portfolio management

Definition
The process of managing the assets of a mutual fund, including choosing and monitoring appropriate investments and allocating funds accordingly.

Managing different types of securities for minimizing risk and maximizing returns through diversification of funds into different securities. Shares,Bonds,gold,Real assets are some of securities comes under PF investments.
1. INTRODUCTION:Stock exchange operations are peculiar in nature and most of the Investors feel insecure in managing their investment on the stock market because it is difficult for an individual to identify companies which have growth prospects for investment. Further due to volatile nature of the markets, its require constant reshuffling of portfolios to capitalized on the growth opportunities. Even after identifying the growth oriented companies and their securities, the trading practices are also complicated, making it a difficult task for investors to trade in all the exchange and follow up on post trading formalities. That is why professional investment advice through portfolio management service can help the investors to make an intelligent and informed choice between alternative investments opportunities without the worry of loosing their invested money.Hence this is very much important to the stock dealers specially who are new to the market. 2. MEANING OF PORTFOLIO MANAGEMENT:Portfolio management in common parlance refers to the selection of securities and their continuous shifting in the portfolio to optimize returns to suit the objectives of an investor. In India, as well as in a number of western countries, portfolio management service has assumed the role of a specialized service now a days and a number of professional merchant bankers compete aggressively to provide the best to high networth clients, who have little time to manage their investments. The idea is catching on with the boom in the capital market and an increasing number of people are inclined to make profits out of their hard-earned savings. Portfolio management service is one of the merchant banking activities recognized by Securities and Exchange Board of India(SEBI). The service can be rendered either by merchant bankers or portfolio managers or discretionary portfolio manager as define in clause (e) and (f) of Rule 2 of Securities and Exchang Board of India(Portfolio Managers)Rules, 1993 and their functioning are guided by the SEBI. 3. OBJECTIVES OF PORTFOLIO MANAGEMENT:The major objectives of portfolio management are summarized as below:i. Keep the security, safety of Principal sum intact both in terms of money as well as its purchasing

power. ii. Stability of the flow of income so as to facilitate planning more accurately and systematically the reinvestment or consumption of income. iii. To attain capital growth by re-investing in growth securities or through purchase of growth securities. iv. Marketability of the security which is essential for providing flexibility to investment portfolio. v. Liquidity i.e.nearness to money which is desirable for the investor so as to take advantage of attractive opportunities upcoming in the market. vi. Diversification: The basic objective of building a portfolio is to reduce the risk of loss of capital and income by investing in various types of securities and over a wide range of industries. vii. Favourable tax status : The effective yield an investor gets from his investment depends on tax to which it is subject. By minimizing the tax burden, yield can be effectively improved.

4. BASIC PRINCIPLES OF PORTFOLIO MANAGEMENT:There are two basic principles for effective portfolio management which are given below:1. Effective investment planning for the investment in securities by considering the following factorsa. Fiscal,financial and monetary policies of the Govt.of India and the Reserve Bank of India. b. Industrial and economic environment and its impact on industry Prospect in terms of prospective technological changes, competition in the market, capacity utilization with industry and demand prospects etc. II. Constant review of investment: Its require to review the investment in securities and to continue the selling and purchasing of investment in more profitable manner. For this purpose they have to carry the following analysis: a. To assess the quality of the management of the companies in which investment has been made or proposed to be made. b. To assess the financial and trend analysis of companies balance sheet and profit&loss Accounts to identify the optimum capital structure and better performance for the purpose of withholding the investment from poor companies. c. To analysis the security market and its trend in continuous basis to arrive at a conclusion as to whether the securities already in possession should be disinvested and new securities be purchased. If so the timing for investment or dis-investment is also revealed. 5. ACTIVITIES IN PORTFOLIO MANAGEMENT:A. There are three major activities involved in an efficient portfolio management which are as follows:a. Identification of assets or securities, allocation of investment and also identifying the classes of assets for the purpose of investment. b. They have to decide the major weights, proportion of different assets in the portfolio by taking in to consideration the related risk factors. c. Finally they select the security within the asset classes as identify. The above activities are directed to achieve the sole purpose to maximize return and minimize risk in the investment even if there are unlimited risk in the market. Let us have a look on the composite risk involve in the market during operation:I. Interest rate risk: This arises due to variability in the interest rates from time to time. A changes in the interest rates establishes an inverse relationship in the price of the security i.e. price of securities trends to move inversely with change in rate of interest. Long term securities shows greater variability in compare to short term securities by this risk.

II. Purchasing power risk: It is also known as inflation risk and the inflation affect the purchasing power adversely. Inflation rates vary over time and changes unexpectedly causing erosion in the value of real return and expected return. Thus purchasing power risk is more in inflationary conditions especially in respect of bond and fixed income securities. It is not desirable to invest in such securities during inflationary situations. Purchasing power risk is however less in flexible income securities like equity shares or common stock where rise in dividend income off-sets increase in the rate of inflation and provides advantage of capital gain. III. Business risk: Business risk arises from sale and purchase of securities affected by business cycles, technological changes etc. Business cycles affect all types of securities viz. there is cheerful movement in boom due to bullish trend in stock price where as bearish trend in depression brings down fall in the prices of all types of securities. Therefore securities bearing flexible income affected more than the fixed rated securities during depression due to decline in their market price. IV. Financial Risk: This arises due to changes in the capital structure of the company. It is also known as leveraged risk and expressed in the terms of debt-equity ratio. Excess of debt over equity in the capital structure of a company indicates that the company is highly geared even if the per capital earnings(EPS) of such company may be more. Because highly dependence on borrowings exposes to the risk of winding up for its inability to honour its commitments towards lenders and creditors. So the investors should be aware of this risk and portfolio manager should also be very careful. By taking in to accounts of all the above factors, investment decision in portfolio management are taken as followings: B. INVESTMENT DECISION: By a certain sum of funds, the investment decision are basically depends upon the following factors:I. Objectives of investment portfolio: This is a crucial point which a Finance Manager must consider. There can be many objectives of making an investment. The manager of a provident fund portfolio has to look for security and may be satisfied with none too high a return, where as an aggressive investment company be willing to take high risk in order to have high capital appreciation. How the objectives can affect in investment decision can be seen from the fact that the Unit Trust of India has two major schemes : Its capital units are meant for those who wish to have a good capital appreciation and a moderate return, where as the ordinary unit are meant to provide a steady return only. The investment manager under both the scheme will invest the money of the Trust in different kinds of shares and securities. So it is obvious that the objectives must be clearly defined before an investment decision is taken. II. Selection of investment: Having defined the objectives of the investment, the next decision is to decide the kind of investment to be selected. The decision what to buy has to be seen in the context of the following:a. There is a wide variety of investments available in market i.e. Equity shares, preference share, debentures, convertible bond, Govt.securities and bond, capital units etc. Out of these what types of securities to be purchased . b. What should be the proportion of investment in fixed interest dividend securities and variable dividend bearing securities. The fixed one ensure a definite return and thus a lower risk but the return is usually not as higher as that from the variable dividend bearing shares. c. If the investment is decided in shares or debentures, then the industries showed a potential in growth

should be taken in first line. Industry-wise-analysis is important since various industries are not at the same level from the investment point of view. It is important to recognized that at a particular point of time, a particular industry may have a better growth potential than other industries. For example, there was a time when jute industry was in great favour because of its growth potential and high profitability ,the industry is no longer at this point of time as a growth oriented industry. d. Once industries with high growth potential have been identified, the next step is to select the particular companies, in whose shares or securities investments are to be made. To identify the industries, which have a high growth potential the following techniques/approaches may be taken in to consideration:a. Statistical analysis of past performance: A statistical analysis of the immediate past performance of the share price indices of various industries and changes there in related to the general price index of shares of all industries should be made. The Reserve Bank of India index numbers of security prices published every month in its bulletin may be taken to represent the behaviour of share prices of various industries in the last fiew years. The related changes in the price index of each industry as compare with the changes in the average price index of the shares of all industries would show those industries which are having a higher growth potential in the past fiew years. It may be noted that a Industry may not remaining a growth Industry for all the time. So we have to make an assessment of the various Industries keeping in view the present potentiality also to finalized the list of Industries in which we will try to spread our investment. b. Assessing the intrinsic value of an Industry/Company:After identifying the Industry, we have to assess the various factors which influence the value of a particular share. Those factors generally relate to the strengths and weaknesses of the company under consideration, Characteristics of the industry within which the company fails and the national and international economic scene. The major objective of the analysis is to determine the relative quality and the quantity of the security. It is also to be seen that the security is good at current market prices. This approach is known as intrinsic value approach. Industry analysis can help to assess the nature of demand of a particular product, Cost structure of the industry and other economic and Govt. constraints on the same. An appraisal of the particular industries prospect is essential and the basic profitability of any company is depends upon the economic prospect of the industry to which it belongs. The following factors are important in this regards:a. Demand and Supply pattern for the industries products and its growth potential: The management expert identify fives stages in the life of an industry. These are Introduction, development, rapid growth, maturity and decline. If an industry has already reached the maturity or decline stage, its future demand potential is not likely to be high. b. Profitability : It is a vital consideration for the investors as profit is the measures of performance and a source of earning for him. So the cost structure of the industry as related to its sale price is an important consideration. The other point to be considered is the ratio analysis, specially return on investment, gross profit and net profit ratio of the existing companies in the industry. c. Particular characteristics of the industry: Each industry has its own characteristics, which must be studied in depth in order to understand their impact on the working of the industry. Because the industry having a fast changing technology become obsolete at a faster rate. Similarly, many industries are characterized by high rate of profits and losses in alternate years. Such fluctuations in earnings must be carefully examine.

d. Labour management relations in the industry: The state of labour-management relationship in the particular industry also has a great deal of influence on the future profitability of the industry. So it is vital to see that the industry under analysis has been maintaining a cordial relationship between labour and management. e. Company Analysis: To select a company for investment a number of qualitative factors have to be seen to visualize the performance of the company in future by analyzing its past performance such as :1. Size and ranking: In this regard the net capital employed, the net profits,the return on investment and the sales volume of the company under consideration may be compared with similar data of other company in the same industry group to assess the risk associated with the company. 2. Growth record: Three growth indicators may be looked in to i.e. Price earnings ratio, Percentage growth rate of earnings per annum and Percentage growth rate of net block of the company in the past fiew years should be examined. 3. Financial analysis: By the help of Financial analysis we can understand the financial solvency and liquidity, the efficiency, the profitability and the financial and operating leverage of the company in which the fund are used. 4. Pattern of existing stock holding: This analysis would show the stake of Various parties associate with the company. An interesting case in this regard is that of the Panjab National Bank in which the L.I.C. and other financial institutions had substantial holdings. When the bank was nationalized, the residual company proposed a scheme whereby those shareholders, who wish to opt out, could received a certain amount as compensation in cash. It was only at the instant and bargaining strength of institutional investors that the compensation offered to the shareholders, who wish to opt out of the company, was raised considerably. 5. Marketability of the shares: Mere listing of a share on the stock exchange does not automatically mean that the share can be sold and purchase. There may be inactive shares with no transaction for long period. So we have to examined the speculative interest of such scrip, extent of public holding and the particular stock exchange where it is traded. Fundamental analysis thus is basically an examination of the economics and financial aspects of a company with the aim of estimating future earnings and dividend prospect. So after having analysed of all the relevant information we have to decide whether we should buy or sell the securities. II. Timing of Purchases:The timing of dealings in the securities, specially shares is of crucial importance, because after correctly identifying the companies one may lose money if the timing is bad due to wide fluctuation in the price of shares of that companies. The decision regarding timing of purchases is particularly difficult because of certain psychological factors. It is obvious that if a person wishes to make any gains, he should buy cheap and sell dear, i.e. buy when the share are selling at a low price and sell when they are at a higher price. But in practical it is a difficult task. When the prices are rising in the market i.e. there is bull phase, everybody joins in buying without any delay because every day the prices touch a new high. Later when the bear face starts, prices tumble down everyday and everybody starts counting the losses. The ordinary investor regretted such situation by thinking why he did not sell his shares in previous day and ultimately sell at a lower price. This kind of investment decision is entirely devoid of any sense of timing. There are various theories and technique to deal with the portfolio management, some of their concept

are discuss shortly hereunder:Dow Jones theory: According to this theory of Charles H. Dow , purchase should be made when bull trend started i.e. when price of the share are on the rise and sells them when they are on the fall i.e. at the time when bearish trend started. Randam walk theory: Basically stock prices can never be predicted because they are not a result of any underlying factors but are mere statistical ups and downs. This hypothesis is known as Randam walk hypothesis. In the Laymans language it may be said that prices on the stock exchange behave exactly the way a drunk would behave while walking in a blind lane, i.e. up and down, with an unsteady way going in any direction he likes, bending on the side once and on the other side the second time. Capital Assets Pricing Model(CAPM): CAPM provides a conceptual framework for evaluating any investment decision. It is used to estimate the expected return of any portfolio with the following formula: E(Rp) = Rf+Bp(E(Rm)-Rf) Where, E(Rp) = Expected return of the portfolio Rf = Risk free rate of return Bp = Beta portfolio i.e. market sensitivity index E(Rm)= Expected return on market portfolio (E(Rm)-Rf)= Market risk premium The above model of portfolio management can be used effectively to:*Estimate the required rate of return to investors on companys common stock. **Evalute risky investment projects involving real Assets. ***Explain why the use of borrowed fund increases the risk and increases the rate of return. ****Reduce the risk of the firm by diversifying its project portfolio. Moving Average: It refers to the mean of the closing price which changes constantly and moves ahead in time, there by encompasses the most recent days and deletes the old one. CONCLUSION From the above discussion it is clear that portfolio functioning is based on market risk, so one can get the help from the professional portfolio manager or the Merchant banker if required before investment. Because applicability of practical knowledge through technical analysis can help an investor to reduce risk. In other words Security prices are determined by money manager and home managers, students and strikers, doctors and dog catchers, lawyers and landscapers, the wealthy and the wanting. This breadth of market participants guarantees an element of unpredictability and excitement. If we were all totally logical and could separate our emotions from our investment decisions then, the determination of price based on future earnings would work magnificently. And since we would all have the same completely logical expectations, price would only change when quarterly reports or relevant news was released. I believe the future is only the past again, entered through another gate Sir Arthur wing Pinero. 1893. If price are based on investors expectations, then knowing what a security should sell for become less important than knowing what other investors expect it to sell for. There are two times of a mans life

when he should not speculate; when he cant afford it and when he can Mark Twin,1897. A Casino make money on a roulette wheel , not by knowing what number will come up next, but by slightly improving their odds with the addition of a 0 and 00. Yet many investors buy securities without attempting to control the odds. If we believe that this dealings is not a Gambling we have to start up it with intelligent way. Through it is basically a future estimation or expectation , one should know the standard norms and related rules for lowering the risk. MRS. APARNA (SEN)BISWAS dhrubaparna@gmail.com

For more details, visit http://moneyandemploymentonline.blogspot.com