Definition of 'Portfolio Management' The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals performance. and institutions, and balancing risk against
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 A Portfolio Management refers to the science of analyzing the strengths, weaknesses, opportunities and threats for performing wide range of activities related to the one’s portfolio for maximizing the return at a given risk. It helps in making selection of Debt Vs Equity, Growth Vs Safety, and various other tradeoffs. Major tasks involved with Portfolio Management are as follows.
Taking decisions about investment mix and policy Matching investments to objectives Asset allocation for individuals and institution
Balancing risk against performance There are basically two types of portfolio management in case of mutual and exchange-traded funds including passive and active.
Passive management involves tracking of the market index or index investing. Active management involves active management of a fund’s portfolio by manager or team of managers who take research based investment decisions and decisions on individual holdings.
terms of mutual fund industry, a portfolio is built by buying additional bonds, mutual funds, stocks, or other investments. If a person owns more than one security, he has an investment portfolio. The main target of the portfolio owner is to increase value of portfolio by selecting investments that yield good returns. As per the modern portfolio theory, a diversified portfolio that includes different types or classes of securities; reduces the investment risk. It is because any one of the security may yield strong returns in any economic climate. Facts about Portfolio
There are many investment vehicles in a portfolio. Building a portfolio involves making wide range of decisions regarding buying or selling of stocks, bonds, or other financial instruments. Also, one needs to make decision regarding the quantity and timing of the buy and sell.
Portfolio Management is goal-driven and target oriented. There are inherent risks involved in the managing a portfolio. The basics and ideas of Investment Portfolio Management are also applied to portfolio management in other industry sectors. Application Portfolio Management: It involves management of complete group or subset of software applications in a portfolio. These applications are considered as investments as they involve development (or acquisition) costs and maintenance costs. The decisions regarding making investments in modifying the existing application or purchasing new software applications make up an important part of application portfolio management. Product Portfolio Management: The product portfolio management involves grouping of major products that are developed and sold by businesses into (logical) portfolios. These products are organized according to major line-of-business or business segment. The management team actively manages the product portfolios by taking decisions regarding the development of new products, modifying existing products or discontinue any other products. The addition of new products helps in diversifying the investments and investment risks. Project Portfolio Management: It is also referred as an initiative portfolio management where initiative portfolio involves a defined beginning and end; precise and limited collection of desired results or work products; and management team for executing the initiative and
utilising the resources. A number of initiatives that supports a product, product line or business segment, are grouped into a portfolio by managers.
Objectives of Portfolio Management
The main objectives of portfolio management in finance are as follows:-
1. Security of Principal Investment : Investment safety or minimization of risks is one of the most important objectives of portfolio management. Portfolio management not only involves keeping the investment intact but also contributes towards the growth of its purchasing power over the period. The motive of a financial portfolio management is to ensure that the investment is absolutely safe. Other factors such as income, growth, etc., are considered only after the safety of investment is ensured. 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 capitalby 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. 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 investor’s 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.
If you are tasked to manage the programs and projects of your company, you need to be knowledgeable and skillful in managing your portfolio. The following are key secrets to a successful and effective portfolio management: Selection The very first thing that an organization or company needs to do is to choose and approve which projects or programs will go inside the portfolio. Usually, a portfolio is designed to successfully accomplish a certain business goal or objective, so the selection criteria must meet that goal or objective. Prioritization After the selection process, programs and projects within the portfolio must be given priority in accordance with the resources, budgets and decisions. So, this requires brainstorming among the staff of the company or members of the organization. Bear in mind that portfolio management also requires teamwork. Kick-Off After the process of selection and prioritization of a portfolio of projects
or programs, they are kicked off. Then, they will be managed and tracked. Management Particularly, portfolio management closely manages the resources, scope, cost and time of the programs or projects so that the portfolio will always remain intact. Reporting You also need to carefully decide on what reporting is required, for whom and what information. You also need to figure out the things that you have to gauge, track and report on as these factors will help you achieve your goals and objectives. Communications This is one of the most important aspects of portfolio management. You must always keep the change control boards, teams and portfolio stakeholders informed. Bear in mind that priorities change most of the time, so having clear and effective communication with everyone with regard to portfolio’s health and wealth is important to ensure that the portfolio does what it is originally designed for: to successfully meet a certain business goal or objective. See more at: http://financial-management-slides.com/key-
CHAPTER: 1 PORTFOLIO MANAGEMENTINTRODUCTION Stock exchangeoperations are peculiar in nature and most of the Investors feel insecure in managing their investmenton the stock market because it is difficult for an individual to identifycompanies which have growth prospects for investment. Further due to
volatile nature of themarkets, it requires constant reshuffling of portfolios to capitalize on the growth opportunities.Even after identifying the growth oriented companies and their securities, the trading practicesare also complicated, making it a difficult task for investors to trade in all the exchange andfollow up on post trading formalities.Investors choose to hold groups of securities rather than single security that offer the greater e x p e c t e d r e t u r n s . T h e y b e l i e v e t h a t a c o m b i n a t i o n of securities held together will give a beneficial res ult if they are grouped in a manner to secure higher r e t u r n a f t e r t a k i n g i n t o consideration the risk element. That is why professional investment advice through portfoliomanagement service can help the investors to make an intelligent and informed choice between alternative investments opportunities without the worry of post trading hassles.
SCOPE OF PORTFOLIO MANAGEMENT: Portfolio management is an art of putting money in fairly safe, quite profitable and reasonablyin liquid form. An investor’s attempt to find the best combination of risk and return is the first andusually the foremost goal. In choosing among different investment opportunities the following aspects risk management should be considered: a) The selection of a level or risk and return that reflects the investor’s tolerance for risk and desire for return, i.e. personal preferences. b) The management of investment alternatives to expand the set of opportunities available at the investors acceptable risk level.The very risk-averse investor might choose to invest in mutual funds. The more risk-tolerantinvestor might choose shares, if they offer
higher returns. Portfolio management in India is still inits infancy. An investor has to choose a portfolio according to his preferences. The first preferencenormally goes to the necessities and comforts like purchasing a house or domestic appliances. Hissecond preference goes to some contractual obligations such as life insurance or provident funds.T h e third preference goes to make a provision for s a v i n g s r e q u i r e d f o r m a k i n g d a y t o d a y payments. The next preference goes to short term investments such as UTI units and post officedeposits which provide easy liquidity. The last choice goes to investment in company shares anddebentures. There are number of choices and decisions to be taken on the basis of the attributes of risk, return and tax benefits from these shares and debentures. The final decision is taken on the basis of alternatives, attributes and investor preferences.For most investors it is not possible to choose between managing one’s own portfolio. They can hire a professional manager to do it. The professional managers provide a variety of servicesincluding diversification, active portfolio managemen t, liquid securities and performance of duties associated with keeping track of investor’s money NEED FOR PORTFOLIO MANAGEMENT: Portfolio management is a process encompassing many activities of investment in assets andsecurities. It is a dynamic and flexible concept and involves regular and systematic analysis, judgment and action. The objective of this service is to help the unknown and investors with theexpertise of professionals in investment portfolio management. It involves construction of a portfolio based upon the investor’s objectives, constraints, preferences for risk and returns and taxl i a b i l i t y . T h e p o r t f o l i o i s r e v i e w e d a n d a d j u s t e d f r o m t i m e t o t i m e i n t u n e w i t h t h e m a r k e t conditions. The evaluation of portfolio is to be done in terms of targets set for risk and returns. The changes in the portfolio are to be
effected to meet the changing condition.Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governingsuch allocation. The modern view of investment is oriented more go towards the assembly of proper combination of individual securities to form investment portfolio.A combination of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after taking into consideration the risk elements.The modern theory is the view that by diversification risk can be reduced. Diversification can b e m a d e b y t h e i n v e s t o r either by having a large number of shares of c o m p a n i e s i n d i f f e r e n t regions, in different industries or those producing different types of product lines. Moderntheory believes in the perspective of combination of securities under constraints of risk and returns
OBJECTIVES OF PORTFOLIO MANAGEMENT: The major objectives of portfolio management are summarized as below:1) Security/Safety of Prinicpal: Security not only involves keeping the principal sum intact but also keeping intact its purchasing power intact. 2) Stability of Income: So as to facilitate planning more accura t e l y a n d systematically the reinvestment consumption of income . 3) Capital Growth:
This can be attained by reinvesting in growth s e c u r i t i e s o r through purchase of growth securities. 4) Marketability: i.e. is the case with which a security can be bought or sold. This isessential for providing flexibility to investment portfolio. 5) Liquidity i.e Nearness To Money: I t i s d e s i r a b l e t o i n v e s t o r s o a s t o t a k e advantage of attractive opportunities upcoming in the market . 6) Diversification: The basic objective of building a portfolio is to reduce risk of lossof capital and / or income by investing in various types of securities and over a wide rangeof industries. 7) Favorable Tax Status: The effective yield an investor gets form his investmentd e p e n d s o n t a x t o w h i c h i t i s subject. By minimizing the tax burden, yield c a n b e effectively improved