Portfolio Management

Investment portfolio refers to the various assets of an investor which are to be considered as a
unit. It is not merely a collection of unrelated assets but a carefully blended asset combination within a unified framework. It is necessary for investors to take all decisions as regards their wealth position in a context of portfolio. The object of portfolio is to reduce risk by diversification and maximize gains.

Thus, portfolio is a combination of various instruments of investment. It is also a combination of securities with different risk-return characteristics. A portfolio is built up out of the wealth or income of the investor over a period of time with a view to manage the risk-return preferences. The analysis of risk-return characteristics of individual securities in the portfolio is made from time to time and changed that may take place in combination with other securities are adjusted accordingly. The objective of portfolio is to reduce risk by diversification and maximize gains.

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Portfolio management includes portfolio planning, selection and construction, review and
evaluation of securities. The skill in portfolio management lies in achieving a sound
balance between the objectives of safety, liquidity and profitability. It should be revised at regular intervals as well.

A professional, who manages other people’s or institution’s investment portfolio with the
object of profitability, growth and risk minimization is known as a portfolio manager. Portfolio management or investment helps investors in effective and efficient management of their investment to achieve their financial goals. The rapid growth of capital markets in India has opened up new investment avenues for investors. The stock markets have become attractive investment options for the common man. But investors should be able to effectively and efficiently manage investments in order to keep maximum returns with minimum risk.

A portfolio manager by virtue of his knowledge, background and experience is expected
to study the various avenues available for profitable investment and advise his client to
enable the latter to maximize the return on his investment and at the same time
safeguard the funds invested.

OBJECTIVES OF PORTFOLIO MANAGEMENT

• Security/Safety of Principal: Security not only involves keeping the principal sum intact but also keeping intact its purchasing power. Safety means protection for investment against loss under reasonably variations. In order to provide safety, a careful review of economic and industry trends is necessary. In other words, errors in portfolio are unavoidable and it requires extensive diversification. Even investor wants that his basic amount of investment should remain safe.
• Stability of Income: So as to facilitate planning more accurately and systematically the reinvestment of income is important.
• Capital Growth: This can be attained by reinvesting in growth securities or through purchase of growth securities. Capital appreciation has become an important investment principle. Investors seek growth stocks which provides a very large capital appreciation by way of rights, bonus and appreciation in the market price of a share.
• Marketability: It is the case with which a security can be bought or sold. This is essential for providing flexibility to investment portfolio.
• Liquidity: It is desirable to investor so as to take advantage of attractive opportunities upcoming in the market.
• Diversification: The basic objective of building a portfolio is to reduce risk of loss of capital and / or income by investing in various types of securities and over a wide range of industries.
• Tax Incentives: The effective yield an investor gets form his investment depends on tax to which it is subject. By minimizing the tax burden, yield can be effectively improved. Investors try to minimize their tax liabilities from the investments. The portfolio manager has to keep a list of such investment avenues along with the return risk, profile, tax implications, yields and other returns. Investment programmers without considering tax implications may be costly to the investor.

Portfolio construction requires a knowledge of the different aspects of securities. The components of portfolio construction are (a) Asset allocation (b) Security selection and (c) Portfolio structure. Asset allocation means setting the asset mix. Security selection involves choosing the appropriate security to meet the portfolio targets and portfolio structure involves setting the amount of each security to be included in the portfolio.

A common way of reducing risk is to follow the principle of diversification. Diversification is investing in a number of different securities rather than concentrating in one or two securities. The diversification assures the benefit of obtaining the anticipated return on the portfolio of securities. In a diversified portfolio, some securities may not perform as expected but other securities may exceed expectations with the effect that the actual results of the portfolio will be reasonably close to the anticipated results.

Portfolio managers make decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance.
A professional, who manages other people’s or institution’s investment portfolio with the object of profitability, growth and risk minimization, is known as a portfolio manager.

The role of portfolio manager includes the following,

• Quantify their clients’ risk tolerances and return needs by taking into account his liquidity, income, time horizon, expectations
• Do an optimal asset allocation and choose strategy that meets the clients needs
• Diversify the portfolio to eliminate the unsystematic risk
• Monitor the changing market scenario, expectations, client needs etc and rebalance accordingly
• Lower the transaction cost by minimizing the taxes, trading turnover, and liquidity costs.

When it comes to investing there are many options available to individuals. A person can invest in stocks, bonds, mutual funds, etc. Once a person invests in multiple products their performance needs to be tracked and strategies made to ensure the investor reaps the most profit possible. This is where the investment portfolio comes into play. Maintaining a diverse portfolio helps to mitigate loss because the investor has not placed all of their eggs in one basket. There are different types of investment portfolios. Perhaps the most common type’s individuals are exposed to are: Conservative, Balanced and Aggressive Growth.