introduction to portfolio management

1. Introduction to
Portfolio Management
July, 2015
By: Prachi KulkarniBY- Ameya Ranadive

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Introduction

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Portfolio Management
- Introduction
- Functions of Portfolio Manager
- Portfolio Diversification
- Objectives of Portfolio Management
- Principles of Portfolio Management

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Portfolio means the total holding of securities
belonging to any person. (:SEBI)
Portfolio management is a technique of matching the
components of one’s investment mix with
predetermined financial goals.
The assets in the portfolio could include stocks,
bonds, options, gold, real estate, futures contracts, or
any other item that is expected to retain its value.
Meaning

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Portfolio Manager means any person who pursuant
to a contract or arrangement with a client, advises
or directs or undertakes on behalf of the client the
management or administration of a portfolio of
securities or funds.
Functions of Portfolio Managers:
Study economic environment affecting the capital
market and client’s investments
Study securities market, price trends etc.
Functions

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Maintain complete and updated financial performance
data of different companies,
Keep a track on the latest policies and guidelines of GoI,
RBI, SEBI,
Study industries that affect investor sentiment and
securities market,
Study behavior of financial institutions and other players
in the market,
Counsel the prospective investors on share market and
suggest on investment matters,
Buy and sell securities in order to attain maximum return
with lesser risk.
Functions

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Portfolio Diversification: Spreading portfolio assets
over sufficient number of securities to avoid
excessive risk from any one security.
We know different types of assets with their
peculiar features that enable diversification.
Investment in shares should be diversified by
industry and company size.
Diversification

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Objectives of Portfolio Management:
Stability of Income
Capital Growth
Liquidity
Safety
Tax Incentives
Convenience
Objectives

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Process

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Learn the basic
principles of finance
Protect the
portfolio
Performance
Evaluation
Set portfolio
objectives
Formulate an
investment strategy
Have a game plan
for portfolio revision

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Investment objectives are related to the risk and
return expectations of the investor.
Portfolio manager has to determine-
a. Return Objectives
b. Risk Objectives
Return Objectives: required (minimum), desired, pre-tax,
post-tax, real and nominal returns.
Portfolio Objectives

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Risk Objectives: are related to investor’s willingness and
ability to take risk. Few determinants of risk are:
• Required spending needs
• Long-term wealth target
• Financial strength
• Other liabilities in future
Willingness to take risk
Below Average Above Average
Below Average Low risk tolerance Counseling required
Above Average Counseling required High risk tolerance
Ability to take risk
Portfolio Objectives

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• Client description
• The purpose of the IPS with respect to policies, objectives,
goals, restrictions, and portfolio limitations.
• Identification of duties and responsibilities of parties
involved.
• The formal statement of objectives and constraints.
• A calendar schedule for both portfolio performance and IPS
review.
• Asset allocation ranges and statements regarding flexibility
and rigidity when formulating or modifying the strategic
asset allocation.
• Guidelines for portfolio adjustments and rebalancing.
Investment Policy Statement (IPS)

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Portfolio
Evaluation
Portfolio
Revision
Portfolio
Selection
Portfolio
Analysis
Security
Analysis
Portfolio Management

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• Security Analysis: It is the process of detailed
investigation into the financial, managerial, marketing
capabilities and macro and micro economic environment
of a security, in order to find out possibility of investment
to earn maximum profits with minimum risk.
Portfolio Management Phases
- It involves three stages:
Economy Analysis
Industry Analysis
Company Analysis

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• Portfolio Analysis: This phase consists of identifying
the range of possible portfolios that can be
constituted from a selected set of securities and
calculating their return and risks for further analysis.
Portfolio Management Phases
--Lower correlation between assets
mean greater diversification.
--More the assets, greater is the
diversification

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Portfolio Selection: On the basis of inputs of portfolio
analysis, a right mix of securities is selected in order to
maximise the returns and minimise the risk.
Portfolio Revision: In response to the dynamic market,
changes in investor’s funds position, risk appetite, the
mix of securities and their proportion in the portfolio
need to be revised.
Portfolio Management Phases

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Portfolio Evaluation:
• Portfolio manager wishes to evaluate his investment strategy in
terms of return per unit of risk. This can be done in absolute terms as
well as relative to overall market performance. Evaluation has to take
into account:
(i) Risk free rate and rate of return
(ii) Systematic and unsystematic risk
• There are different methods to evaluate performance of portfolio such as
Sharpe, Treynor and Jensen.
Portfolio Management Phases

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Investment
Success Rules
By Sir John Templeton

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Investment Success Rules
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• Begin with contemplation , you will think clearer & commit fewer mistakes
• Outperforming the market is a difficult task
• Invest - don’t trade or speculate
• Buy Value, not market trends or the economic outlook
• Search for bargains among quality stocks
• There’s no free lunch. Avoid sentiment & tip investments
• Do your homework or hire experts
• Diversify - by company, by industry
• Invest for maximum total real return
• Learn from your mistakes
• Aggressively monitor your investment
• Remain flexible and open minded about all types of investments
• Don’t panic
• Do not be fearful or negative too often
• Buy Low. So simple in concept, difficult in execution.

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THANK YOU