Portfolio Management

Meaning

Portfolio management is 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 determining

strengths, weaknesses, opportunities and threats

in the choice of debt vs. equity, domestic vs.

international, growth vs. safety, and many other

trade-offs encountered in the attempt to maximize

return at a given appetite for risk.

The portfolio is a collection of investment

instruments like shares, mutual funds, bonds ,

fixed deposits and other cash equivalents etc.

Active Vs Passive Management

There are two types of Portfolio Revision Strategies.

Active Strategy

Active Strategy involves frequent changes in an existing portfolio over a

certain period of time for maximum returns and minimum risks.

Active Strategy helps a portfolio manager to sell and purchase securities

on a regular basis for portfolio revision.

Stocks that seem to be best bets or attractive are given more weight in the

portfolio than their weight in the index. For ex. IT industry stocks may be

given more weight.

Passive Strategy

Passive Strategy involves rare changes in portfolio only under certain

predetermined rules.

The simplest form of passive management is holding the index fund that is

designed to replicate a good and well defined index of common stock such

as BSE Sensex and NSE-NIFTY.

Fundamental strategies:

Top down approach

Active equity managers based on fundamental analysis can

start from either direction depending on what exactly the

manager thinks is mispriced relative to his valuation model.

The try to focus on three things

First- they shift funds into and out of stocks , bonds,

depending of stock forecasts (Tactical asset allocation)

Secondly- they shift funds into different equity sectors and

industry (Sector rotation strategy)

Thirdly – they do stock picking to identify undervalue stocks

that is to buy low and sell high.

Technical strategies:

Active managers can form equity portfolios on the

basis of past stock price trends by assuming two things

-past stock price trends will continue in the same

direction

-they will reverse themselves

A contrarian investment strategy is based on belief

best time to buy stock is when majority of investors

are most bearish about it. And they well sell the stock

when it is near its peak.

Importance of Portfolio Management

Portfolio Management is a perfect way to

select the “Best Investment Strategy” based

on age, income, risk taking the capacity of the

individual and investment budget.

It helps to keep a gauge on the risk taken as

the process of PM keeps “Risk

Minimization” as the focus.