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Portfolio Managementintroduction
Portfolio Managementintroduction
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 trade-offs 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.
Stock exchange operations are peculiar in nature and most of the Investors feel insecure in managing
their investment on the stock market because it is difficult for an individual to identify companies which have
growth prospects for investment. Further due to volatile nature of the markets, it requires constant reshuffling of
portfolios to capitalize on the growth opportunities. Even after identifying the growth oriented companies
and their securities, the trading practices are also complicated, making it a difficult task for investors to trade in
all the exchange and follow up on post trading formalities.
They believe that a combination of securities held together will give a beneficial resultgrouped in a manner to
secure higher return after taking into consideration the risk element. That is why professional investment advice
through portfolio management service can help the investors to make an intelligent and informed choice
between alternative investments opportunities without the worry of post trading hassles.
DEFINITIONS OF PORTFOLIO
InvestorsWords.com
A collection of investments (all) owned by the same individual or organization. These investments often
include stocks, which are investments in individual businesses bonds, which are investments in debt that are
designed to earn interest and mutual funds which are essentially pools of money from many investors that are
invested by professionals or according to indices.
A collection of variouscompany shares,fixed interest securitiesor money-marketinstruments. People may talk
grandly of 'running a portfolio' when they own a couple of shares but the characteristic of a serious investment
portfolio is diversity. It should show a spread of investments to minimize risk - brokers and investment advisers
warn against' putting all your eggs in one basket'.
a) All the securities held for investment as by an individual, bank, investment company, etc.
b) A list of such securities.
3)Financial Dictionary
Managing a large single portfolio or being employed by its owner to do so. Portfolio managers have the
knowledge and skill which encourage people to put their investment decisions in the hands of a professional
(for a fee).
securities
and performance
of duties
2. Balance
Achieve a desired balance of projects via a number of parameters: risk versus return; short-term versus longterm; and across various markets, business arenas and technologies. Typical methods used to reveal balance
include bubble diagrams, histograms and pie charts.
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.
2. Consistency of Returns: Portfolio management also ensures to provide the stability of returns by
reinvesting the same earned returns in profitable and good portfolios. The portfolio helps to yield steady
returns. The earned returns should compensate the opportunity cost of the funds invested.
3. Capital Growth: Portfolio management guarantees the growth of capital by reinvesting in growth
securities or by the purchase of the growth securities. A portfolio shall appreciate in value, in order to safeguard
the investor from any erosion in purchasing power due to inflation and other economic factors. A portfolio must
consist of those investments, which tend to appreciate in real value after adjusting for inflation.
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4. Marketability: Portfolio management ensures the flexibility to the investment portfolio. A portfolio
consists of such investment, which can be marketed and traded. Suppose, if your portfolio contains too many
unlisted or inactive shares, then there would be problems to do trading like switching from one investment to
another. It is always recommended to invest only in those shares and securities which are listed on major stock
exchanges, and also, which are actively traded.
5. Liquidity: Portfolio management is planned in such a way that it facilitates to take maximum advantage of
various good opportunities upcoming in the market. The portfolio should always ensure that there are enough
funds available at short notice to take care of the investors liquidity requirements.
6. Diversification of Portfolio: Portfolio management is purposely designed to reduce the risk of loss of
capital and/or income by investing in different types of securities available in a wide range of industries. The
investors shall be aware of the fact that there is no such thing as a zero risk investment. More over relatively
low risk investment give correspondingly a lower return to their financial portfolio.
7. Favorable Tax Status: Portfolio management is planned in such a way to increase the effective yield an
investor gets from his surplus invested funds. By minimizing the tax burden, yield can be effectively improved.
A good portfolio should give a favorable tax shelter to the investors. The portfolio should be evaluated after
considering income tax, capital gains tax, and other taxes.
The objectives of portfolio management are applicable to all financial portfolios. These objectives, if
considered, results in a proper analytical approach towards the growth of the portfolio. Furthermore, overall risk
needs to be maintained at the acceptable level by developing a balanced and efficient portfolio. Finally, a good
portfolio of growth stocks often satisfies all objectives of portfolio management.
.
1.INVESMENT MANAGEMENT:
Investment management is the professional management of various securities (shares, bonds etc.) and assets
(e.g., real estate), to meet specified investment goals for the benefit of the investors. Investors may be
institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via
investment contracts and more commonly via collective investment schemes e.g. mutual funds or Exchange
Traded Funds).The term asset management is often used to refer to the investment management of collective
investments,(not necessarily) whilst the more generic fund management may refer to all forms of institutional
investment as well as investment management for private investors. Investment managers who specialize in
Advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to
their services as wealth management or portfolio management often within the context of so-called "private
banking". Fund manager (or investment adviser in the U.S.) refers to both a firm that provides investment
management services and an individual who directs fund management decisions.
2. IT PORTFOLIO MANAGEMENT:
IT
portfolio
management
is
the
application
of
systematic
management
to
large
classes
of items managed by enterprise Information Technology (IT) capabilities. Examples of IT portfolios would be
planned initiatives, projects, and ongoing IT services (such as application support). The promise of IT portfolio
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investments
are
not
liquid,
like
stocks
and
bonds
(although
investment
portfoliosmay also include illiquid assets), and are measured using both financial and non-financialyardsticks
(for example, a balanced scorecard approach); a purely financial view is not sufficient. At its most mature, IT
Portfolio management is accomplished through the creation of two portfolios:
(i)
Application Portfolio -Management of this portfolio focuses on comparing spending one stablished
systems
based
upon
their
relative
value
to
the organization.
The
comparison
Project Portfolio -This type of portfolio management specially address the issues with spending on
the development of innovative capabilities in terms of potential ROI and reducing investment
overlaps in situations where reorganization or acquisition occurs. The management issues with the
second type of portfolio management can be judged in terms of data cleanliness, maintenance
savings, suitability of resulting solution and the relative value of new investments to replace these
projects.
product
or
service
which
brings
about
beneficial
change
or
added
value.
This
finite characteristic of projects stands in contrast to processes, or operations, which are permanent or semipermanent functional work to repetitively produce the same product or service. In practice, the management of
these two systems is often found to be quite different, and as such requires the development of distinct technical
skills and the adoption of separate management.
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a) There is a wide variety of investments available in market i.e. Equity shares, preference share, debentures,
convertible bond, Govt. securities and bond, capital units etc. Out of these what types of securities to be
purchased.
b) What should be the proportion of investment in fixed interest dividend securities and variable dividend
bearing securities? The fixed one ensures a definite return and thus a lower risk but the return is usually not as
higher as that from the variable dividend bearing shares.
c) If the investment is decided in shares or debentures, then the industries showing a potential in growth should
be taken in first line. Industry-wise-analysis is important since various industries are not at the same level from
the investment point of view. It is important to recognize that at a particular point of time, a particular industry
may have a better growth potential than other industries. For example, there was a time when jute industry was
in great favour because of its growth potential and high profitability, the industry is no longer at this point of
time as a growth oriented industry.
d) Once industries with high growth potential have been identified, the next step is to select the particular
companies, in whose shares or securities investments are to be made
FUNDAMENTAL ANALYSIS:
(A)FUNDAMENTAL ANALYSIS OF GROWTH ORIENTED COMPANIES:
One of the first decisions that an investment manager faces is to identify the industries which have a high
growth potential. Two approaches are suggested in this regard. They are:
a) Statistical Analysis of Past Performance:
A statistical analysis of the immediate past performance of the share price indices of various industries and
changes there in related to the general price index of shares of all industries should be made. The Reserve Bank
of India index numbers of security prices published every month in its bulletin may be taken to represent the
behaviour of share prices of various industries in the last few years. The related changes in the price index of
each industry as compared with the changes in the average price index of the shares of all industries would
show those industries which are having a higher growth potential in the past few years. It may be noted that an
Industry may not be remaining a growth Industry for all the time. So he shall now have to make an assessment
of the various Industries keeping in view the present potentiality also to finalize the list of Industries in which
he will try to spread his investment.
After an investment manager has identified statistically the industries in the share of which the
investors show interest, he would assess
share.
These factors generally relate to the strengths and weaknesses of the company under consideration,
Characteristics of the industry within which the company fails and the national and international economic
scene.
This approach is known as the intrinsic value approach. The major objective of the analysis is to determine the
relative quality and the quantity of the security and to decide whether or not is security is good at current
markets prices. In this, both qualitative and quantitative factors are to be considered.
rate. Similarly, many industries are characterized by high rate of profits and losses in alternate years. Such
fluctuations in earnings must be carefully examined.
4. Labour Management Relations in the Industry:
The state of labour-management relationship in the particular industry also has a great deal of influence on the
future profitability of the industry. The investment manager should, therefore, see whether the industry under
analysis has been maintaining a cordial relationship between labour and management. Once the industrys
characteristics have been analyzed and certain industries with growth potential identified, the next stage would
be to undertake and analyse all the factors which show the desirability of various companies within an industry
group from investment point of view.
the existing capacities and their utilization, proposed expansion and diversification plans and the nature of the
companys technology.
The plans of the company, in terms of expansion or diversification, can be known from the directors reports the
chairmans statements and from the future capital commitments as shown by way of notes in the balance sheets.
The nature of technology of a company should be seen with reference to technological developments in the
concerned fields, the possibility of its product being superseded of the possibility of emergence of more
effective method of manufacturing. Growth is the single most important factor in company analysis for the
purpose of investment management. A company may have a good record of profits and performance in the past;
but if it does not have growth potential, its shares cannot be rated high from the investment point of view.
that an investment manager always gives a close look to the management of the company whose shares he is to
invest. Quality of management has to be seen with reference to the experience, skill and integrity of the persons
at the helm of the affairs of the company. The policy of the management regarding relationship with the
shareholders is an important factor since certain business houses believe in generous dividend and bonus
distributions while others are rather conservative.
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(C) TIMING OF PURCHASES:The timing of dealings in the securities, specially shares is of crucial importance, because after correctly
identifying the companies one may lose money if the timing is bad due to wide fluctuation in the price of shares
of thatcompanies.The decision regarding timing of purchases is particularly difficult because of certain psychol
ogical factors. It is obvious that if a person wishes to make any gains, he should buy cheap and sell dear, i.e.
buy when the share are selling at a low price and sell when they are at a higher price. But in practical it is
a difficult task. When the prices are rising in the market i.e. there is bull phase, everybody joins in buying
without any delay because every day the prices touch a new high. Later when the bear face starts, prices tumble
down every day and everybody starts counting the losses. The ordinary investor regretted such situation by
thinking why he did not sell his shares in previous day and ultimately sell at a lower price. This kind of
investment decision is entirely devoid of any sense of timing.
In short we can conclude by saying that Investment management is a complex activity which may be broken
down into the following steps:
1) Specification Of Investment Objectives And Constraints:
The typical objectives sought by investors are current income, capital appreciation, and safety of principle. The
relative importance of these objectives should be specified
further theconstraints arising from liquidity, time horizon, tax and special circumstances must be identified.
2) Choice Of The Asset Mix :
The most important decision in portfolio management is the asset mix decision very broadly; this is concerned
with the proportions of stocks (equity shares and units/shares of equity-oriented mutual funds) and bonds in
the portfolio. The appropriate stock-bond mix depends mainly on the risk tolerance and investment horizon of
the investor.
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Under this method the probable future value of a share of a company is determined it can be done by ratios of
earning per share of the company and price earnings ratio
EARNING PER SHARE = _ PROFIT AFTER TAX__ NO. OF EQUITY SHARESPRICE EARNING
RATIO = _MARKET PRICE (PER SHARE)_ EARNING PER SHARE
One can estimate trend of earning by EPS, which reflects trends of earning quality of company, dividend policy,
and quality of management. Price Earnings ratio indicate a confidence of market about the company future, a
high rating is preferable.
SYSTEMATIC RISK
RISK
SYSTEMATIC
UNSYSTEMATIC RISK
1. Market Risk
2. Interest Rate Risk
3. Inflation Rate Risk
1. Business 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.
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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.
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PROCESS/STEPS
OF PORTFOLIO
PROCESS
/STEPS OF PORTFOLIO
MANAGEMENT
Specification of Investment objective and
Constraints
Selection
SelectionofofAsset
AssetMix
Mixes
Formulation
Portfolio
Formulation
of of
Portfolio
Strategy
Strategy
Selection
of Securities
Selection
of Securities
Portfolio
Execution
Portfolio
Execution
Portfolio
Revision
Portfolio
Revision
Portfolio Evaluation
follows:
Specification of investment objectives can be done in following two ways:
1. Maximize the expected rate of return, subject to the risk exposure being held within a certain limit (the
risk tolerance level).
2. 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.
4. Regulations:
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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.
5. 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.
1. 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:
6.
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.
7. 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.
8. Stocks:
Stocks include equity shares and units/shares of equity schemes of mutual funds. It includes income
shares, growth shares, blue chip shares, etc.
9. 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.
10. 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.
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, advance-decline 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.
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:
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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.
SELECTION OF SECURITIES:
The following factors should be taken into consideration while selecting the fixed income avenues:
Technical analysis looks at price behaviour and volume data to determine whether the share will
move up or down or remain trend less.
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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.
Under a buy and hold policy, the initial portfolio is left undisturbed. It is essentially a buy and hold policy.
Irrespective of what happens to the relative values, no rebalancing is done. For example, if the initial portfolio
has a stock-bond mix of 50:50 and after six months it happens to be say 70:50 because the stock component has
appreciated and the bond component has stagnated, than in such cases no changes are made.
The constant mix policy calls for maintaining the proportions of stocks and bonds in line with their target value.
For example, if the desired mix of stocks and bonds is say 50:50, the constant mix calls for rebalancing the
portfolio when relative value of its components change, so that the target proportions are maintained.
The portfolio insurance policy calls for increasing the exposure to stocks when the portfolio appreciates in
value and decreasing the exposure to stocks when the portfolio depreciates in value. The basic idea is to ensure
that the portfolio value does not fall below a floor level.
Portfolio Upgrading:
While portfolio rebalancing involves shifting from stocks to bonds or vice versa, portfolio-upgrading calls for
re-assessing the risk return characteristics of various securities (stocks as well as bonds), selling over-priced
securities, and buying under-priced securities. It may also entail other changes the investor may consider
necessary to enhance the performance of the portfolio.
7. PORTFOLIO EVALUATION:
Portfolio evaluation is the last step in the process of portfolio management. It is the process that is concerned
with assessing the performance of the portfolio over a selected period of time in terms of return and risk.
Through portfolio evaluation the investor tries to find out how well the portfolio has performed. The portfolio
of securities held by an investor is the result of his investment decisions. Portfolio evaluation is really a study of
the impact of such decisions. This involves quantitative measurement of actual return realized and the risk born
by the portfolio over the period of investment. It provides a mechanism for identifying the weakness in the
investment process and for improving these deficient areas.
.
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
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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.
Advice new investments, review the existing ones, identification of objectives, recommending high yield
securities etc.
3. Financial analysis:
He should evaluate the financial statement of company in order to understand, their net worth future earnings,
prospectus and strength.
5. Study of industry:
He should study the industry to know its future prospects,technical changes etc. required for investment
proposal he should also see the problems of the industry.
A portfolio manager plays a pivotal role in deciding the best investment plan for an individual as
per his income, age as well as ability to undertake risks. Investment is essential for every earning
individual. One must keep aside some amount of his/her income for tough times. Unavoidable
circumstances might arise anytime and one needs to have sufficient funds to overcome the same.
A portfolio manager is responsible for making an individual aware of the various investment
tools available in the market and benefits associated with each plan. Make an individual realize why he
actually needs to invest and which plan would be the best for him.
A portfolio manager is responsible for designing customized investment solutions for the clients.
No two individuals can have the same financial needs. It is essential for the portfolio manager to first
analyse the background of his client. Know an individuals earnings and his capacity to invest. Sit with
your client and understand his financial needs and requirement.
A portfolio manager must keep himself abreast with the latest changes in the financial market.
Suggest the best plan for your client with minimum risks involved and maximum returns. Make him
understand the investment plans and the risks involved with each plan in a jargon free language. A
portfolio manager must be transparent with individuals. Read out the terms and conditions and never
hide anything from any of your clients. Be honest to your client for a long term relationship.
A portfolio manager ought to be unbiased and a thorough professional. Dont always look for your
commissions or money. It is your responsibility to guide your client and help him choose the best
investment plan. A portfolio manager must design tailor made investment solutions for individuals
which guarantee maximum returns and benefits within a stipulated time frame. It is the portfolio
managers duty to suggest the individual where to invest and where not to invest? Keep a check on the
market fluctuations and guide the individual accordingly.
A portfolio manager needs to be a good decision maker. He should be prompt enough to finalize the
best financial plan for an individual and invest on his behalf.
Communicate with your client on a regular basis. A portfolio manager plays a major role in setting
financial goal of an individual. Be accessible to your clients. Never ignore them. Remember you have
the responsibility of putting their hard earned money into something which would benefit them in the
long run.
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Be patient with your clients. You might need to meet them twice or even thrice to explain them all the
investment plans, benefits, maturity period, terms and conditions, risks involved and so on. Dont ever
get hyper with them.
Never sign any important document on your clients behalf. Never pressurize your client for any plan. It is
his money and he has all the rights to select the best plan for himself
Every portfolio manager in India as per the regulation 13 of SEBI shall follow the following Code of Conduct:
1. A portfolio manager shall maintain a high standard of integrity fairness.
2. The clients funds should be deployed as soon as he receives.
3. A portfolio manager shall render all times high standards and unbiased service.
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.
2. He shall not derive any direct or indirect benefit out of the clients funds or securities.
3. He shall not pledge or give on loan securities held on behalf of his client to a third person without obtaining a
written permission from such clients.
4. While dealing with his clients funds, he shall not indulge in speculative transactions.
5. He may hold the securities in the portfolio account in his own name on behalf of his clients only if the
contract so provides. In such a case, his records and his report to his clients should clearly indicate that such
securities are held by him on behalf of his client.
6. He shall deploy the money received from his client for an investment purpose as soon as possible for that
purpose.
7. He shall pay the money due and payable to a client forthwith.
8. He shall not place his interest above those of his clients.
9. He shall not disclose to any person or any confidential information about his client,which has come to his
knowledge.
10. He shall endeavour to:
11. Ensure that the investors are provided with true and adequate information withoutmaking any misguiding or
exaggerated claims.
12. Ensure that the investors are made aware of the attendant risks before any investment decision is made by
them.
13. Render the best possible advice to his clients relating to his needs and the environment and his own
professional skills.
14. Ensure that all professional dealings are affected in a prompt, efficient and cost effective manner.
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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.
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 Services, called, as PMS are the advisory services provided by corporate financial
intermediaries. It enables investors to promote and protect their investments that help them to generate higher
returns. It devotes sufficient time in reshuffling the investments on hand in line with the changing dynamics. It
provides the skill and expertise to steer through these complex, volatile and dynamic times. It is a choice of
selecting and revising spectrum of securities to it with the characteristics of an investor. It prevents holding of
stocks of depreciating-value. It acts as a financial intermediary and is subject to regulatory control of SEBI.
Under PMS, the Client and the Portfolio Manager chart out specific needs of the client and the Portfolio
Manager manages the Portfolio in accordance with those needs. Sometimes the Portfolio Manager may also
have separate ready schemes for the client to choose from. As a result of this customization, client, with his
specific needs, benefits. The service level in the form of reporting transactions, holdings statements etc., also
are comparable or even better than that of a mutual fund.
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 and all your financial statements will be e-mailed
2. Professional Management:
An experienced team of portfolio managers ensure your portfolio is tracked, monitored and optimized
at all times.
3. Continuous Monitoring:
The clients are informed about your investment decisions. A dedicated website and a customer services
desk allow you to keep a tab on portfolios performance.
4. Timing:
Portfolio managers preserve clients money on time. Portfolio management services (PMS) help in
allocating right amount money in right type of saving plan at right time. This means portfolio managers
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analysis the market and provides his expert advice to the client regarding the amount he should take out
at the time of big risk in stock market.
5. Professional Management:
PMS provides benefits of professional money management with the flexibility, control and potential tax
advantages of owing individual stocks or other securities. The portfolio managers take care of all the
administrative aspects of clients portfolio with a monthly or semi annual reporting on overall status of
the portfolio and performance.
6. Flexibility:
Portfolio managers plan saving of his client according to their need and preferences. But sometimes,
portfolio managers can invest clients money according to his preference 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.
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1. Portfolio management services (PMS) handles all types of administrative work like opening a new bank
account or dealing with any financial settlement or depository transaction.
2. PMS also help in managing the tax of his client based on detailed statement of the transaction found on
the clients portfolio.
3. PMS also provide a Portfolio manager to the client who acts as personal relationship manager though
whom the client can interact with the fund manager at any time depending on his own preferences such
as:
i.
To discuss any concern saving or money, the client can interact with portfolio manager on the monthly
basis.
ii.
The client can discuss on any major changes he want in his asset allocation and investment strategies.
1. Keep the security, safety of principles intact both in terms of money as well as its purchasing power.
2. Stability of the flow of income so as to facilities planning more accurately and systematically the
reinvestment or consumption of income.
3. To attain capital growth by re-investing in growth securities or through purchase of growth securities.
4. Marketability of the security which is essential for providing flexibility to the investment portfolio.
5. Liquidity i.e. nearness to the money which is desirable to the investors so as to take advantages of
attractive opportunities upcoming in the market.
6. Diversification: The basic objective of building a portfolio is to reduce the risk of loss of capital and
income by investing in various types of securities and over a wide range of industries.
7. Favourable tax status: the effectively yield a investors gets from his investments depends on tax to
which it is subject.
8. Capital growth which can be attained by reinvesting in growth securities or through purchased of
growth securities.
INVESTORS ALERTS
Dos:
Only intermediaries having specific SEBI registration for rendering Portfolio management services can
offer portfolio management services
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 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.
While the concept of Portfolio Management Services and Mutual Funds remains the same of collecting money
from investors, pooling them and investing the funds in various securities. There are some differences between
them described as follows:
1. In the case of portfolio management, the target investors are high net-worth investors, while in the case of
mutual funds the target investors include the retail investors.
2. In case of portfolio management, the investments of each investor are managed separately, while in the case
of MFs the funds collected under a scheme are pooled and the returns are distributed in the same proportion, in
which the investors/ unit holders make the investments.
3. The investments in portfolio management are managed taking the risk profile of individuals into account. In
mutual fund, the risk is pooled depending on the objective of a scheme.
4. In case of portfolio management, the investors are offered the advantage of personalized service to try to
meet each individual clients investment objectives separately while in case of mutual funds investors are not
offered.
when he should take his money out of particular saving plan. Portfolio manager analyses market and
provides his expert advice to the client regarding the amount of cash he should take out at the time
of big risk in stock market.
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.
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