12-11-2012, 12:54 PM
PORTFOLIO MANAGEMENT
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INTRODUCTION
Portfolio management is all about strengths, weaknesses, opportunity, threats in the choice of debt vs. equity, domestic vs. international vs. growth vs. safety, and numerous other trades-offs encountered in the attempt to maximize return at a given appetite for risk.
A portfolio is a collection of securities. Since it is rarely desirable to invest the entire funds of an individual or an institution in a single security, it is essential that every security be view in portfolio context. Thus, it seems logical that the expected return on a portfolio should depend on the expected return of each of the security contained in the portfolio.
Portfolio analysis considers the determination of future risk and return in holding various blends of individual securities. Portfolio expected return is a weighted average of the expected return of individual securities but portfolio variance, in short contrast, can be something less than a weighted average of a security variance. As a result, an investor can sometimes reduce portfolio risk by adding security will greater individual risk than any other security in the portfolio. This is because risk depends greatly on the covariance among returns of individual securities. Portfolios, which are combination of securities may or may not take only aggregate characteristics of their individual parts.
Purchasing power risk:
It is also known as inflation risk and the inflation affects 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.
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.
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.
INVESTMENT DECISION:
Given a certain sum of funds, the investment decision are basically depends upon the following factors:-
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.
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.
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.
NEED FOR PORTFOLIO MANAGEMENT
Portfolio management is process encompassing many activities of investment in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis, judgment and actions. The objectives of this service help the investors with the expertise of professional in investment portfolio management. It involves construction of portfolio based upon the investor's objectives, constraints and preferences for a risk, returns, and tax liability. The portfolio reviewed and adjusted from time to time in tune with market conditions. The evolution 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 surplus funds in hand among the verity of financial assets open for investment. Portfolio theory concerns itself with the principal governing such allocation. The modern view of investment is oriented more towards the assembly of proper combinations of individual securities to force investment portfolio. 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.
PORTFOLIO SELETION
Portfolio analysis provides the input for next phase in portfolio management, which is portfolio selection. The proper goal of portfolio analysis
can be to get high return at a given level of risks. The inputs from portfolio analysis can be used to identify the set of efficient portfolios. From this set of portfolio, optimal has to be selected for investment.
PORTFOLIO REVISION
Having constructed the optimal portfolio, the investor has to constantly monitor the portfolio to ensure that it continues to be optimal. As the economy and financial markets are dynamic, the changes take place almost daily. The investor now has to revise his portfolio. The revision leads to purchase of new securities and sale of some of the existing securities from the portfolio.
PORTFOLIO EVALUTION
The objective of construction a portfolio and revising it periodically is to earn maximum return with minimum risk. Portfolio evaluation is the process, which is concerned with assessing the performance of a portfolio over selected period in terms of return and risk. Portfolio evolution useful in yet another way. It provided a mechanism of identifying weakness in the investment process and for improving these deficient areas.
RISK
Risk refers to the possibility that the actual outcomes of an investment will be differ from its expected outcome. More specifically, most investors are concerned about the range of the possible outcome. Risk distinguished between the expected return and the realize return from an investment. The expected return is the uncertain future return that an investor expects to get from his investment. The realized return is the certain return that an investor has actually obtained from his investments at the end of the holding period.
RETURN ON PORTFOLIO
Each security in portfolio contributes returns in the proportion of its investment. Thus the portfolio expected returns is the average of the expected returns is weight representing the proportionate share of the security in the total investment. Why an investor does have some many securities in his portfolio, if the security ABC given the maximum returns, why not he the security all his funds and thus maximum the return? The answers to this question lie in the investor's perception of risk attached to investments his objectives of income, safety, appreciation, liquidity and hedge against loss of value of money etc., this pattern of investment in different asset categories, securities categories, types of investment etc., would all be described under the caption of diversification which aims at the reduction or even elimination of nonsystematic or company related risk and achieve the specific objectives of investors.
PORTFOLIO RISK
Risk on a portfolio from risk on individual securities. The risk is reflected in the variability of the return from zero to infinity. The expected return depends on the probability of return and their weighted contribution of the portfolio. There are two measures of risk in this context, one is the absolute deviation and other is standard deviation.
NEED OF THE STUDY
In the finance field, it is a common knowledge that money or finance is scarce and the investors try to maximize their return. But, the return is higher, if the risk is also higher. Return and risk go together and they have a tradeoff. The art of investment is to see that the return is maximized with the minimum of risk, which is inherent in invest
In the above discussion, we concentrated on the word "investment" and for making invest we need to make securities analysis. Combination of securities with different risk return characteristics will constitute the portfolio of the investor.
The portfolio is also built up out of the wealth or income of the investor over a period, with a view to suit his risk or return preferences to that of the portfolio analysis is thus an analysis of the risk characteristics of individual securities in the portfolio and changes that may take. Place in the combination with other securities due to interaction among themselves and impact of each of them on others.
WHAT IS THE STOCK EXCHANGE
Stock exchange is a market is a security are brought and sold and it is an essential component of a developed capital market.
According to the securities contracts (regulation) Act, 1956, stock exchange means “any body of individuals, whether incorporated or no, constituted for the purpose of assisting, regulating or controlling the business of buying and selling or dealing in securities”.
Continuous price Formation
The third major function closely related to the second, discharged by the stock exchange is the process continues price formation the collective judgment of the many people opining the simultaneously in the market resulting in the emergency of a large no of the buyers and sellers at any point of time, as the affect of beginning about changing in the levels of the securities in small products they buy evening out wide swing in prices.
Trading process
An investment must have some knowledge of how the securities market operators. The market of old of new securities on stock market can be done only thought of members (brokers) of the stock exchange. Those members are either individuals or partnerships firms, in the process of trading in stock exchange there is a basic need for the between an individual and broker, a transaction to buy and sell securities is called trading this is to be done through the following process.
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