PORTFOLIO MANAGEMENT

CONCEPT OF PORTFOLIO:

In simple term Portfolio can be defined as combination of securities that have Return and

Risk characteristics of their own. Portfolio may or may not take on the aggregate characteristics

of their individual parts. Portfolio is the collection of financial or real assets such as equity

shares, debentures, bonds, treasury bills and property etc.

Portfolio is a combination of assets or it consists of collection of securities. These

holdings are the result of individual preferences, decisions of the holders regarding risk, return

and a host of other considerations.

Portfolio management concerns the construction & maintenance of a collection of

investment. It is investment of funds in different securities in which the total risk of the portfolio

is minimized. While expecting maximum return from it. It primarily involves reducing risks

rather that increasing return. Return is obviously important though, and the ultimate objective of

portfolio manager is to achieve a chosen level of return by incurring the least possible risk.

INTRODUCTION TO PORTFOLIO MANAGEMENT:

Investing in securities such as shares, debentures and bonds is profitable as well as

exciting. It indeed it involves a great deal of risk. It is rare to find investors investing their entire

savings in a single security. Instead, they tend to invest in a group of securities. Such, group of

securities is called a Portfolio Creation of a Portfolio helps to reduce risk without sacrificing

returns.

Definition:

“Portfolio management is the process of building, managing and assessing an inventory of

company products and projects. ...”

Portfolio Management:

An investor considering investment in securities is faced with the problem of choosing

from among a large number of securities. His choice depends upon the risk-return characteristics

of individual securities. He would attempt to choose the most desirable securities and like to

allocate his funds over this group of securities. Again he is faced with the problem of deciding

which securities to hold and how much to invest in each.

The investor faces an infinite number of possible portfolio or group of securities. The risk

and return characteristics of Portfolios differ from those of individual securities combining to

form a Portfolio. The investor tries to choose the optimal portfolio taking into consideration the

risk-return characteristics of all possible portfolios.

As the economic and financial environment keeps changing the risk-return characteristics

of individual securities as well as portfolio also change. An investor invests his funds in a

portfolio expecting to get a good return with less risk to bear.

Portfolio Management comprises all the processes involved in the creation and

maintenance of an investment portfolio. It deals specifically with Security analysis, Portfolio

analysis, Portfolio selection, Portfolio revision and Portfolio evaluation.

NEED FOR PORTFOLIO MANAGEMENT:

Portfolio management is a process encompassing many activities of investments in assets

and securities. It is a dynamic and flexible concept and involves regular and systematic

analysis, judgment and actions. The objective of this service is to help the unknown and

investors with the expertise of professionals in investment portfolio management. It involves

construction of portfolio based upon the investors’ objective, constraints, and preferences for

a risk and returns and tax liability. The portfolio reviewed and adjusted from time to time in

tune with the market conditions. The evaluation of portfolio is to be done in terms of targets

set for risk and return. The changes in the portfolio are to be effected to meet the changing

conditions.

Portfolio construction refers to the allocation of surplus funds in hand among

the variety of financial assets open for investment. Portfolio theory concerns

itself with the principals governing such allocation. The modern view of

investment is oriented more towards the assembly of proper combinations of

individual securities to form investment portfolios. A combination of securities held together

will give a beneficial result if they are grouped in a manner to secure a high return after

taking into consideration the risk element.

The modern theory is of the view that by diversification, risk can be reduced.

Diversification can be made by the investor either by having a large number of shares of

companies in different regions, in different industries are those producing different types of

product lines. Modern theory believes in the perspective of combination of securities under

constraints of risk and return.

Aim:

The aim of Portfolio Management is to achieve the maximum return from a portfolio

which has been delegated to be managed by an individual manager or financial

institution. The manager has to balance the parameters which define a good investment ie

security, liquidity and return. ...

OBJECTIVES OF PORTFOLIO MANAGEMENT:

The objective of portfolio management is to invest in securities in such a way that:

Maximizes one's Return.

Minimizes risks.

In order to achieve one's investment objectives.

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.

Safety of the Investment:

The first important objective of a portfolio, no matter who owns it, is to ensure that

the investment is absolutely safe. Other considerations like Income, Growth, etc., only come

into the picture after the safety of the investments is ensured.

Investment safety or minimization of risks is one of the important objectives of portfolio

management. There are many types of risks, which are associated with investment in equity

stocks, including super stocks. We should keep in mind that there is no such thing as a

Zero-Risk investment. Moreover, relatively Low-Risk investments give correspondingly

lower returns.

Stable Current Returns:

Once investments safety is guaranteed, the portfolio should yield a steady current

income. The current returns should at least match the opportunity cost of the funds of the

investor. What we are referring is current income by way of interest or dividends, not capital

gains.

Appreciation in the value of capital

A good portfolio should appreciate in value in order to protect the investor from any

erosion in purchasing power due to inflation. In other words, a balanced portfolio must

consist certain investments, which tend to appreciate in real value after adjusting for

inflation.

Marketability:

A good portfolio consists of investments, which can be marketed without difficulty. If

there are too many unlisted or inactive shares in our portfolio, we will have to face problems

in encasing them, and switching from one investment to another. It is desirable to invest in

companies listed on major stock exchanges, which are actively traded.

Liquidity:

The portfolio should ensure that there are enough funds available at short notice to take

care of the investor's liquidity requirements. It is desirable to keep a line of credit from a bank

fro use in case it become necessary to participate in Right Issues, or for any other personal

needs.

Tax Planning:

Since taxation is an important variable in total planning. A good portfolio should enable

its owner to enjoy a favourable tax shelter. The portfolio should be developed considering

not only income tax, but capital gains tax, and gift tax, as well. What a good portfolio aims at

is tax planning, not tax evasion or tax avoidance.

Elements of portfolio management

Portfolio management is on-going process involving the following basic takes.

a. Identification of investor’s objectives, constraints and preferences.

b. Strategies are to be developed and implemented in tune with investment policy

formulated.

c. Review and monitoring of the performance of the portfolio

d. Finally the evaluation of portfolio.

SEBI GUIDELINES TO THE PORTFOLIO MANAGERS:

On 7th January 1993 the Securities Exchange Board of India issued

regulations to the portfolio managers for the regulation of portfolio management services

by merchant bankers. They are as follows:

Portfolio management services shall be in the nature of investment or consultancy

management for an agreed fee at client’s risk.

The portfolio manager shall not guarantee return directly or indirectly the fee

should not be depended upon or it should not be return sharing basis.

Various terms of agreements, fees, disclosures of risk and repayment should be

mentioned.

Clients' funds should be kept separately in client wise account, which should be

subject to audit.

Manager should report clients at intervals not exceeding 6 months.

Portfolio manager should maintain high standard of integrity and not desire any

benefit directly or indirectly form client’s funds.

The client shall be entitled to inspect the documents.

Portfolio manger shall not invest funds belonging to clients in balancing, bills

discounting and lending operations.

Client money can be invested in money and capital market instruments.

Settlement on termination of contract as agreed in the contract.

Client’s funds should be kept in a separate bank account opened in scheduled

commercial bank.

Purchase or Sale of securities shall be made at prevailing market price.

Portfolio managers with his client are fiduciary in nature. He shall act both as an

agent and trustee for the funds received.