Portfolio Management

Portfolio

                  Portfolio is a combination of securities such as stocks, bonds and money market instruments.

                    Diversification of investments helps to spread risk over many assets. A diversification of securities gives the assurance of obtaining the anticipated return on the portfolio.

             In a diversified portfolio, some securities may not perform as expected, but others may exceed    the expectation and making the actual return of the portfolio reasonably close to the anticipated one.

Portfolio Management

                      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, opportunities and threats in the choice of

 debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered

in the attempt to maximize return at a given appetite for risk.

Modern Portfolio Theory - MPT

A theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

Also called "portfolio theory" or "portfolio management theory."

There are four basic steps involved in portfolio construction:
-Security valuation
-Asset allocation
-Portfolio optimization
-Performance measurement

Granular Portfolio

                      A type of portfolio that is well diversified across a wide variety of areas, typically with

a significant number of holdings. Because these portfolios contain a large number of positions over many areas, they are considered to have a lower overall risk profile. Conversely, portfolios that have "low granularity" have fewer positions or contain highly correlated assets, are less diversified and have a higher overall risk profile.

Zero-Investment Portfolio

                                        A group of investments which, when combined, create a zero net value. Zero-investment portfolios can be achieved by simultaneously  purchasing securities and selling equivalent securities. This will achieve lower risk/gains compared to only purchasing or selling the same securities.

Diversification

               A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.

Tactical Asset Allocation

                      An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.

Portfolio Insurance

                A method of hedging a portfolio of stocks against the market risk by short selling stock index futures.

Rebalancing

             The process of realigning the weightings of one's portfolio of assets.

  

INVESTMENT ALTERNATIVES

                             Today's investor is faced with an overwhelming number of choices when it comes to implementing an investment strategy. Since the right combination of investments in the right types of accounts can mean reaching your goals sooner rather than later, it is important to know your alternatives. Below is a list of investments alternatives.

Stocks   

                     A share of stock represents partial ownership in a company. Initially sold by the company itself to raise money, the shares are then bought and sold by investors in the secondary market. Shareholders can vote on the company's major decisions, and receive dividends as their share of profits. As a company's stock price rises or falls, so does the shareholders' investment.

Bonds
                          Like stocks, bonds are issued by companies and governments to raise money to fund a variety of projects and operations. Unlike stocks, a bond is a loan that the issuer promises to pay back, usually at a set interest rate. Bonds are then bought and sold by investors in the secondary market.

Mutual Funds
                         One of the most convenient investment options available, mutual funds offer investors the benefits of professional management and diversification. By pooling the assets of many investors, and pursuing a set investment objective, mutual fund managers are able to provide investors with buying power unavailable to individual investors.

Insurance and Annuities
                         Insurance and annuities can help you work towards life's goals and plan for the unexpected. Offering tax-deferred growth, the option of income for life and a guaranteed death benefit, annuities can be a way to supplement your 401(k) or IRA retirement savings plan. An annuity requires you to make one or a series of payments and, if you choose, the insurance company will pay you a regular stream of income in the future in return. With life insurance, you pay premiums to the insurance company which entitle your beneficiaries to a specified benefit payment should something happen to you unexpectedly. This is all subject to the paying ability of the issuing insurance company.

Cash and Cash Equivalents
                      Treasury bills, money market mutual funds, certificates of deposit, even passbook savings accounts are all considered cash.* Returns on these types of savings and investments are usually low because they often involve little or no loss of principal.But as a relatively safe place to keep funds that you may need to access readily, they play an important role in any investment plan.

Tax Sheltered Investments
              Benefit from tax deferred investments such as retirement plans and municipal bonds. Take advantage of income opportunities that are free of federal, state, or local taxes.

Real estate

                          For most of the investors the most important asset in their portfolio is a residential house. In addition to residential house, the more affluent investors are likely to be interested in the following type of real estate:

v  Auricular land

v  Semi-urban land

v  Time share in a holiday resort

 Normal Diversification- This occurs when the investor combines more than one asset in the portfolio.

 

                                                                                                          75% 0f total risk

                                                             Unsystematic Risk

 

             Risk

 

                                                            Systematic Risk                      25% of total risk

                                     

                                                3                      5                     10                 15

                                 Number of Assets

Unsystematic Risk:

                 It is that part of an assets total risk which can be eliminated through diversification.

Systematic risk:

                    It is that risk which cannot be eliminated. It is inherent in the market place. It arises on account of the economy-wide uncertainties and the tendency of individual securities to move together with the change in market. For example changes in the interest rates by the Government, Inflation rate and etc.

An overview of the Investments Alternatives

	Return		Risk	Marketability/ Liquidity	Tax Shelter (in India)
	Current Yield	Capital Appreciation
Equity Shares	Low	High	High	Fairly High	Section 80L benefit
Non-convertible Debentures	High	Negligible	Low	Average	Nil
Equity Schemes	Low	High	High	High	Section 80L benefit
Debt scheme	High	Low	Low	High	No tax on dividends
Bank Deposits	Moderate	Nil	Negligible	High	Section 80L benefit
Public Provident Fund	Nil	High	Nil	Average	Section 88 benefit
Life Insurance Policies	Nil	Moderate	Nil	Average	Section 88 benefit
Residential House	Moderate	Moderate	Negligible	Low	High
Gold ,Silver	Nil	Moderate	Average	Average	Nil