2. Introduction
 Although proper care has been taken while
constructing the portfolio but still there is a need to
revise the portfolio keeping the present situation in
mind. There may be a case where stock is not
performing to expectations and then arises the need of
portfolio revision. There are two ways of managing the
portfolio:

3. Passive management
 Passive management is a process of holding a well
diversified portfolio for a long term with the buy and hold
approach. Passive management refers to the investor’s
attempt to construct a portfolio that resembles the overall
market returns. The simplest form of passive management
is holding the index fund that is designed to replicate a
good and well defined index of the common stock such as
BSE-sensex or NSE-nifty. The fund manager buys every
stock in the index in the exact proportion of the stock in
that index. If reliance industry stock constitutes 5% of the
index, the fund also invests 5% of its money in reliance
industry stock.

4. `
 The problem in the index fund is transaction cost. It is
NSE-nifty, the manager has to buy 50 stocks in the
market proportion and cannot leave the stock to save
the transaction cost. Further the reinvestment of the
dividends also poses a problem. Here, the alternative is
to keep the cash in hand or to invest the money in
stocks incurring transaction cost. Keeping away the
stock of smallest weights and the money in hand fail to
replicate the index fund in proper manner. The
commonly used approaches in constructing an index is
as follows:

5. 1. Keeping each stock in proportion to its
representation in index.
2. Holding a specified no. of stocks for example
20, which historically track the index in the best
manner.
3. Holding a smaller set of stocks to match the index in
a pre-specified set of characteristic. This may be in
terms of sector, industry and the market
capitalisation.

6. Active management
 Active management is holding securities based on the
forecast about the future. The portfolio managers who
pursue active strategy with respect to market
components are called market timers. The portfolio
managers vary their cash position or beta of the equity
portion of the portfolio based on the market forecast.
 Stocks that seem to be best or attractive are given more
weights in the portfolio than their weights in the
index.

7. Formula plans
 The formula plans provides the basic rules and
regulations for the purchase and sale of securities. The
amount to be spend on different securities is fixed. The
amount may be fixed either in constant or variable
ratio. This depends on the investor’s attitude towards
risk and return.

8. Assumptions
(I) The first assumption is that certain percentage of the
investor’s fund is allocated to fixed income securities and
common stocks. Like if market is at bottom more
allocation is provided to equity and less to debt.
(II) If market moves higher the proportion of stocks in the
portfolio may either decline or remain constant
(III) Stocks are bought and sold whenever there is a
significant change in the price.
(IV) Investor should strictly follow the formula plan once
choosen.
(V) Investor should select the goods that move along the
market.

9. Advantages of formula plan
(I) Basic rules and regulation for the purchase and sale of
securities are provided.
(II) The rules and regulations are rigid and help to overcome
human emotion.
(III) The investor can earn higher profits by adopting the
plans.
(IV) A course of action is formulated according to the
investor’s objective.
(V) It controls the buying and of securities by investor.
(VI) It is useful for taking decisions on the timing of
investment.

10. Disadvantages
(I) The formula plan does not help the selection of
security.
(II) It is strict and not flexible with inherent problem of
investment
(III) The formula plan should be applied for long periods.
(IV) Even if the investor adopts the formula plan, he
needs forecasting. Market forecasting helps him to
identify the best stocks.