market.
This is further divided into the following:
1. Market risks:
A variation in price sparked off due to real, social political and economical events is
referred as market risks.
2. Interest rate risks:
Uncertainties of future market values and the size of future incomes, caused by
fluctuations in the general level of interest is referred to as interest rate risk.
Here price of securities tend to move inversely with the change in rate of interest.
3. Inflation risks:
Uncertainties in purchasing power is said to be inflation risk.
UNSYSTEMATIC RISK
Unsystematic risk refers to that portion of risk that is caused due to factors related to a
firm or industry. This is further divided into:
1. Business risk:
Business risk arises due to changes in operating conditions caused by conditions that
thrust upon the firm which are beyond its control such as business cycles, government
controls, etc.
2. Internal risk:
Internal risk is associated with the efficiency with which a firm conducts its operations
within the broader environment imposed upon it.
3. Financial risk:
Financial risk is associated with the capital structure of a firm. A firm with no debt
financing has no financial risk.
Benefits of PMS
1. Personalized Advice:
A client gets investment advice and strategies from expert Fund Managers. An
Investment Relationship Manager will ensure that you receive all the services related to
your investment needs. The personalized services also translates into zero paper work
To discuss any concern saving or money, the client can interact with portfolio manager on
the monthly basis.
The client can discuss on any major changes he want in his asset allocation and
investment strategies.
Portfolio Manager
Portfolio Manager is a professional who manages the portfolio of an investor with the objective
of profitability, growth and risk minimization. According to SEBI, Any person who pursuant to a
contract or arrangement with a client, advises or directs or undertakes on behalf of the client the
management or administration of a portfolio of securities or the funds of the client, as the case
may be is a portfolio manager. He is expected to manage the investors assets prudently and
choose particular investment avenues appropriate for particular times aiming at maximization of
profit. He tracks and monitors all your investments, cash flow and assets, through live price
updates. The manager has to balance the parameters which defines a good investment i.e.
security, liquidity and return. The goal is to obtain the highest return for the client of the
managed portfolio.
There are two types of portfolio manager known as Discretionary Portfolio Manager and Non
Discretionary Portfolio Manager. Discretionary portfolio manager is the one who individually
and independently manages the funds of each client in accordance with the needs of the client
and non-discretionary portfolio manager is the one who manages the funds in accordance with
the directions of the client.
3. The portfolio manager shall not derive any direct or indirect benefit out of the client's
funds or securities.
4. The portfolio manager shall not borrow funds or securities on behalf of the client.
5. portfolio manager shall ensure proper and timely handling of complaints from his clients
and take appropriate action immediately
6. The portfolio manager shall not lend securities held on behalf of clients to a third person
except as provided under these regulations.
4. A portfolio manager shall not make any statement that is likely to be harmful to the
integration of other portfolio manager.
5. A portfolio manager shall not make any exaggerated statement.
6. A portfolio manager shall not disclose to any client or press any confidential information
about his client, which has come to his knowledge.
7. A portfolio manager shall always provide true and adequate information.
8. A portfolio manager should render the best pose advice to the client.
Investors Alerts
Dos:
Investors should make sure that they are dealing with SEBI authorized portfolio manager.
Investors must obtain a disclosure document from the portfolio manager broadly covering
manner and quantum of fee payable by the clients, portfolio risks, performance of the
portfolio manager etc.
Investors must check whether the portfolio manager has a necessary infrastructure to
effectively service their requirements.
Investors should make sure that they receive a periodical report on their portfolio as per
the agreed terms.
Investors must make sure that portfolio manager has got the respective portfolio account
by an independent charted accountant every year and that the certificate given by the
charted accountant is given to an investor by the portfolio manager.
In case of complaints, the investors must approach the authorities for redressal in a timely
manner.
Donts:
They should not hesitate to approach the authorities for redressed of the grievances.
They should not invest unless they have understood the details of the scheme including
risks involved.
Should not invest without verifying the background and performance of the portfolio
manager.
3. Flexibility:
Portfolio manager plan saving of his client according to their need and preferences.
But sometime portfolio manager can invest the clients money according to his own
preferences because they know the market very well than his client. It is his clients
duty to provide him a level of flexibility so that he can manage the investment with
full efficiency and effectiveness.
4. Rules and Regulation:
In comparison to mutual funds, portfolio managers do not need to follow any rigid
rules of investing a particular amount of money in a particular mode of investment.
Mutual fund managers need to work according to the regulations set up by financial
authorities of their country. Like in India, they have to follow rules set up by SEBI
Conclusion
After the overall all study about each and every aspect of this topic it shows that portfolio
management is a dynamic and flexible concept which involves regular and systematic analysis,
proper management, judgment, and actions and also that the service which was not so popular
earlier as other services has become a booming sector as on today and is yet to gain more
importance and popularity in future as people are slowly and steadily coming to know about this
concept and its importance.
It also helps both an individual the investor and FII to manage their portfolio by expert portfolio
managers. It protects the investors portfolio of funds very crucially.
Portfolio management service is very important and effective investment tool as on today for
managing investible funds with a surety to secure it. As and how development is done every
sector will gain its place in this world of investment.