Portfolio Management |Objectives |Phases of Portfolio Management |Portfolio Theories

Portfolio Management :- Portfolio + Management, portfolio refers to a combination of financial assets or a collection of investment such as shares, bond, mutual funds etc. , management means taking right decision at the right time (i.e. selection of best securities).

Investors invest in securities such as s bonds, debentures and shares etc. & Investment in such type of securities requires analytical skills.

According to the famous punching line that never puts all eggs in the same basket, an investor never invest all funds in one security, he invests in a diversified portfolio that can reduce the risk and get good returns. So, selection of best securities is the important activities in portfolio management.

Objectives :-

  • Safety of Principal- to keep the capital or principal amount safe & it should not erode in terms of purchasing power.
  • Reduce Risk- to reduce the risk by investing in different types of securities.
  • Capital growth- to attain capital growth by reinvesting in growth securities.
  • Stability of income- To facilitate planned & systematic reinvestment of income to ensure stability in returns.
  • Liquidity/Marketability- investor is able to take advantage and buy and sell the securities.
  • Tax benefits- effective plan reduce the tax burden by which yield can be improved effectively.

Phases of Portfolio Management :-

Security Analysis:- various securities are available for an investor to invest such as equity shares, preference shares, debentures and bonds, Convertible Debentures, Deep Discount Bonds, Zero Coupon Bonds, Global Depository Receipts, Euro-currency Bonds, etc. out of these securities, investor has to choose best one, for this detailed analysis of securities is necessary. There are two approaches to analyse security i.e. fundamental and technical analysis. Fundamental analysis focus on fundamental factors of company such as EPS, DP Ratio, company’s market share and management etc. In fundamental analysis, intrinsic value of security compares with the current market price. If the current market price is greater than intrinsic value then the share said to be overprice and vice versa. With the help of fundamental analysis, investor would buy securities which are under- price and sell which are over-price.

The second approach to analyse securities is Technical Analysis. According to this, past movement in the prices of shares are studied to identify the trends and patterns in prices of securities and to predict the future price movements, immediate past patterns is considered.

Portfolio Analysis:- after selection of best securities for investment, the next step is to make portfolio by combining these securities. The return and risk can be studied on the basis of risk return profiles.

Portfolio Selection & Revision:- The rational investor is to identify the best portfolio out of various after that continuously monitor that.

Portfolio Evaluation:- The objective to make a portfolio is maintain optimal risk return.

Theories:- Theories play an important role in selecting and combining securities for expected rate of return for any given degree of risk from investor’s point of view.

  • Traditional Approach:- This approach to portfolio management concerns with the investor, portfolio objectives, investment strategy, other assets, need for income. In addition to this, investor considers age, responsibilities, portfolio needs, need for income, capital maintenance, liquidity, risk and taxation.
  • Modern Approach:- This approach developed by Dr. Harry M. Markowitz in 1950. Harry Markowitz is regarded as the father of Modern Portfolio Theory and his theory provides a mathematical framework in which investors can optimise their risk and return.