PORTFOLIO

Portfolio Management
What Is Portfolio:
 
A portfolio is a collection of securities. Since it is
rarely desirable to invest the entire funds of an
individual or an institution in a single security, it is
essential that every security be viewed in a
portfolio context.
A set or combination of securities held by investor.
A portfolio comprising of different types of
securities and assets.
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 As the investors acquire different sets of assets

of financial nature, such as gold, silver, real
estate, buildings, insurance policies, post office
certificates, NSC etc., they are making a
provision for future. The risk of each of such
investments is to be understood before hand.
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 Why Portfolio:
 You will recall that expected return from
individual securities carries some degree of
risk. Risk was defined as the standard
deviation around the expected return. In effect
we equated a security’s risk with the variability
of its return. More dispersion or variability
about a security’s expected return meant the
security was riskier than one with less
dispersion.
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 Definition of Portfolio Management:

 It is a process of encompassing many activities
of investment in assets and securities. The
portfolio management includes the planning,
supervision, timing, rationalism and
conservatism in the selection of securities to
meet investor’s objectives. It is the process of
selecting a list of securities that will provide the
investor with a maximum yield constant with
the risk he wishes to assume.
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 Application to portfolio Management:

 Portfolio Management involves time element
and time horizon. The present value of future
return/cash flows by discounting is useful for
share valuation and bond valuation. The
investment strategy in portfolio construction
should have a time horizon, say 3 to 5 year; to
produce the desired results of say 20-30%
return per annum.
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 Besides portfolio management should also take

into account tax benefits and investment
incentives. As the returns are taken by investors
net of tax payments, returns net of taxation and
inflation are more relevant to tax paying
investors. These are called net real rates of
returns, which should be more than other
returns. They should encompass risk free return
plus a reasonable risk premium, depending
upon the risk taken, on the instruments/assets
invested.
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 Objective of Portfolio Management:-

 The objective of portfolio management is to invest
in securities is securities in such a way that one
maximizes one’s returns and minimizes risks in
order to achieve one’s investment objective.
 A good portfolio should have multiple objectives
and achieve a sound balance among them. Any one
objective should not be given undue importance at
the cost of others. Presented below are some
important objectives of portfolio management.
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1.Stable Current Return

2. Marketability
3. Tax Planning
4. Appreciation in the value of capital
5. Liquidity
6. Safety of the investment
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 Scope of Portfolio Management:-

a. Monitoring the performance of portfolio by

incorporating the latest market conditions.
b. Identification of the investor’s objective, constraints
and preferences.
c. Making an evaluation of portfolio income
(comparison with targets and achievement).
d. Making revision in the portfolio.
e. Implementation of the strategies in tune with
investment objectives.
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 SEBI Guidelines to Portfolio Management:-

 SEBI has issued detailed guidelines for portfolio
management services. The guidelines have been
made to protect the interest of investors. The salient
features of these guidelines are given here under;
 The nature of portfolio management services shall
be investment consultant.
 The portfolio manager shall not guarantee any
return ti his clients.
 Client’s funds will be kept in separate bank
account.
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 The portfolio manager shall acts as trustee of

client’s funds.
 The portfolio manager can invest in money or
capital market.
 Purchase and sale of securities will be at
prevailing market price.
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 Different Phases of Portfolio Management:

 Portfolio management is a process encompassing
many activities aimed at optimizing the
investment of one’s funds. Main five phases can
be identified in this management process:
 Security Analysis
 Portfolio Analysis
 Portfolio Selection
 Portfolio Revision
 Portfolio Construction
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 (A) SECURITY ANALYSIS:-

The different types of securities are available to an
investor for investment. In stock exchange of the
country the shares of 1000 number’s of companies are
listed. Traditionally, the securities were classified into
ownership such as equity shares, preference share,
and debt as a debenture bonds etc. Recently
companies to raise funds for their projects are issuing
a number of new securities with innovative feature.
Convertible debenture, discount bonds, Zero coupon
bonds, Flexi bond, floating rate bond, etc. are some of
these new securities.
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 (B) PORTFOLIO ANALYSIS:-

The main aim of portfolio analysis is to give a
caution direction to the risk and return of an
investor on portfolio. Individual securities have
risk return characteristics of their own.
Therefore, portfolio analysis indicates the
future risk and return in holding of different
individual instruments. The portfolio analysis
has been highly successful in tracing the
efficient portfolio.
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 Portfolio analysis considers the determination of

future risk and return in holding various blends
of individual securities. An investor can
sometime reduce portfolio risk by adding
another security with greater individual risk
than any other security in the portfolio. Portfolio
analysis is mainly depending on Risk and
Return of the portfolio. The expected return of a
portfolio should depend on the expected return
of each of the security contained in the portfolio.
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 C) PORTFOLIO SELECTION: -
Portfolio analysis provides the input for the
next phase in portfolio management, which is
portfolio selection. The proper goal of portfolio
construction is to generate a portfolio that
provides the highest returns at a given level of
risk. A portfolio having this characteristic is
known as an efficient portfolio.
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 The inputs from portfolio analysis can be used

to identify the set of efficient portfolios. From
this set of efficient portfolios the optimum
portfolio has to be selected for investment.
Harry Markowitz portfolio theory provides
both the conceptual framework and analytical
tools for determining the optimal portfolio in a
disciplined and objective way.
 (D) PORTFOLIO REVISION: -
 Once the portfolio is constructed, it undergoes
changes due to changes in market prices and
reassessment of companies. Portfolio revision
means alteration of the composition of
debt/equity instruments, shifting from the one
industry to another industry, changing from one
company to another company. Any portfolio
requires monitoring and revision. Portfolios
activities will depend on daily basis keeping in
view the market opportunities.
Portfolio revision uses some theoretical tools like
security analysis that already discuss before this,
Markowitz model, Risk-Return evaluation.

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 fund
invested in the securities. New securities may be
added to the portfolio or some of the existing
securities may be removed from the portfolio.
 Portfolio revision involving purchase and sale
of securities gives rise to certain problem which
acts as constraints in portfolio revision, from
those constraints some may be as following

1.Statutory Stipulations
2.Transaction cost
3. Intrinsic difficulty
4. Taxes
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 PORTFOLIO CONSTRUCTION:-
Portfolio construction refers to the allocation of
funds among a variety of financial assets open
for investment. Portfolio theory concerns itself
with the principles governing such allocation.
The objective of the theory is to elaborate the
principles in which the risk can be minimized
subject to desired level of return on the
portfolio or maximize the return, subject to the
constraint of a tolerate level of risk.
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 Thus, the basic objective of portfolio

management is to maximize yield and
minimize risk. The other ancillary objectives
are as per the needs of investors, namely:
 Safety of the investment
 Stable current Returns
 Appreciation in the value of capital
 Marketability and Liquidity
 Minimizing of tax liability.
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 In pursuit of these objectives, the portfolio

manager has to set out all the various
alternative investment along with their
projected return and risk and choose
investment with safety the requirement of the
individual investor and cater to his preferences.
The manager has to keep a list of such
investment avenues along with return-risk
profile, tax implications, yield and other return
such as convertible options, bonus, rights etc.
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THANK YOU