IAPM

UNIT 5
 Portfolio
Defined as: A collection of different financial
investment held by a person at point of time.

Notion of Portfolio Construction

• Notion of Diversification
• Notion of Negative Correlation
 Portfolio Management
Process
Traditionally, portfolio management is viewed as a
process or activity that may be divided into seven
broad phases, which are interrelated.
• Deciding about Investment Objectives.
• Deciding about Investment Constraints.
• Asset Mix Decision.
• Formulation of Portfolio Strategy.
• Selection of Securities.
• Portfolio Execution.
• Alignment of Portfolio.
• Performance Evaluation.
 1. Deciding About
Investment Objectives
• Safety
• Regularity of Income
• Capital Gain
• Tax Savings
• Liquidity
• Speculation
• Hedging
• Arbitrage
2. Constraints
• Liquidity 3. Asset Mix
• Taxes Decision
• Time horizon
• Unique preferences Asset mix
and circumstances decision is
about the
proportion of
equity shares,
debentures and
other avenues in
a Portfolio.
 4.Formulation of Portfolio
Strategy.
Active Portfolio Passive Portfolio
Strategy Strategy.
• Riding the market swings Passive Portfolio
• Switching Sectors Strategy is the
• Combining fundamental strategy of buy and
& technical analysis hold
5. Selection of Securities- we have
different factors to consider for securities and
bonds

6. Portfolio Execution- taking

decision according to decision taken in the
portfolio strategy and selection of security

7. Realignment of Portfolio-
• Buy & Hold
• Constant Ratio Plan
Portfolio Revision

• A portfolio is a mix of securities selected

from a vast universe of securities.
• Two variables determine the composition of
portfolio; securities and total amount
invested in each security.
• The financial markets are continually
changing.
• A portfolio once constructed may not be
optimal in future span.
• Portfolio revision is change in the mix of
securities of a portfolio.
Need for Revision
• Availability of additional funds for
investment
• Change in risk tolerance
• Change in investment goals
• Need to liquidate a part of portfolio to
provide funds for some alternative use
Constraints in a Portfolio
• Transaction cost
• Taxes
• Statutory stipulations
• Intrinsic difficulty

The only thing we know about the future is that it will be different –
Peter Drucker
Portfolio Revision Strategies
Active Revision Passive Revision
In an active Portfolio Passive Portfolio Strategy
manager keeps on changing is the strategy of buy and
his action plan according to hold
the fluctuations in market
 Formula Plans
Mechanical revision techniques or procedures
developed to enable the investors to benefit
from price fluctuations in the market by buying
stocks when prices are low and selling them
when prices are high. These techniques are
referred to as Formula Plans.

Formula Plans

Constant Rupee Constant Ratio Variable Ratio

value plan Plan Plan
 Mutual Funds
Mutual fund is an organization, which collects small
savings from general public with the aim of
investing it into securities.
-resulting profit distributed among contributors
known as unit holders

Benefits:
• Expert Knowledge
• Diversification
• Low cost of investment
• Risk Sharing
 History
• 1963: the Beginning
• 1990: Entry of Mutual Funds by Public
Sector Banks
• 1993: Announcement of SEBI Regulation
and entry of Private Mutual Funds
• 1996:marked another era with SEBI and
AMFI coming in.
Mutual Funds: Constituents
• Sponsor
• Mutual Fund Organization(Trust)
• Asset Management Company(AMC)
• Custodian
 Regulation of Mutual
Funds in India
• Formation & Registration
• Documents of Scheme
• Regulation of Schemes
• Investment by Mutual Fund
• Advertisement code of conduct
• Disclosure of NAV
• Winding Up
 Types of Mutual Funds
• Open ended funds
• Close ended funds
• Growth funds
• Equity funds
• Balanced funds
• Money market mutual funds
• Equity Linked Schemes
• Infrastructure funds
Types of Mutual Funds
• Debt funds
• Income and growth funds
• Income funds
• Power mutual funds
• Index funds
• IT funds
• Funds of fund
• Dynamic fund
Classification of Mutual Fund
Based on Structure
• Open ended funds
• Close ended funds
• Interval funds
Other classification
• Tax Saving schemes
• Industry specific
scheme
• Index funds
Based on Investment Objectives
• Growth funds
• Income funds
• Balanced funds
• Money market funds
• Load funds
• No load funds
 Top Ten AMC

Reference: Khatri Dhanesh,Security Analysis and Portfolio Management, Macmillan Publication