Final Project Rough

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PORTFOLIO MANAGEMENT

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OBJECTIVE

Primarily to understand the basic concepts of Portfolio management and Mutual fundsand its benefits as an investment avenue.

Secondly, to compare and evaluate the performance of different equity mutual fundschemes of different companies on the basis of risk, return and volatility.

Thirdly, to suggest the schemes which are out performers and laggards Finally to create and ideal portfolio in which risk will be distributed towards different

schemes and will earn higher rate of return.


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SCOPE OF PROJECT

The scope of the project is mainly concentrated on the different categories of the mutualfunds such as equity schemes, debt funds, balanced funds and equity linked savings

schemes etc.

The ideal portfolio is created by analyzing the risk pattern of the schemes and distributingthe overall risk to earn maximum returns.

Monitoring the performance of portfolio by incorporating the latest market conditions. Identification of the investors objective, constraints and preferences. Making an evaluation of portfolio income (comparison with targets and achievement). Implementation of the strategies in tune with investment objectives.


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RESEARCH METHODOLOGY

Secondary data:-

Data collected from various books, newspapers and internet.

LIMITATIONS

The major limitations of the project are:-

Detailed study of the topic was not possible due to the limited size of the project. There was a constraint with regard to time allocated for the research study. The availability of information in the form of annual reports & price fluctuations of the

companies was a big constraint to the study.


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INTRODUCTION TO PORTFOLIO MANAGEMENT

Investing in securities such as shares, debentures, and bonds is profitable as well as

exciting. It is indeed rewarding, but involves a great deal of risk and calls for scientific knowledge

as well artistic skill. In such investments both rationale and emotional responses are involved.

Investing in financial securities is now considered to be one of the best avenues for investing one

savings while it is acknowledged to be one of the best avenues for investing one saving while it is

acknowledged to be one of the most risky avenues of investment.

It is rare to find investors investing their entire savings in a single security. Instead,

they tend to invest in a group of securities. Such a group of securities is called portfolio .Creation of a portfolio helps to reduce risk, without sacrificing returns. Portfolio management

deals with the analysis of individual securities as well as with the theory and practice of optimally

combining securities into portfolios. An investor who understands the fundamental principles and

analytical aspects of portfolio management has a better chance of success.


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EVOLUTION OF PORTFOLIO MANAGEMENT

Portfolio management is essentially a systematic method of maintaining ones investment

efficiently. Many factors have contributed to the existence and development of the concept.

In the early years of the century analyst used financial statements to find the value of the

securities. The first to be analyzed using this was Railroad Securities of the USA. A booklet

entitled The Anatomy of the Railroad was published by Thomas F. Woodlock in 1900. As the

time progressed this method became very important in the investment field, although most of the

writers adopted different ways to publish their data. They generally advocated the use of

different ratios for this purpose. John Moody in his book The Art of wall Street Investing,

strongly supported the use of financial ratios to know the worth of the investment. The proposed

type of analysis later on became the common-size analysis.

After analyzing 75 years data of share price, he concluded that the market movement was

quite orderly and followed a pattern of waves. His theory is known as Elliot Wave Theory.

According to J.C. Francis the development of investment management can be traced

chronologically through three different phases. First phase is known as Speculative Phase.

Investment was not a wide spread activity, but a cake of few rich people. The process is

speculative in nature. Investment management was an art and needed skills. Price manipulation

was resorted to by the investors. During this time period pools and corners were used for

manipulation. The result of this was the stock exchange crash in the year 1929.

Finally the daring speculative ventures of investors were declared illegal in the US by the

Securities Act of 1934. Second phase began in the year 1930. The phase was of professionalism.

After coming up of the Securities Act, the investment industry began the process of upgrading its

ethics, establishing standard practices and generating a good public image. As a result the

investments market became safer place to invest and the people in different income group started

investing. Investors began to analyze the security before investing. During this period the

research work ofBenjamin Graham and David L. Dood was widely publicized and publicly

acclaimed. They published a book Security Analysis in 1934, which was highly sought after.

There research work was considered first work in the field of security analysis and acted as the

base for further study. They are considered as pioneers of security analysis as a discipline. Third

phase was known as the scientific phase. The foundation of modern portfolio theory was laid by


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Markowitz. His pioneering work on portfolio management was described in his article in the

Journal of Finance in the year 1952 and subsequent books published later on. He tried to quantify

the risk. He showed how the risk can be minimized through proper diversification of investment

which required the creation of the portfolio. He provided technical tools for the analysis and

selection of optimal portfolio. For his work he won the Noble Prize for Economics in the year

1990. The work of Markowitz was extended by the William Sharpe, John Linter and Jan

Mossin through the development of the Capital Asset Pricing Model (CAPM). If we talk of the

present the last two phases of Professionalism and Scientific Analysis are currently advancing

simultaneously with investment in various financial instruments becoming safer, with proper

knowledge to each and every investor


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What is Portfolio Management?

The art of selecting the right investment policy for the individuals in terms of minimum

risk and maximum return is called as portfolio management.

Portfolio management refers to managing an individuals investments in the form of bonds,

shares, cash, mutual funds etc so that he earns the maximum profits within the stipulated time

frame.

In a laymans language, the art of managing an individuals investment is called as portfolio

management

A Portfolio Management refers to the science of analyzing the strengths, weaknesses,

opportunities and threats for performing wide range of activities related to the ones portfolio for

maximizing the return at a given risk. It helps in making selection of Debt Vs Equity, Growth Vs

Safety, and various other tradeoffs.

Major tasks involved with Portfolio Management are as follows.

Taking decisions about investment mix and policy Matching investments to objectives Asset allocation for individuals and institution Balancing risk against performanceThere are basically two types of portfolio management in case of mutual and exchange-traded

funds including passive and active.

Passive management involves tracking of the market index or index investing. Active management involves active management of a funds portfolio by manager or team of

managers who take research based investment decisions and decisions on individual

holdings.


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What is a Portfolio?

A portfolio refers to a collection of investment tools such as stocks, shares, mutual funds, bonds,

and cash and so on depending on the investors income, budget and convenient time frame.

Portfolio: In terms of mutual fund industry, a portfolio is built by buying additional bonds,

mutual funds, stocks, or other investments. If a person owns more than one security, he has an

investment portfolio. The main target of the portfolio owner is to increase value of portfolio by

selecting investments that yield good returns.

As per the modern portfolio theory, a diversified portfolio that includes different types or classes

of securities; reduces the investment risk. It is because any one of the security may yield strong

returns in any economic climate.

Facts about Portfolio

There are many investment vehicles in a portfolio. Building a portfolio involves making wide range of decisions regarding buying or selling

of stocks, bonds, or other financial instruments. Also, one needs to make decision

regarding the quantity and timing of the buy and sell.

Portfolio Management is goal-driven and target oriented. There are inherent risks involved in the managing a portfolio. The basics and ideas of Investment Portfolio Management are also applied to portfolio

management in other industry sectors.

Application Portfolio Management: It involves management of complete group or subset of

software applications in a portfolio. These applications are considered as investments as they

involve development (or acquisition) costs and maintenance costs. The decisions regarding

making investments in modifying the existing application or purchasing new software

applications make up an important part of application portfolio management.


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Product Portfolio Management: The product portfolio management involves grouping of

major products that are developed and sold by businesses into (logical) portfolios. These

products are organized according to major line-of-business or business segment.

The management team actively manages the product portfolios by taking decisions regarding the

development of new products, modifying existing products or discontinues any other products.

The addition of new products helps in diversifying the investments and investment risks.

Project Portfolio Management: It is also referred as an initiative portfolio management where

initiative portfolio involves a defined beginning and end; precise and limited collection of

desired results or work products; and management team for executing the initiative and utilizing

the resources. A number of initiatives that supports a product, product line or business segment,

are grouped into a portfolio by managers.


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SCOPE OF PORTFOLIO MANAGEMENT

Portfolio management is an art of putting money in fairly safe, quite profitable and reasonably

in liquid form. An investors attempt to find the best combination of risk and return is the first and

usually the foremost goal. In choosing among different investment opportunities the following

aspects risk management should be considered:

a) The selection of a level or risk and return that reflects the investors tolerance for risk anddesire for return, i.e. personal preferences.

b) The management of investment alternatives to expand the set of opportunities available atthe investors acceptable risk level.

The very risk-averse investor might choose to invest in mutual funds. The more risk-tolerant

investor might choose shares, if they offer higher returns. Portfolio management in India is still in

its infancy. An investor has to choose a portfolio according to his preferences. The first preference

normally goes to the necessities and comforts like purchasing a house or domestic appliances. His

second preference goes to some contractual obligations such as life insurance or provident funds.

The third preference goes to make a provision for savings required for making day to day

payments. The next preference goes to short term investments such as UTI units and post office

deposits which provide easy liquidity. The last choice goes to investment in company shares and

debentures. There are number of choices and decisions to be taken on the basis of the attributes of

risk, return and tax benefits from these shares and debentures. The final decision is taken on the

basis of alternatives, attributes and investor preferences.

For most investors it is not possible to choose between managing ones own portfolio. They

can hire a professional manager to do it. The professional managers provide a variety of services

including diversification, active portfolio management, liquid securities and performance of

duties associated with keeping track of investors money.


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NEED FOR PORTFOLIO MANAGEMENT

Portfolio management is a process encompassing many activities of investment in assets

and securities. It is a dynamic and flexible concept and involves regular and systematic analysis,

judgment and action. The objective of this service is to help the unknown and investors with the

expertise of professionals in investment portfolio management. It involves construction of a

portfolio based upon the investors objectives, constraints, preferences for risk and returns and tax

liability. The portfolio is reviewed and adjusted from time to time in tune with the market

conditions. The evaluation of portfolio is to be done in terms of targets set for risk and returns.

The changes in the portfolio are to be effected to meet the changing condition.

Portfolio construction refers to the allocation of surplus funds in hand among a variety of

financial assets open for investment. Portfolio theory concerns itself with the principles governing

such allocation. The modern view of investment is oriented more go towards the assembly of

proper combination of individual securities to form investment portfolio.

A combination of securities held together will give a beneficial result if they grouped in a

manner to secure higher returns after taking into consideration the risk elements.

The modern theory is the view that by diversification risk can be reduced. Diversification

can be made by the investor either by having a large number of shares of companies in different

regions, in different industries or those producing different types of product lines. Modern theory

believes in the perspective of combination of securities under constraints of risk and returns.


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OBJECTIVES OF PORTFOLIO MANAGEMENT

1. Security/Safety of Principal:Security not only involves keeping the principal sum intact but also keeping intact its

purchasing power intact.

2. Stability of Income:So as to facilitate planning more accurately and systematically the reinvestment

consumption of income.

3. Capital Growth:This can be attained by reinvesting in growth securities or through purchase of growth

securities.

4. Marketability:It is the case with which a security can be bought or sold. This is essential for providing

flexibility to investment portfolio.

5. Liquidity i.e. nearness to money:It is desirable to investor so as to take advantage of attractive opportunities upcoming in

the market.


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6. Diversification:The basic objective of building a portfolio is to reduce risk of loss of capital and / or

income by investing in various types of securities and over a wide range of industries.

7. Favorable tax status:The effective yield an investor gets form his investment depends on tax to which it is

subject. By minimizing the tax burden, yield can be effectively improved.


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ACTIVITIES IN PORTFOLIO MANAGEMENT

Portfolio management is also known as investment management which consists of

managing the investment securities options. There are seven main activities in portfolio

management. They are:

1. Laying down the objectives of investment and the difficulties involved in it2. Choosing the asset mix3. Portfolio strategy formulation4. Securities selection5. Execution of portfolio6. Revision of portfolio and7. Evaluation of performance.1. Laying down the objectives of investment and the difficulties involved in it

The two main objectives of any investment would be the expectation regarding returns

and the ability of the investor to assume a level of risk. Investors would aim to achieve a

steady income involving growth and higher returns. Risk levels could be conservative,

moderate or aggressive. Risk and returns are directly related. More the risk, the more

would be the returns and lower the risk, lower would be the returns. The difficulties or

constraints in laying down the objectives of investment could be related to liquidity

requirements of the investor, investment horizon, post-tax returns, law and regulations of

the country and his personal circumstances.

2. Choosing the asset mixThe second activity in portfolio management is to decide the proportion of the various

asset categories in the investors portfolio. The various asset categories include bonds and

debentures, stocks, cash investments, precious metals like gold and silver, investment in

real estate etc. Investments are aimed at various purposes like education to build human

capital, purchase of house, meeting medical & sustaining expenses etc. The choice of


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proper asset mix will be based upon the expectation of returns and the risk perception of

the investor.

3. Portfolio strategy formulationAfter the choice of asset mix is done, the next step for the investor is to formulate a

portfolio strategy. Active portfolio strategy and passive portfolio strategy are the two

broad choices that are available to formulate. An active portfolio strategy involves

professionals in investments and investors who are aggressive to get higher returns and

earnings. Passive portfolio strategy involves creating a well-diversified portfolio, the risk

of which is pre-determined and holding the portfolio unaltered over a period of time.

4. Securities selectionThe selection of debt securities like debentures and bonds have to be evaluated

considering the factors like yield to maturity, default risk, tax shield and liquidity. The

selection of equity shares involves technical, fundamental and random analysis. These

analyses are aimed at price behavior, volume of trading, trend, level of earnings, growth

prospects, risk exposure, prevailing stock price etc.

5. Execution of portfolioAfter the formulation of investment objectives, choosing asset mix, formulating portfolio

strategy and selection of securities, the portfolio has to be executed by buying or selling

transactions or both. A proper understanding and knowledge of trading game, trade

motivation, nature of key players in the market, likely losers and winners etc. will aid in

this respect.

6. Revision of portfolioThe portfolio thus executed after formulation has to be reviewed and monitored

periodically. This is essential because the risk-return levels of the various securities in the

portfolio would have altered over time, the objectives of the investor would have

changed, risk perception of the investor would have changed and the targets would have


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drifted away. The revision of portfolio involves portfolio re-balancing and portfolio

upgrading.

7. Evaluation of performanceThe evaluation of performance is with respect to the rate of return and risk. It involves

measuring the returns generated, risk adhered to and the overall performance of the

portfolio.

Measuring the rate of

The rate of return from a portfolio for a given period, say one year can be measured as follows:

Rate of return= Dividend Income + Terminal Value

Initial value

Initial value

x100

Example:

Let us calculate the rate of return of a portfolio with the following values:

Initial market value of the portfolio = $100,000

Dividend and interest income received till the end of the year = $15,000

Terminal market value of the portfolio = $102,000

Rate of return = ($15,000 + $102,000 -

$100,000)

$100,000

x 100

=> 17%


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There are also other measures of calculating returns like arithmetic average measure, internal rate

of return measure etc.

Measuring the

The measures of risk that are most widely and commonly used are variability and beta measures.

The preferred measure of variability is standard deviation and beta reflects the systematic risk of

the portfolio.

Measuring the overall

Measuring the performance of the portfolio involves considering both risk and return. The most

widely used measures of performance are Treynors measure, the Sharpe measure, the Jensen

measure and the M2 measure.

Treynor's measure

=>

Excess return on

portfoliop

Beta of portfoliop

Sharpe's measure

=>

(Average rate of return on portfolio pAverage rate of return on a risk

free investment)

Standard deviation of return of portfoliop

Jensen's measure

=>

Average return on portfolio p [Risk-free return + Portfolio Beta

(Average return on market portfolioRisk free return)]

M2 Measure => M2 = rp* - rM


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Where: rp* = return on adjusted portfolio whose volatility matches the volatility of the market

index and rM = return on the market index.

The above are the various activities in portfolio management.


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ROLE OF PORTFOLIO MANAGEMENT

There was a time when portfolio management was an exotic term. A practice which is

beyond the reach of the small investor, but the time has changed now. Portfolio management is

now a common term and is widely practiced in INDIA. The theories and concepts relating to

portfolio management now find their way in the front pages of the financial newspapers and

magazines. In early 90s India embarked on a program of economic liberalization and

globalization, with high participation of private players. This reform process has made the Indian

industry efficient, with rapid computerization, increased market transparency, better

infrastructure and customer services, closer integration and higher volume. The markets are

dominated by large institutional investors with their diversified portfolios. A large number of

mutual funds have come up in the market since 1987. With this development investment in

securities has gained considerable momentum

Along with the spread of the securities investment way among Indian investors have changed due

to the development of the quantitative techniques. Professional portfolio management, backed by

research is now being adopted by mutual funds, investment consultants, individual investors and

big brokers. The Securities Exchange Board of India (SEBI) is a regulatory body in INDIA. It

ensures that the stock market is free from fraud, and of course the main objective is to ensure that

the investors money is safe.

With the advent of computers the whole process of portfolio management has become quite easy.

The computer can absorb large volumes of data, perform the computations accurately and quickly

give out the results in any desired form. Moreover simulation, artificial intelligence etc provides

means of testing alternative solutions. The trend towards liberalization and globalization of the

economy has promoted free flow of capital across international borders. Portfolio not only now

include domestic securities but foreign too. So financial investments cant be reaped without

proper management. Another significant development in the field of investment management is

the introduction to Derivatives with the availability of Options and Futures. This has broadened

the scope of investment management. Investment is no longer a simple process. It requires a

scientific knowledge, a systematic approach and also professional expertise. Portfolio


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management is the only way through which an investor can get good returns, while minimizing

risk at the same time.

PORTFOLIO MANAGEMENT PROCESS

Investment management is a complex activity which may be broken down into the following

steps:

Specification of Investment Objectives & Constraints:

The typical objectives sought by investors are current income, capital appreciation, and safety of

principle. The relative importance of these objectives should be specified further the constraints

arising from liquidity, time horizon, tax and special circumstances must be identified.

Choice of the asset mix:

The most important decision in portfolio management is the asset mix decision very broadly; this

is concerned with the proportions of stocks (equity shares and units/shares of equity -oriented

mutual funds) and bonds in the portfolio.

The appropriate stock-bond mix depends mainly on the risk tolerance and investment horizon of

the investor.

Portfolio management is on-going process involving the following basic tasks:

Identification of the investors objectives, constraints and preferences. Strategies are to be developed and implemented in tune with investment policy

formulated.

Review and monitoring of the performance of the portfolio. Finally the evaluation of the portfolio.


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MODERN PORTFOLIO THEORY

Modern Portfolio theory (MPT) presents the concept of diversification in investing by using

mathematical formulation. It aims to select a collection of investment assets which has lower risk

than any individual asset. It can be observed spontaneously as dynamic market conditions cause

changes in value of different types of assets in conflicting ways. The prices in the bond marketmay fall independently from prices in the stocks market, thus there is overall lower risk in a

collection of both bond and stocks assets as compared to individual asset. Moreover, the

diversification reduces the risk even if cases where assets returns are positively correlated.

MPT stress the fact that assets in an investment portfolio must not be chosen individually where

each asset is selected on the basis of its own merits. Instead, it is important to observe the

changes in price of each asset relative to changes in the price of every other asset in the portfolio.

Investing in the assets is basically the exchange between risk and expected return. The assets

with higher expected returns are usually more risky.

A Portfolio Manager is responsible for building a portfolio of assets such as stocks, bonds and

other assets that generates the maximum possible rate of return at the least possible level of risk.

The portfolio management involves allocation of funds in various assets to achieve

diversification of portfolio that offer maximum return at the lowest possible risk.
http://www.portfoliomanagement.in/wp-content/uploads/2011/09/image18.png


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MPT assists in the selection of a portfolio with the maximum possible expected return at a given

level of risk. Similarly, MPT assists in the selection of a portfolio with the lowest possible risk at

a given amount of expected return. Thus, it is not possible to have a targeted expected return

exceeding the highest-returning available security except there is possibility of negative

holdings. MPT stresses the diversification and assists the portfolio managers in finding the best

possible diversification strategy.

Modern portfolio theory (MPT) refers to the theory of investment that seeks to maximize the

expected return of portfolio at a given level of risk. Similarly it also attempts to diminish risk for

a given level of return expected. To achieve this, portfolio manager choose the proportions of

different assets in a portfolio carefully. The modern portfolio theory is extensively used for

practice in the financial industry, however basic assumptions of this theory has faced certain

challenges in fields like behavioral economics.

In technical terms, a Modern Portfolio theory (MPT) represents the return of asset as a normally

distributed function or as an elliptically distributed random variable where risk is defined as the

standard deviation of return. According to MPT, the return of a portfolio is equivalent to the

weighted combination of the assets returns because the portfolio is modeled as a weighted

combination of assets. MPT aims to reduce the total variance of the return of portfolio by

combining various assets whose returns are negatively correlated or not positively correlated.MPT assumes that the markets are competent and investors are logical


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PORTFOLIO MANAGEMENT STRATERGIES

Portfolio Management Strategies refer to the approaches that are applied for the efficient

portfolio management in order to generate the highest possible returns at lowest possible risks.

There are two basic approaches for portfolio management including Active Portfolio

Management Strategy and Passive Portfolio Management Strategy.

Active Portfolio Management Strategy

The Active portfolio management relies on the fact that particular style of analysis or

management can generate returns that can beat the market. It involves higher than average costs

and it stresses on taking advantage of market inefficiencies. It is implemented by the advices of

analysts and managers who analyze and evaluate market for the presence of inefficiencies. The

active management approach of the portfolio management involves the following styles of the

stock selection.

Top-down Approach: In this approach, managers observe the market as a whole and decide

about the industries and sectors that are expected to perform well in the ongoing economic cycle.

After the decision is made on the sectors, the specific stocks are selected on the basis of

companies that are expected to perform well in that particular sector.

Bottom-up: In this approach, the market conditions and expected trends are ignored and the

evaluations of the companies are based on the strength of their product pipeline, financial

statements, or any other criteria. It stresses the fact that strong companies perform well

irrespective of the prevailing market or economic conditions.

Passive Portfolio Management Strategy

Passive asset management relies on the fact that markets are efficient and it is not possible to

beat the market returns regularly over time and best returns are obtained from the low costinvestments kept for the long term.

The passive management approach of the portfolio management involves the following styles of

the stock selection.


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Efficient market theory: This theory relies on the fact that the information that affects the

markets is immediately available and processed by all investors. Thus, such information is

always considered in evaluation of the market prices. The portfolio managers who follows this

theory, firmly believes that market averages cannot be beaten consistently.

Indexing: According to this theory, the index funds are used for taking the advantages of

efficient market theory and for creating a portfolio that impersonate a specific index. The index

funds can offer benefits over the actively managed funds because they have lower than average

expense ratios and transaction costs.

Apart from Active and Passive Portfolio Management Strategies, there are three more kinds of

portfolios including Patient Portfolio, Aggressive Portfolio and Conservative Portfolio.

Patient Portfolio: This type of portfolio involves making investments in well-known stocks.

The investors buy and hold stocks for longer periods. In this portfolio, the majority of the stocks

represent companies that have classic growth and those expected to generate higher earnings on a

regular basis irrespective of financial conditions.

Aggressive Portfolio: This type of portfolio involves making investments in expensive stocks

that provide good returns and big rewards along with carrying big risks. This portfolio is a

collection of stocks of companies of different sizes that are rapidly growing and expected to

generate rapid annual earnings growth over the next few years.

Conservative Portfolio: This type of portfolio involves the collection of stocks after carefully

observing the market returns, earnings growth and consistent dividend history.


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TECHNIQUES OF PORTFOLIO MANAGEMENT

As of now the under noted technique of portfolio management: are in vogue in our country.

1.

Equity Portfolio:

It is influenced by internal and external factors the internal factors affect the inner working

of the companys growth plans are analyzed with referenced to Balance sheet, profit &

loss a/c (account) of the company.

Among the external factor are changes in the government policies, Trade cycles, Political

stability etc.

2. Equity Stock Analysis:Under this method the probable future value of a share of a company is determined it can

be done by ratios of Earning per Share (EPS) of the company and Price Earning (P/E)

ratio.

EPS =Profit after Tax

No. of Equity Shares

P/E Ratio =

Market Price

EPS


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One can estimate trend of earning by EPS, which reflects trends of earning quality of company,

dividend policy, and quality of management.

Price earnings ratio indicate a confidence of market about the company future, a high rating is

preferable.

The following points must be considered by portfolio managers while analyzing the securities.

1. Nature of the Industry & its Product:Long term trends of industries, competition within, and outside the industry, Technical

changes, labor relations, sensitivity, to Trade cycle.

Industrial analysis of prospective earnings, cash flows, working capital, dividends, etc.

2. Ratio analysis:Ratios such as debt equity ratios current ratios net worth, profit earnings ratio, return on

investment, are worked out to decide the portfolio.

The wise principle of portfolio management suggests that Buy when the

market is low orBEARISH,and sell when the market is risingorBULLISH.

Stock market operation can be analyzed by:

a) Fundamental approach :- Based on intrinsic value of sharesb) Technical approach:- Based on Dow Jones theory, Random walk theory, etc.

Prices are based upon demand and supply of the market.

Objectives are maximization of wealth and minimization of risk. Diversification reduces risk and volatility. Variable returns, high illiquidity; etc.


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Portfolio management (PM) techniques are the systematic methods for analyzing or evaluating a

set of projects or activities for achieving the optimal balance between stability and growth, risks

and returns; and attractions and drawbacks. It focuses on achieving this balance by using the

limited resources available in best possible manner.

Common aspects of Portfolio management (PM) techniques

The individual projects are assessed and the results are balanced. Thus PM involves appropriate

single project evaluation techniques for achieving the desired balance.

It is mandatory to examine the every project in the similar fashion for ensuring the validity and

consistency of the input data.

Portfolio Management (PM) Techniques

There are various techniques that are used for supporting the portfolio management process:

Heuristic models

Scoring techniques

Visual or mapping techniques

Portfolio Management involves selection of a portfolio of new product development projects for

achieving the below mentioned goals:

Maximizing the profitability

Maximizing the value of the portfolio

Providing optimal balance

Supporting the strategy of the enterprise

Project Portfolio Management Techniques comprises of complete spectrum of project portfolio

management (PPM) functions. It includes selecting projects and their successful execution by

creating project-friendly and formalized environment.


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The efficient Portfolio Management is ensured by the senior management team of an

organization which conducts regular meetings for managing the product pipeline and making

decisions related to the product portfolio.

Activities of Portfolio management

Creating a product strategy including products, strategy approach, markets, customers,

competitive emphasis, etc

Understanding the budget or resources available for balancing the portfolio

Assessment of project for investment requirements, risks, profitability and other suitable factors

The portfolio management techniques must be used for the proper balance of following goals

Risk vs. profitability

New products vs Improvements

Strategy fit vs Reward

Market vs Product line

Long-term vs short-term

Initially, the Portfolio Management techniques are used for optimizing the financial returns or

projects profitability by applying heuristic or mathematical models. However, this approach

fails to address the need to balance the portfolio as per the organizations strategy. Later, Scoring

techniques came into picture when these are used for weighting and scoring criteria for

considering factors such as profitability, risk, investment requirements, and strategic alignment.

The drawbacks of these techniques include inability to optimize the mix of projects and over

emphasis on financial measures. Mapping techniques are widely used for visualizing a

portfolios balance by graphical presentation in the form of a two-dimensional (2 D) graph that

displays balance between two factors as mentioned below.


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Marketplace fit vs. product line coverage

Risks vs. profitability

Financial return vs. probability of success

The development of new product needs significant investments and Portfolio Management has

become widely used tool for making strategic decisions regarding the product development and

the investment of company resources. The revenues are based increasingly on new products that

are developed during last one to three years. Therefore, the companys profitability and its

continued existence depend on the portfolio decisions.


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BENEFITS OF PORTFOLIO MANAGEMENT

There is large number of benefits of Portfolio Management that can provide high value returns in

case it is performed on regular basis and implemented properly. There are many companies that

aimed to utilize their management efforts on balanced project portfolio for achieving optimal

performance and returns for the entire portfolio.

Maximize overall returns

The proper portfolio management ensures the proper mix of projects for achieving the maximum

overall returns. The project portfolio comprises of projects that provide values that differ widely

from each other.

The projects in the portfolio vary in terms of following factors.

Short- and long-term benefit

Synergy with corporate goals

Level of investment

Anticipated payback

By considering all these factors, PPM focuses on optimization of the returns of the entire

portfolio by doing the following activities.

Executing the most value-producing projects

Directing the funds towards worthy initiatives

Eliminating the redundancies between projects

Saving time and costs


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Balancing the Risks posed by Projects

The PPM involves the balancing of the risks posed by the projects in the portfolio. The

companies should evaluate and balance the projects risks in their portfolios for minimizing the

risks and maximizing the returns by diversifying portfolio holdings.

A traditional portfolio may minimize the risk and protect principal; however it also limits the

prospective returns. On the contrary, the hard-line project portfolio may provide greater chances

of good returns however it also poses considerably higher risk of failure or loss. PPM balances

the risks with potential returns by diversifying the project portfolio of the companies.

Optimal Allocation of Resources

The resources are optimally allocated among various projects of the portfolio. As the resources

are really limited, all the projects should compete with each other for resources. PPM involves

measuring, comparing, and prioritizing the projects in order to classify and implement the most

valuable projects only. The conflicts between the projects for resources are resolved by the high

level management. The skill sets required for each project and ideal source of these resources are

determined by incorporating formal sourcing strategies.

Correction of Performance problems

The performance problems are corrected prior to their development in major issues. Although,

PPM cannot completely get rid of performance crisis, however it assists in addressing the

performance issues early. The PPM involves identification, escalation and addressing of any

issues related to execution and helps in keeping the progress of projects on track.

Aligning projects according to business goals

PPM ensures that projects remain aligned to the business goals during their execution by

performing following activities.

Management oversight and monitoring throughout the project


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Standard communication and coordination

Regular course correction for checking the project drifts

Redirecting projects for maintaining alignment and changing business objectives

Executive level Project Oversight

Executives are involved for prioritizing and over sighting the project responsibilities. This

ensures that projects receive the required support and they can be completed successfully.

Executives have the required business acumen and they can align project by using various

business strategies.


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RISK ON PORTFOLIO

The expected returns from individual securities carry some degree of risk. Risk on the portfolio is

different from the risk on individual securities. The risk is reflected in the variability of the returns

from zero to infinity. Risk of the individual assets or a portfolio is measured by the variance of its

return. The expected return depends on the probability of the returns and their weighted

contribution to the risk of the portfolio. These are two measures of risk in this context one is the

absolute deviation and other standard deviation.

Most investors invest in a portfolio of assets, because as to spread risk by not putting all eggs in

one basket. Hence, what really matters to them is not the risk and return of stocks in isolation, but

the risk and return of the portfolio as a whole. Risk is mainly reduced by Diversification.

Following are the some of the types of Risk:

Interest Rate Risk:This arises due to the variability in the interest rates from time to time. A change in the

interest rate establishes an inverse relationship in the price of the security i.e. price of the

security tends to move inversely with change in rate of interest, long term securities show

greater variability in the price with respect to interest rate changes than short termsecurities.

Interest rate risk vulnerability for different securities is as under:

Types Risk Extent

Cash Equivalent Less vulnerable to interest rate risk.

Long Term Bonds More vulnerable to interest rate risk.


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Purchasing Power Risk:It is also known as inflation risk also emanates from the very fact that inflation affects the

purchasing power adversely. Nominal return contains both the real return component and

an inflation premium in a transaction involving risk of the above type to compensate for

inflation over an investment holding period. Inflation rates vary over time and investors

are caught unaware when rate of inflation changes unexpectedly causing erosion in the

value of realized rate of return and expected return. Purchasing power risk is more in

inflationary conditions especially in respect of bonds and fixed income securities. It is not

desirable to invest in such securities during inflationary periods. Purchasing power risk is

however, less in flexible income securities like equity sharesor common stock where rise

in dividend income off-sets increase in the rate of inflation and provides advantage of

capital gains.

Business Risk:Business risk emanates from sale and purchase of securities affected by business cycles,

technological changes etc. Business cycles affect all types of securities i.e. there is

cheerful movement in boom due to bullish trend in stock prices whereas bearish trend in

depression brings down fall in the prices of all types of securities during depression due to

decline in their market price.

Financial Risk:It arises due to changes in the capital structure of the company. It is also known as

leveraged risk and expressed in terms of debt-equity ratio. Excess of risk vis--vis equity

in the capital structure indicates that the company is highly geared. Although a leveraged

companys earnings per share are more but dependence on borrowings exposes it to risk of

winding up for its inability to honor its commitments towards lender or creditors. The risk

is known as leveraged or financial risk of which investors should be aware and portfolio

managers should be very careful.


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Systematic Risk or Market Related Risk:

Systematic risks affected from the entire market are (the problems, raw materialavailability, tax policy or government policy, inflation risk, interest risk and financial

risk). It is managed by the use of Beta of different company shares.

Unsystematic Risks:The unsystematic risks are mismanagement, increasing inventory, wrong financial policy,

defective marketing etc. this is diversifiable or avoidable because it is possible to

eliminate or diversify away this component of risk to a considerable extent by investing in

a large portfolio of securities. The unsystematic risk stems from inefficiency magnitude of

those factors different form one company to another.


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RISKRETURN ANALYSIS

All investment has some risk. Investment in shares of companies has its own risk or uncertainty;

these risks arise out of variability of yields and uncertainty of appreciation or depreciation of

share prices, losses of liquidity etc.

The risk over time can be represented by the variance of the returns, while the return over time is

capital appreciation plus payout divided by the purchase price of the share.

Normally, the higher the risk that the investor takes, the higher is the return. There is, however, a

risk less return on capital of about 12% which is the bank, rate charged by the R.B.I or long term,

yielded on government securities at around 13% to 14%. This risk less return refers to lack of

variability of return and no uncertainty in the repayment or capital. But other risks such as loss of

liquidity due to parting with money etc., may however remain, but are rewarded by the total

return on the capital.

Risk-return is subject to variation and the objectives of the portfolio manager are to reduce that

variability and thus reduce the risk by choosing an appropriate portfolio.


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Traditional approach advocates that one security holds the better, it is according to the modern

approach diversification should not be quantity that should be related to the quality of scripts

which leads to quality of portfolio.

Experience has shown that beyond the certain securities by adding more securities expensive.

Returns on Portfolio:

Each security in a portfolio contributes return in the proportion of its investments in security. Thus the

portfolio expected return is the weighted average of the expected return, from each of the securities,

with weights representing the proportions share of the security in the total investment. Why does an

investor have so many securities in his portfolio? If the security ABC gives the maximum return why

not he invests in that security all his funds and thus maximize return? The answer to this questions lie

in the investors perception of risk attached to investments, his objectives of income, safety,

appreciation, liquidity and hedge against loss of value of money etc. this pattern of investment in

different asset categories, types of investment, etc., would all be described under the caption of

diversification, which aims at the reduction or even elimination of non-systematic risks and achieve

the specific objectives of investors


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PERSONS INVOLVED IN PORTFOLIO MANAGEMENT

Investor:

Are the people who are interested in investing their funds?

Portfolio Managers:

Is a person who is in the wake of a contract agreement with a client, advices or directs or

undertakes on behalf of the clients, the management or distribution or management of the funds of

the client as the case may be.

Discretionary Portfolio Manager:

Means a manager who exercise under a contract relating to a portfolio management exercise anydegree of discretion as to the investment or management of portfolio or securities or funds of

clients as the case may be. The relationship between an investor and portfolio manager is of a

highly interactive nature.

The portfolio manager carries out all the transactions pertaining to the investor under the power

of attorney during the last two decades, and increasing complexity was witnessed in the capital

market and its trading procedures in this context a key (uninformed) investor formed )

investor found himself in a tricky situation , to keep track of market movement ,update his

knowledge, yet stay in the capital market and make money , therefore in looked forward to

resuming help from portfolio manager to do the job for him . The portfolio management seeks

to strike a balance between risks and return.

The generally rule in that greater risk more of the profits but S.E.B.I. in its guidelines prohibits

portfolio managers to promise any return to investor.

Portfolio management is not a substitute to the inherent risks associated with equity investment


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PORTFOLIO MANAGEMENT: FACTORS INFLUENCING THE PROCESS

Portfolio management should begin with the setting of investing objectives. While one investor

may aim for rapid growth, another may be seeking safe investments. Accordingly, one can

choose between debt instruments (such as bonds) and equities (stocks). In addition, derivatives

(such as options and futures contracts) are can also help diversify the portfolio.

Other factors that affect the process of portfolio management are:

Circumstances of the portfolio owner

Performance measurement (including expected return and risk associated with it)

Changing economic conditions

Preference of the area of investment (domestic or international)

Financial institutions conduct their own investment analysis. Individual investors mayhire their services to achieve financial goals.


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HOW TO BUILD A PROFITABLE PORTFOLIO

Portfolio management is basically an approach of balancing risks and rewards. Investors should

keep the following tips in mind while deciding about the right portfolio blend.

Goals: You should be clear about your goals as an investor. The objective of the portfolio

management should be clear if one wants to accumulate wealth by good returns or to hold on his

investments.

Risk Tolerance: As an investor one should know how to handle the fluctuations of everchanging volatile market. It is important to know the ways for tolerating the risks and subsequent

rise and fall of net worth. If you are not capable of handling the pressure of sharp decline in the

values of tour investments then you should try to invest in more stable funds/stocks. By this way,

you may not make the returns quickly however it can offer you sound sleep at night.

Know your investments: It is recommended to invest in the stocks/funds of the businesses and

industries that you are aware of. You should know the activities of the companies and procure

knowledge about the sector you are investing in. This way you would be able to know if the

company will continue to be successful. The performance of the specific business or industry

cannot be easily predicted with certainty.

When to Buy/Sell: In order to succeed in the stock markets, it is very important to know when

to buy or when to sell. You should do every purchase with a purpose, and constantly re-assess

that purpose as per the prevailing market and other conditions.

Measuring Return on Investment (ROI): The performance of the portfolio is measured by the

return on investment (ROI). The individuals can successfully formulate a logical money-

management strategy by knowing the probability of returns received by each dollar invested.

ROI = (GainsCost)/Cost


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The ROI can change depending on the improvement or worsening of the market conditions. It

also depends on the kind of assets or securities held by the investor. In general, the higher

potential ROI involves higher risk and vice-versa. Thus, one of the major tasks of the portfolio

management is the proper risk control.

Measuring Risk: The risk tolerance of the person determines the pace of his/her returns. The

risks and rewards are in essence interrelated to each other where tolerance of the risks tends to

influence or even dictate the rewards. An investor whose goal is to maintain his/her current

assets instead of growing them, he/she will keep only safe and secure investments in the

portfolio.

Diversification of the portfolio: The diversification of the portfolio is required to minimize the

risks and maximizes the returns in the long term. It is preferred to diversify your portfolio

however; one should take care to avoid over-diversifying. The diversified portfolio led to

smoothing of peak-and-valley pricing effects caused by the fluctuations in the normal market and

in surviving long term market downturns. The over diversification can become

counterproductive so it needs to be avoided.

Avoiding the gambling: As an investor, one should avoid portfolio that relies on high-risk,

high-return investments. It is because; the higher speculative investment can lead to conditions

where investor may require selling his holdings prematurely at a loss due to liquidity crisis and

expected returns wont materialize.

Final Project Rough

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