WHAT IS A PORTFOLIO?

A combination of various investment products like bonds, shares, securities, mutual funds and so on is called a portfolio. In the current scenario, individuals hire well trained and experienced portfolio managers who as per the clients risk taking capability combine various investment products and create a customized portfolio for guaranteed returns in the long run. It is essential for every individual to save some part of his/her income and put into something which would benefit him in the future. A combination of various financial products where an individual invests his money is called a portfolio. The portfolio, which is once selected, has to be continuously reviewed over a period of time and if necessary revised depending on the objectives of investor. Thus, portfolio revision means changing the asset allocation of a portfolio.

WHAT IS PORTFOLIO REVISION?

The art of changing the mix of securities in a portfolio is called as portfolio revision. The process of addition of more assets in an existing portfolio or changing the ratio of funds invested is called as portfolio revision. The sale and purchase of assets in an existing portfolio over a certain period of time to maximize returns and minimize risk is called as Portfolio revision. Portfolio revision involves changing the existing mix of securities:

Changing the securities currently included in the portfolio Altering the proportion of funds invested in the securities. New securities may be added or some of them may be removed from the portfolio.

It is process of adjusting the existing portfolio in accordance with the changes in financial market and investors position so as to ensure maximum return from the portfolio with minimum risk.

 NEED FOR PORTFOLIO REVISION

An individual at certain point of time might feel the need to invest more. The need for

portfolio revision arises when an individual has some additional money to invest.

Change in investment goal also gives rise to revision in portfolio. Depending on the

cash flow, an individual can modify his financial goal, eventually giving rise to changes in the portfolio i.e. portfolio revision.

Financial market is subject to risks and uncertainty. An individual might sell off some of his assets owing to fluctuations in the financial market.

PORTFOLIO REVISION STRATEGIES

There are two types of Portfolio Revision Strategies. The choice depends on the investors objectives, skill, resources and time. 1. Active Revision Strategy Active Revision Strategy involves frequent changes in an existing portfolio over a certain period of time for maximum returns and minimum risks. Active Revision Strategy helps a portfolio manager to sell and purchase securities on a regular basis for portfolio revision. It is based on analysis of technical factors and fundamental factors. Frequency of trading is much higher resulting in higher transaction cost. It is holding securities based on the forecast about the future. The portfolio managers vary their cash position or beta of the equity portion of the portfolio based on the market forecast. For e.g.- IT or FMCG industry stocks may be given more weights than their respective weights in the NSE-50.

2. Passive Revision Strategy Passive Revision Strategy involves rare changes in portfolio only under certain predetermined rules. These predefined rules are known as formula plans. According to passive revision strategy a portfolio manager can bring changes in the portfolio as per the formula plans only. It involves only minor & infrequent adjustments to the portfolio over time. Under this, adjustment to portfolio is carried according to predetermined rules & procedures designated as formula plans. It is a process of holding a well diversified portfolio for long term with the buy and hold approach. It also refers to the investors attempt to construct a portfolio that resembles the overall market returns. For e.g.- If Reliance Industrys stock constitutes 5% of the index, the fund also invests of 5% of its money in Reliance Industry Stock.

WHAT ARE FORMULA PLANS ?

Formula Plans are certain predefined rules and regulations deciding when and how many assets an individual can purchase or sell for portfolio revision. Securities can be purchased and sold only when there are changes or fluctuations in the financial market. It consists of a predetermined rule and these rules calls for specified action when there are changes in the securities market.

WHY FORMULA PLANS ?

Formula plans help an investor to make the best possible use of fluctuations

in the financial market. One can purchase shares when the prices are less and sell off when market prices are higher.

With the help of Formula plans an investor can divide his funds into

aggressive and defensive portfolio and easily transfer funds from one portfolio to other.

The formula plans specify predetermined rules for the transfer of funds from

aggressive portfolio to the defensive portfolio & vice versa. These rules enable the investors to automatically sell shares when their prices are rising & buy shares when their prices are falling.

Aggressive Portfolio Aggressive Portfolio consists of funds that appreciate quickly and guarantee maximum returns to the investor. The volatility of aggressive portfolio must be greater than that of conservative portfolio, the larger the difference between the two, the greater the profits the formula plan can yield.

Defensive Portfolio Defensive portfolio consists of securities that do not fluctuate much and remain constant over a period of time. Formula plans facilitate an investor to transfer funds from aggressive to defensive portfolio and vice a versa. The conservative (defensive) portfolio must include high- grade bonds having a high degree of safety and stability of the returns. The conservative portfolio tends to decline during periods of prosperity, owing to falling interest rates. While the stock prices are rising, therefore, the aggressive portfolio also rises

Advantages Of Formula Plan 1. Basic rules and regulation for the purchase and sale of securities are provided. 2. The rules and regulations are rigid and help to overcome human emotion. 3. The investor can earn higher profits by adopting the plans.

4. 5.

A course of action is formulated according to the investors objective. It controls the buying and of securities by investor.

6. It is useful for taking decisions on the timing of investment.

Disadvantages Of Formula Plan 1. The formula plan does not help the selection of security. 2. It is strict and not flexible with inherent problem of investment 3. The formula plan should be applied for long periods. 4. Even if the investor adopts the formula plan, he needs forecasting. Market forecasting helps him to identify the best stocks.

Different formula plans forimplementing passive portfolio revision Constant rupee value Constant ratio plan Dollar cost average