PORTFOLIO MANAGEMENT

The portfolio is a collection of investment instruments like shares, mutual funds, bonds,
FDs and other cash equivalents, etc. It is the combination of physical assets and
financial assets.
Portfolio management is the art of selecting the right investment tools in the right
proportion to generate optimum returns with a balance of risk from the
investment made.
Investment portfolio composing securities that yield a maximum return for given levels of
risk or minimum risk for given levels of returns are termed as “efficient portfolio”.
The investors, through portfolio management, attempt to maximize their expected
return consistent with individually acceptable portfolio risk.
Portfolio management thus refers to investment of funds in such combination of different
securities in which the total risk of portfolio is minimized while expecting maximum
return from it.

As returns and prices of all securities do not move exactly together, variability in one
security will be offset by the reverse variability in some other security. Ultimately, the
overall risk of the investor will be less affected.

Steps/phases involved in Portfolio management process:

Portfolio management involves complex process which the following steps to be
followed carefully.

1.​ Identification of objectives and constraints.

2.​ Selection of the asset mix.
3.​ Formulation of portfolio strategy
4.​ Security analysis
5.​ Portfolio execution
6.​ Portfolio revision
7.​ Portfolio evaluation.
Now each of these steps can be discussed in detail.
1. Identification of objectives and constraints
The primary step in the portfolio management process is to identify the limitations and
objectives. The portfolio management should focus on the objectives and constraints of
an investor in first place. The objective of an Investor may be income with minimum
amount of risk, capital appreciation or for future provisions. The relative importance of
these objectives should be clearly defined.

2. Selection of the asset mix

The next major step in portfolio management process is identifying different assets that
can be included in portfolio in order to spread risk and minimize loss.
In this step, the relationship between securities has to be clearly specified. Portfolio may
contain the mix of Preference shares, equity shares, bonds etc. The percentage of the
mix depends upon the risk tolerance and investment limit of the investor.
3. Formulation of portfolio strategy
After certain asset mix is chosen, the next step in the portfolio management process is
formulation of an appropriate portfolio strategy. There are two choices for the formulation
of portfolio strategy, namely

A: an active portfolio strategy;

B: passive portfolio strategy.

An active portfolio strategy attempts to earn a superior risk adjusted return by adopting
to market timing, switching from one sector to another sector according to market
condition, security selection or an combination of all of these.
A passive portfolio strategy on the other hand has a pre-determined level of exposure to
risk. The portfolio is broadly diversified and maintained strictly.

4. Security analysis
In this step, an investor actively involves himself in selecting securities.
Security analysis requires the sources of information on the basis of which analysis is
made. Securities for the portfolio are analyzed taking into account of their price, possible
return, risks associated with it etc. As the return on investment is linked to the risk
associated with the security, security analysis helps to understand the nature and extent
of risk of a particular security in the market.
Security analysis involves both micro analysis and macro analysis. For example,
analyzing one script is micro analysis. On the other hand, macro analysis is the analysis
of market of securities. Fundamental analysis and technical analysis helps to identify the
securities that can be included in portfolio of an investor.

5. Portfolio execution
When selection of securities for investment is complete the execution of portfolio plan
takes the next stage in a portfolio management process. Portfolio execution is related to
buying and selling of specified securities in given amounts. As portfolio execution has a
bearing on investment results, it is considered one of the important step in portfolio
management.

6. Portfolio revision
Portfolio revision is one of the most important step in portfolio management. A portfolio
manager has to constantly monitor and review scripts according to the market condition.
Revision of portfolio includes adding or removing scripts, shifting from one stock to
another or from stocks to bonds and vice versa.

7. Performance evaluation
Evaluating the performance of portfolio is another important step in portfolio
management. Portfolio manager has to assess the performance of portfolio over a
selected period of time. Performance evaluation includes assessing the relative merits
and demerits of portfolio, risk and return criteria, adherence of the portfolio management
to publicly stated investment objectives or some combination of these factors.
 The quantitative measurement of actual return realized, and the risk borne by the
portfolio over the period of investment is called for while evaluating risk and return
criteria. They are compared against the objective norms to assess the relative
performance of the portfolio.
Performance evaluation gives useful feedback to improve the quality of the portfolio
management process on a continuing basis.

TYPES OF PORTFOLIO MANAGEMENT

Portfolio Management can be of the following types:
Active Portfolio Management: As the name suggests, in an active portfolio
management service, the portfolio managers are actively involved in buying and selling
of securities to ensure maximum profits to investors.
Passive Portfolio Management: In a passive portfolio management, the portfolio
manager deals with a fixed portfolio designed to match the current market scenario.
Discretionary Portfolio Management Services: In Discretionary portfolio management
services, an individual investor authorizes a portfolio manager to take care of his
financial needs on his behalf. The individual gives money to the portfolio manager who
in turn takes care of all his investment needs, paper work, documentation, filing and so
on. In discretionary portfolio management, the portfolio manager has full rights to take
decisions on his client's behalf.
Non-Discretionary Portfolio Management Services: In non discretionary portfolio
management services, the portfolio manager can merely advise the client/ investor what
is good and bad for him but the client reserves full right to take his own decisions.

PORTFOLIO REVISION
The art of changing the mix of securities in a portfolio is called as portfolio revision.
The objective of portfolio revision is same as the portfolio selection. The ultimate aim
of portfolio revision is maximization of return and minimization of risk. Portfolio revision
involves changing the existing mix of securities.

This may be affected either by changing the securities currently included in the portfolio
or by altering the proportion of funds invested in the securities.
Need for Portfolio Revision
The primary factor necessitating portfolio revision is changes in the financial markets
since the creation of the portfolio.
The need for portfolio revisions may arise some because of some investor-related
factors also. These factors may be listed as:

1.​ Availability of additional funds for investment.

2.​ Change in risk tolerance.
3.​ Change in investment goals.
4.​ Need to liquidate a part of the portfolio to provide funds for some alternative use.
The portfolio needs to be revised to accommodate the changes in the investor’s
position.
Portfolio Revision Strategies
Two different strategies may be adopted for portfolio revisions which are as follows:

1. Active Revision Strategy

Active revision strategy involves frequent and sometimes substantial adjustments to the
portfolio.
Active portfolio revision is essentially carrying out portfolio analysis and portfolio
selection all over again.
It is based on an analysis of the fundamental factors affecting the economy, industry,
and company has also the technical factors like demand and supply.
Consequently, the time, skill, and resources required for implementing an active revision
strategy will be much higher.
The frequency of trading is likely to be much higher under active revision strategy
resulting in higher transaction costs.

2. Passive Revision Strategy

A passive revision strategy, in contrast, involves only minor and not frequent
adjustments to the portfolio over time.
The practitioners of passive revision strategy believe in market efficiency and
homogeneity of expectation among investors. They find a little incentive for actively
trading revising portfolios periodically.
Under passive revision strategy, adjustment to the portfolio is carried out according to
certain predetermined rules and procedures designed as formula plans.
These formula plans help the investor to adjust his portfolio according to changes in the
securities market

OBJECTIVES OF PORTFOLIO MANAGEMENT

1. Safety: Investment safety is one of the important objectives of

portfolio management. The motive should be absolute safety of the
investment .
2. Consistency of Returns: Portfolio Management involves to ensure
stable returns by investing in good portfolios
3. Capital growth: PM guarantees the growth of capital by reinvesting in
growth securities or by purchase of growth securities
4. Marketability/ Liquidity/ transferability. PM should always ensure the
investor’s liquidity requirements.
5. Diversification: Principle of portfolio management is diversification. I.e
Don’t put all eggs in one basket.
6. Favourable tax returns.: By reducing the tax burden yield can be
increased.