Portfolio Management and its Process
Portfolio Management
Definition: Portfolio Management, implies tactfully managing an investment portfolio, by selecting the best investment mix in the right proportion and continuously shifting them in the portfolio, to increase the return on investment and maximize the wealth of the investor. Here, portfolio refers to a range of financial products, i.e. stocks, bonds, mutual funds, and so forth, that are held by the investors
Portfolio Management Process
Portfolio management is a complex activity which may be broken down into following steps:
Step 1. Specification of Investment Objectives & Constraints:
The typical objectives sought by investors are current income, capital appreciation and safety of principal.
The relative importance of those objectives should be specified.
Further, the constraints arising from liquidity, time horizon, tax and special circumstances must be specified.
Step 2. Choice of the Asset Mix:
The most important decision in the portfolio management is the asset mix decision.
Very broadly, this is concerned with the proportion of the stocks and bonds in the portfolio.
The appropriate ‘stock-bond’ mix depends mainly on the risk tolerance and investment horizon of the investor. Some options of the asset mix are
* Bank Deposits
* Post Office Schemes
* Company FDs
* PPF
* Shares
* Bonds
* Insurance
* Money Market
* Precious Metal - Gold, Silver
* Derivatives etc.
Step 3. Formulation of Portfolio Strategy:
Once a certain asset mix is chosen, an appropriate portfolio strategy has to be formulated.
Two broadly classified strategies are: an active portfolio strategy or a passive portfolio strategy.
An active portfolio strategy strives to earn superior risk-adjusted return by resorting to market timing or sector adjustment or security selection or some combination of these.
A passive portfolio strategy involves, on the other hand, holding a broadly diversified portfolio and maintaining a pre-defined level of risk exposure.
Step 4. Selection of Securities:
Generally, investors pursue an active stance with respect to security selection: for stock selection, investors commonly go by Fundamental Analysis and/or Technical Analysis.
The factors that are considered in selecting bonds are yield to maturity, credit rating, term to maturity, tax shelter and liquidity.
Step 5. Portfolio Execution:
This is the phase of portfolio management which is mainly concerned with the implementation of Portfolio plan by actually buying or selling the securities in given amount.
Step 6. Portfolio Revision:
The value of portfolio as well as its composition – the relative proportion of bond and stock components – may change as stock and bond fluctuates.
Of course, the fluctuation in stocks is often dominant factor underlying the change.
In response to such changes, periodic rebalance of the portfolio is required.
This primarily involves a shift from stocks from bonds or vice-versa.
In addition, it may call for sector rotation as well as security switches.
Step 7. Portfolio Evaluation:
The performance of the portfolio should be evaluated periodically.
The key dimensions of portfolio performance evaluation risk and return and the key issue is whether the portfolio return is commensurate with its risk exposure. Such a preview may provide useful feedback to improve quality of the portfolio management process on a continuing basis.
Definition: Portfolio Management, implies tactfully managing an investment portfolio, by selecting the best investment mix in the right proportion and continuously shifting them in the portfolio, to increase the return on investment and maximize the wealth of the investor. Here, portfolio refers to a range of financial products, i.e. stocks, bonds, mutual funds, and so forth, that are held by the investors
Portfolio Management Process
Portfolio management is a complex activity which may be broken down into following steps:
Step 1. Specification of Investment Objectives & Constraints:
The typical objectives sought by investors are current income, capital appreciation and safety of principal.
The relative importance of those objectives should be specified.
Further, the constraints arising from liquidity, time horizon, tax and special circumstances must be specified.
Step 2. Choice of the Asset Mix:
The most important decision in the portfolio management is the asset mix decision.
Very broadly, this is concerned with the proportion of the stocks and bonds in the portfolio.
The appropriate ‘stock-bond’ mix depends mainly on the risk tolerance and investment horizon of the investor. Some options of the asset mix are
* Bank Deposits
* Post Office Schemes
* Company FDs
* PPF
* Shares
* Bonds
* Insurance
* Money Market
* Precious Metal - Gold, Silver
* Derivatives etc.
Step 3. Formulation of Portfolio Strategy:
Once a certain asset mix is chosen, an appropriate portfolio strategy has to be formulated.
Two broadly classified strategies are: an active portfolio strategy or a passive portfolio strategy.
An active portfolio strategy strives to earn superior risk-adjusted return by resorting to market timing or sector adjustment or security selection or some combination of these.
A passive portfolio strategy involves, on the other hand, holding a broadly diversified portfolio and maintaining a pre-defined level of risk exposure.
Step 4. Selection of Securities:
Generally, investors pursue an active stance with respect to security selection: for stock selection, investors commonly go by Fundamental Analysis and/or Technical Analysis.
The factors that are considered in selecting bonds are yield to maturity, credit rating, term to maturity, tax shelter and liquidity.
Step 5. Portfolio Execution:
This is the phase of portfolio management which is mainly concerned with the implementation of Portfolio plan by actually buying or selling the securities in given amount.
Step 6. Portfolio Revision:
The value of portfolio as well as its composition – the relative proportion of bond and stock components – may change as stock and bond fluctuates.
Of course, the fluctuation in stocks is often dominant factor underlying the change.
In response to such changes, periodic rebalance of the portfolio is required.
This primarily involves a shift from stocks from bonds or vice-versa.
In addition, it may call for sector rotation as well as security switches.
Step 7. Portfolio Evaluation:
The performance of the portfolio should be evaluated periodically.
The key dimensions of portfolio performance evaluation risk and return and the key issue is whether the portfolio return is commensurate with its risk exposure. Such a preview may provide useful feedback to improve quality of the portfolio management process on a continuing basis.
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