Definition of Portfolio Management:
It is a process of encompassing many activities of investment in assets and securities. The portfolio management includes the planning, supervision, timing, rationalism and conservatism in the selection of securities to meet investor¶s objectives. It is the process of selecting a list of securities that will provide the investor with a maximum yield constant with the risk he wishes to assume. The portfolio management is growing rapidly serving broad array of investors ± both individual and institutional ± with investment portfolio ranging in asset size from few thousands to crores of rupees. Despite growing importance, the subject of portfolio and investment management is new in the country and is largely misunderstood. In most cases, portfolio management has been practiced as a investment management counseling in which the investor has been advised to seek assets that would grow in value and a nd / or provide income. Portfolio management is concerned with efficient management of investment in the securities. An investment is defined as the current commitment of funds for a period of time in order to derive a future flow of funds that will compensate the investing unit: -
For the time the funds are committed.
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For the expected rate of inflation, and
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For the uncertainty involved in the future flow flow of funds.
The portfolio management deals with the process of selection of securities from the number of opportunities available with different expected returns and carrying different levels of risk and the selection of securities is made with a view to provide the investors the maximum yield for a given level of risk or ensure minimize risk for a given level of return. Portfolio is a collection of investments all owned by the same individual or organization. These investments often include stocks, which are investments in individual businesses; bonds, which are investments in debt that are designed to earn interest; and mutual funds, which are essentially pools of money from many investors investo rs that are invested by professionals or according to indices. http://www.investorwords.com/3741/portfolio.html#ixzz1OwhV5rIu
Investors invest his funds in a portfolio expecting to get a good return consistent with the risk that he has to bear. The return realized from the portfolio has to be measured and the performance of the portfolio has to be evaluated. It is evident that rational investment activity involves creation of an investment portfolio. Portfolio management comprises all the processes involved in the creation and maintenance of an investment portfolio. It deals specially with security analysis, portfolio analysis, portfolio
selection, portfolio revision and portfolio evaluation. Portfolio management makes use of analytical techniques of analysis and conceptual theories regarding rational allocation of funds. Portfolio management is a complex process, which tries to make investment activity more rewarding and less risky.
Application to portfolio Management:
Portfolio Management involves time element and time horizon. The present value of future return/cash flows by discounting is useful for share valuation and bond valuation. The investment strategy in portfolio construction should have a time horizon, say 3 to 5 year; to produce the desired results of say 20-30% ret urn per annum. Besides portfolio management should also take into account tax benefits and investment incentives. As the returns are taken by investors net of tax payments, and there is always an element of inflation, returns net of taxation and inflation are more relevant to tax paying investors. These are called net real rates of returns, which should be more than other returns. They should encompass risk free return plus a reasonable risk premium, depending upon the risk taken, on the instruments/assets invested. Objectives of Portfolio Management:-
The objective of portfolio management is to invest in securities is securities in such a way that one maximizes one¶s returns and minimizes risks in order to achieve one¶s investment objective. A good portfolio should have multiple objectives and achieve a sound balance among them. Any one objective should not be given undue importance at the cost of others. Presented below are some important objectives of portfolio management. 1. Stable Current Return: -
Once investment safety is guaranteed, the portfolio should yield a steady current income. The current returns should at least match the opportunity cost of the funds of the investor. What we are referring to here current income by way of interest of dividends, not capital gains. 2. Marketability: -
A good portfolio consists of investment, which can be marketed without difficulty. If there are too many unlisted or inactive shares in your portfolio, you will face problems in encasing them, and switching from one investment to another. It is desirable to invest in companies listed on major stock exchanges, which are actively traded. 3. Tax Planning: -
Since
taxation is an important variable in total planning, a good portfolio should enable its owner to enjoy a favorable tax shelter. The portfolio should be developed considering not only income tax, but capital gains tax, and gift tax, as well. What a good portfolio aims at is tax planning, not tax evasion or tax avoidance. 4.
Appreciation in the value of capital:
A good portfolio should appreciate in value in order to protect the investor from any erosion in purchasing power due to inflation. In other words, a balanced portfolio must consist of certain investments, which tend to appreciate in real value after adjusting for inflation. 5. Liquidity:
The portfolio should ensure that there are enough funds available at short notice to take care of the investor¶s liquidity requirements. It is desirable to keep a line of credit from a bank for use in case it becomes necessary to participate in right issues, or for any other personal needs. 6. Safety of the investment:
The first important objective of a portfolio, no matter who owns it, is to ensure that the investment is absolutely safe. Other considerations like income, growth, etc., only come into the picture after the safety of your investment is ensured. Investment safety or minimization of risks is one of the important objectives of portfolio management. There are many types of risks, which are associated with investment in equity stocks, including super stocks. Bear in mind that there is no such thing as a zero risk investment. More over, relatively low risk investment give correspondingly lower returns. You can try and minimize the overall risk or bring it to an acceptable level by developing a balanced and efficient portfolio. A good portfolio of growth stocks satisfies the ent ire objectives outline above. Scope of Portfolio Management:-
Portfolio management is a continuous process. It is a dynamic activity. The following are the basic operations of a portfolio management. a)
Monitoring the performance of portfolio by incorporating the latest market conditions.
b)
Identification of the investor¶s objective, constraints and preferences.
c)
Making an evaluation of portfolio income (comparison with targets and achievement).
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Making revision in the portfolio.
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Implementation of the strategies in tune with investment objectives.
5 Strategies to Achieve Your Expected Rate of Return
by Roger Wohlner If your actual returns are different than what you were expecting, consider these strategies to try and achieve your expected rate of return: -Save more of your income -Invest in a tax-efficient manner -Adequately diversify your investment portfolio. -Consider international investments. -Evaluate your portfolio's performance annually. What
Does Portfolio Manager Mean? The person or persons responsible for investing a mutual, exchange-traded or closed-end fund's assets, implementing its investment strategy and managing the da y-to-day portfolio trading.
Investopedia explains Portfolio Manager The portfolio manager is one o f the most important factors to consider when looking at fund investing. Portfolio management can be act ive or passive (index tracking). Historical performance records indicate that only a minority of active fund managers beat t he market indexes. What
Does Portfolio Management Mean? The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against. performance.
Portfolio management is all about strengths, weaknesses, o pportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many ot her tradeoffs encountered in the attempt to maximize return at a given appetite for risk. Investopedia explains Portfolio Management In the case of mutual and exchange-traded funds (ETFs), there are two forms of portfolio management: passive and active. Passive management simply tracks a market index, commonly referred to as indexing or index investing. Active management involves a single manager, comanagers, or a team of managers who attempt to beat the market return by actively managing a fund's portfolio through investment decisions based on research and dec isions on individual holdings. Closed-end funds are generally actively managed.
