portfolio management of an individual
TRANSCRIPT
-
8/11/2019 Portfolio Management of an Individual
1/43
Executive Summary
When you hear the term portfolio management, what do you think of?
Chances are that the images that spring to mind depend greatly on
your financial situation and your educational and professional
background. Some people will think of mutual fund managers, while
others will think of richly panelled conference rooms and wealthy
individuals strategizing with their financial advisors. The reality of the
current world of financial planning is that every adult should be
somewhat conversant with concepts of portfolio management. Most
working adults will ultimately be responsible for making sure that their
future non-wage income is sufficient to meet their needs. In the old
world of pension plans, your pension plan provider carried all the risks
of being able to invest properly so as to fund a guaranteed future
income to you.
In todays world, the funds you have available for future income will be
largely (if not wholly) determined by what you save and how you
manage your total portfolio.
For a quick definition, I describe portfolio management as the process
of planning and executing a portfolio of investments in order togenerate a desired future income stream . This means that portfolio
management starts with looking at what you are investing for, and how
far into the future you are looking. The next stage is to look at how
much you need to invest, how you allocate those investments to meet
your goals with reasonable certainty, and how much uncertainty you
-
8/11/2019 Portfolio Management of an Individual
2/43
are willing to bear. Finally, portfolio management is an ongoing process
of reviewing your plans and altering those plans as time goes on.
For many people, these concepts will sound pretty abstract. If you ask
people what tools they use in their managing their personal portfolios,
you are likely to get some fairly blank looks back, even if you are
talking to people with substantial investments.
Many (if not most) financial advisors still use fairly simplistic tools for
portfolio planning and have no way to estimate the optimal portfolio
balance of risk and return to meet a clients personal goals.
The good news is that there are standard financial techniques that can
dramatically assist individuals in portfolio management.
These financial techniques, embedded in software, will show you your
financial portfolio in ways that you have not considered previously and
will enable you to make far better portfolio management decisions.
-
8/11/2019 Portfolio Management of an Individual
3/43
INTRODUCTION
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.
Portfolio management is all about s t rengths , weaknesses ,
oppor tun i t i e s and threats in the choice of debt vs . equi ty,
domest ic vs . in ternat ional , growth vs . safe ty , and many other
tradeoffs encountered in the attempt to maximize return at a given
appetite for risk.
-
8/11/2019 Portfolio Management of an Individual
4/43
WHAT IS PORTFOLIO MANAGEMENT?
An investor considering investment in securities is faced with the
problem of choosing from among a large number of securities and
how to allocate his funds over this group of securities. Again he is
faced with problem of deciding which securities to hold and how much
to invest in each. The risk and return are the characteristics of
portfolios. The investor tries to choose the optimal portfolio taking into
consideration the risk return characteristics of all possible portfolios.
An investor invests his funds in a portfolio expecting to get good
returns 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 specifically with the security analysis, portfolio
analysis, portfolio selection, portfolio revision & 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.
Portfolio management is the on-go ing p rocess of constructing
portfolios that balance an investor's ever changing goals with the
portfolio manager's assumptions about the future.
http://hubpages.com/hub/How-to-begin-an-investment-portfoliohttp://hubpages.com/hub/How-to-begin-an-investment-portfolio -
8/11/2019 Portfolio Management of an Individual
5/43
OBJECTIVES OF PORTFOLIO MANAGEMENT
The basic objective of Portfolio Management is to maximize yield and
minimize risk . The other objectives are as follows:
Stabi l i ty of Inco m e : An investor considers stability of income
from his investment. He also considers the stability of purchasing
power of income.
Capi tal Grow th : Capital appreciation has become an important
investment principle. Investors seek growth stocks which provide
a very large capital appreciation by way of rights, bonus and
appreciation in the market price of a share.
Liqu id i ty : An investment is a liquid asset. It can be converted
into cash with the help of a stock exchange. Investment should
be liquid as well as marketable. The portfolio should contain a
planned proportion of high-grade and readily salvable investment.
Safety : Safety means protection for investment against loss
under reasonably variations. In order to provide safety, a careful
review of economic and industry trends is necessary. In other
words, errors in portfolio are unavoidable and it requires
extensive diversification.
Tax Inc entiv es : Investors try to minimize their tax liabilities from
the investments. The portfolio manager has to keep a list of such
investment avenues along with the return risk, profile, taximplications, yields and other returns.
-
8/11/2019 Portfolio Management of an Individual
6/43
SELECTION OF PORTFOLIO
The selection of portfolio depends upon the objectives of the investor.
The selection of portfolio under different objectives are dealt
subsequently
Objectives and asset mix:
If the main objective is getting adequate amount of current income,
sixty percent of the investment is made in debt instruments and
remaining in equity. Proportion varies according to individual
preference.
Growth of income and asset mix :
Here the investor requires a certain percentage of growth as the
income from the capital he has invested. The proportion of equity
varies from 60 to 100 % and that of debt from 0 to 40 %. The debt may
be included to minimize risk and to get tax exemption.
Capital appreciation and Asset Mix:
It means that value of the investment made increases over the year.
Investment in real estate can give faster capital appreciation but the
problem is of liquidity. In the capital market, the value of the shares is
much higher than the original issue price.
Safety of principle and asset mix:
Usually, the risk adverse investors are very particular about the
stability of principal. Generally old people are more sensitive towards
safety.
-
8/11/2019 Portfolio Management of an Individual
7/43
Risk and return analysis:
An investor wants higher returns at the lower risk. But the rule of the
game is that more risk, more return. So while making a portfolio the
investor must judge the risk taking capability and the returns desired.
Diversification:
Once the asset mix is determined and risk return relationship is
analysed the next step is to diversify the portfolio. The main advantage
of diversification is that the unsystematic risk is minimized.
-
8/11/2019 Portfolio Management of an Individual
8/43
PORTFOLIO MANAGEMENT PROCESS
The Portfolio Management Process
IDENTIFY GOAL S A ND OB JECTIVES
When will you need the money from your investments? What are you
saving your money for? With the assistance of your financial advisor, the
Investor Profile Questionnaire will guide you through a series of questions
to help identify the goals and objectives for your investments.
DETERMINE OPTIMA L INVESTMENT MIX
Once you have completed the Investor Profile Questionnaire , your optimal
investment mix or asset allocation will be determined. An asset allocation
represents the mix of investments (cash, fixed income and equities) that
match your individual risk and return needs.
-
8/11/2019 Portfolio Management of an Individual
9/43
This step represents one of the most important decisions in your portfolio
construction, as asset allocation has been found to be the major
determinant of long-term portfolio performance.
CREA TE A CUSTOMIZED INVESTMENT POL ICY STA TEMENT
When your optimal investment mix is determined, the next step is to
formalize your goals and objectives in order to utilize them as a benchmark
to monitor progress and future updates. At this stage in the process, you
will be provided with a detailed written Investment Policy Statement , which
summarizes your needs including liquidity, growth and investment horizon.
SELECT INVESTMENTS
Your customized portfolio is created using an allocation of select QFM
Funds. Each QFM Fund is designed to satisfy the requirements of a
specific asset class, and is selected in the necessary proportion to match
your optimal investment mix. The QFM Funds invest in Exchange Traded
Funds ( ETFs ), third party mutual funds and individual securities from
around the world to ensure that you maximize your return while minimizing
your risk.
http://www.qtrade.ca/_pdfs/ETFs.pdfhttp://www.qtrade.ca/_pdfs/ETFs.pdfhttp://www.qtrade.ca/_pdfs/ETFs.pdf -
8/11/2019 Portfolio Management of an Individual
10/43
MONITOR PROGRESS
Building an optimal investment mix is only part of the process. It is equally
important to maintain your optimal mix when varying market conditions
cause your investment mix to drift away from its target.
To ensure that your mix of asset classes stays in line with your unique
needs, your portfolio will be monitored and rebalanced back to your optimal
investment mix should you drift from these target allocations? No matter
how the markets perform, you can be confident that your portfolio will stay
on track with the objectives set out in your Investment Policy Statement .
REASSESS NEEDS AND GOAL S
Just as markets shift, so do your goals and objectives throughout your life.
Whether your personal goals include retirement, funding education or a
major purchase, it is important to conduct regular reviews with yourfinancial advisor to ensure that your portfolio continues to meet your needs.
With the flexibility of the Portfolio Program and Asset Management
Program , when your needs or other life circumstances change, your
portfolio has the flexibility to accommodate such changes.
-
8/11/2019 Portfolio Management of an Individual
11/43
TYPES OF INSTRUMENTS
The structure of a portfolio will depend ultimately on the investors
objectives and on the asset selection decision reached. The portfolio
structure takes into account a range of factors, including the investors time
horizon, attitude to risk, liquidity requirements, tax position and availability
of investments. The main asset classes are cash, bonds and other fixed
income securities, equities, derivatives and property.
Given below is a self explanatory comparison on different
instruments available for Investments today:
Type of
Investments Yields Perspective
Bank Deposits
and Govt of
India Bonds
4 to 5.5%
Banks offer liquidity but if you place
your funds in the Bonds you can be
locked in for the term applied for.
Stock Markets
& Mutual
Funds
Your Principle
amount can double
or shrink in a
matter of days.
Offers great liquidity, but you have
to be constantly monitoring the
same.
Commercial
Real Estate
Returns of 8 to11% P.A., along
with a steady
income flow to plan
Long term investment,coupled withbenefits on enhancing liquidity
through rent discounting, planning
your future income inflows.
-
8/11/2019 Portfolio Management of an Individual
12/43
your future
investments.
Escalations in the prices in the
market can make your asset grow
notionally.
Residential
Real Estate
Returns of 4 to 6%
p.a.
Mostly bought for future self usage,
good chances of growth in the price
of the real estate over a period of
time, safest investment as per the
Indian mind set.
Risk Return Liquidity
Real Estate Depends Depends Very Low
Mutual Fund Low High High
Commodities High High High
Stocks Depends Depends High
Govt. Sec. Low Low Low
Money
MarketLow Low High
-
8/11/2019 Portfolio Management of an Individual
13/43
Fixed
DepositLow Low Low
PPF Low Low Low
Insurance Low High Moderate
Source: Knight Frank India Research 'India Property Investment
Review'-Yahoo finance
From the chart below it can be easily identified the traditional andModern alternatives of investments:
-
8/11/2019 Portfolio Management of an Individual
14/43
PORTFOLIO MANAGER
Portfolio Manager is a professional who manages the portfolio of an
investor with the objective of profitability, growth and risk minimization.
According to SEBI , Any person who pursuant to a contract or
arrangement with a client, advises or directs or undertakes on behalf of the
client the management or administration of a portfolio of securities or the
funds of the client, as the case may be is a portfolio manager.
He is expected to manage the investors assets prudently and choose
particular investment avenues appropriate for particular times aiming at
maximization of profit. He tracks and monitors all your investments, cash
flow and assets, through live price updates. The manager has to balance
the parameters which defines a good investment i.e. security, liquidity and
return. The goal is to obtain the highest return for the client of the managed
portfolio.
There are two types of portfolio manager known as Discretionary
Portfolio Manager and Non Discretionary Portfolio Manager. Discretionary
portfolio manager is the one who individually and independently manages
the funds of each client in accordance with the needs of the client and non-
discretionary portfolio manager is the one who manages the funds in
accordance with the directions of the client.
-
8/11/2019 Portfolio Management of an Individual
15/43
GENERAL RESPONSIBILITIES OF A PORTFOLIO MANAGER
Following are some of the responsibilities of a Portfolio Manager:
The portfolio manager shall act in a fiduciary capacity with regard to the
client's funds.
The portfolio manager shall transact the securities within the limitations
placed by the client.
The portfolio manager shall not derive any direct or indirect benefit out of
the client's funds or securities.
The portfolio manager shall not borrow funds or securities on behalf of
the client.
The portfolio manager shall ensure proper and timely handling of
complaints from his clients and take appropriate action immediately
The portfolio manager shall not lend securities held on behalf of clients to
a third person except as provided under these regulations.
CODE OF CONDUCT OF A PORTFOLIO MANAGER
Every portfolio manager in India as per the regulation 13 of SEBI shall
follow the following Code of Conduct:
1. A portfolio manager shall maintain a high standard of integrity fairness.
2. The clients funds should be deployed as soon as he receives.
-
8/11/2019 Portfolio Management of an Individual
16/43
3.A Portfolio manager shall render all times high standards and unbiased
service.
4. A portfolio manager shall not make any statement that is likely to be
harmful to the integration of other portfolio manager.5. A portfolio manager shall not make any exaggerated statement.
6. A portfolio manager shall not disclose to any client or press any
confidential information about his client, which has come to his knowledge.
7. A portfolio manager shall always provide true and adequate information.
8. A portfolio manager should render the best pose advice to the client.
SEBI GUIDELINES TO PORTFOLIO MANAGEMENT
SEBI has issued detailed guidelines for portfolio management services.
The guidelines have been made to protect the interest of investors. The
salient features of these guidelines are:
The nature of portfolio management service shall be investment
consultant.
The portfolio manager shall not guarantee any return to his client.
Clients funds will be kept in a separate bank account.
The portfolio manager shall act as trustee of cl ients funds.
The portfolio manager can invest in money or capital market. Purchase and sale of securities will be at a prevailing market price.
-
8/11/2019 Portfolio Management of an Individual
17/43
OWERS OF SEBI
SEBI has the following powers to control and manage the portfolio
managers:
1. The portfolio manager shall submit to SEBI such reports, returns and
documents as may be prescribed.
2. SEBI may investigate the affairs of a portfolio manager such as
inspection of books of accounts, records, etc.,
3. SEBI has full authority in the event of violation of any provision tosuspend or cancel the license.
4. No exemptions will be given under any circumstances to portfolio
manager.
TYPES OF INVESTMENT RISK
There are many types of risk that are caused by different factors, or
which affect different investments to varying extents. Some factors affect
most investments and are called systematic risks . Some risks are
specific to a business or asset, and are called non-systematic risks ,
or diversifiable risks , because such risks can be lowered by diversified
investments.
1. Inflation risk is a systematic risk that lessens real returns due to thedecreasing purchasing power of the returns. Although inflation
negatively affects most investment returns, in some cases, currency
inflation can yield higher returns, such as when it is sold short in a
currency transaction.
-
8/11/2019 Portfolio Management of an Individual
18/43
2. Interest rate risk is a risk that lowers yields or returns due to
changes in the prevailing interest rate. Interest rate risk can affect
different securities in different ways. The price of bonds in the
secondary market, for instance, varies inversely to interest rates wheninterest rates rise, the price of bonds drops, and vice versa.
3. Business risk is any risk that can lower a businesss net assets or
net income that could, in turn, lower the return of any security based on
it. Higher mortgage rates can increase the business risk for real estateor construction companies, for instance.
4. Financial risk is the risk that a business will not be able to make
payments due to its debt load. Interest and principal must be paid on
borrowed money failure to make payments can force the business into
bankruptcy.
5. Tax risk is the risk that a taxing authority will change tax laws that
will affect an investment negatively. Higher taxes on investment income
reduce real returns and can lower the prices of investments in the
secondary markets. Higher taxes on businesses will lower their net
income, which will usually lower its stock price.
6. Market risk is the risk that market conditions can negatively impact
investment returns. For instance, the prices of securities are dependent
on general supply and demand that fluctuates independently of any
security in particular.
-
8/11/2019 Portfolio Management of an Individual
19/43
Market risk is generally dependent on economic conditions, such as
inflation, consumer sentiment, or credit availability.
7. Liquidity risk , which is the risk that an investment cannot be sold
quickly for a reasonable price. Real estate, for instance, is an illiquid
investment because it takes considerable time to sell unless it is sold
below market value.
These are the general risks that affect virtually every investment.
IDEAL PORTFOLIO DESIGNED FOR VARIOUS KINDS OF PEOPLE
PORTFOLIO DESIGNED FOR A CONSERVATIVE PERSON:
Share market- 35% [Rs. 35 lakhs]
Mutual Funds- 35% [Rs. 35 lakhs]
Fixed deposits- 10% [Rs. 10 lakhs]
Money market- 10% [Rs. 10 lakhs]
Commodity- 5% [Rs. 5 lakhs] [Not for trading]
Banks Saving- 5% [Rs. 5 lakhs]
-
8/11/2019 Portfolio Management of an Individual
20/43
Assumption & Explanation :
Conservative persons are mostly from Conservative family background or
with more no. of persons depending on him or he may be a retired/ aged
person, who is worried about their near future. So, their risk appetite is very
low. They invest money into some investment instrument from where they
will get fixed returns which will be very useful.
When designing portfolio for these people, very less amount is be assigned
in share market where risk is high. So, we have assigned 35% for share
market wherein we can have diversified portfolio like investing largely into
large cap, who perform well with less risk. In those 35 lacs, we can have
60% for large cap, 40% for mid cap companies.
As mutual funds are having low risk, money can be allocated to this asset
class also. Other forms of investment like fixed deposits, money market are
always having low risk. Bank savings are very necessary as day to day
expenses can be met by this investment. Commodity can be purchased for
safe investment as every family does it.
Commodities like Gold and silver are traditional form of investment from
long time. They help in killing inflation.
Assuming that person of any age and conservative can purchase real
estate for his own family from the returns he gets from fixed returns
investment. He will not think of others asset classes like Art.
-
8/11/2019 Portfolio Management of an Individual
21/43
PORTFOLIO DESIGNED FOR A MODERATE PERSON:
Share market- 50% [Rs. 50 lakhs]
Mutual funds- 25% [Rs. 25 lakhs]
Fixed deposits- 10% [Rs. 10 lakhs]
Money market- 10% [Rs. 10 lakhs]
Bank savings- 3% [Rs. 3 lakhs]
Commodity- 2% [Rs. 2 lakhs] [Not for trading]
Assumption & Explanation :
These types of people are having moderate risk taking capability. But, still
they dont prefer other type of asset classes where returns are very low. In
share market also, they go for small cap companies with very little
investment; so that even if they dont get expected returns, they are not
worse off.
Considering this, we have allocated 50% investment to share market i.e. 50
lakhs. In this asset classes, person can choose between large cap, mid cap
& small cap companies or sector wise companies who are performing
good. Lots of options are available with the person to choose. Out of that
50 lakhs, 50% for large cap, 30% for mid cap, 20% for small cap
companies can be allocated.
-
8/11/2019 Portfolio Management of an Individual
22/43
Mutual funds are also having lots of schemes, having good returns.
Mutual fund companies are having lots of schemes for different levels with
different allocation for different sectors.
In this case, person can invest into fixed deposits with good returns for
limited period of time say up to 3 years. Then, he can divert his money from
one asset class to another depending upon performance of the other class.
As time passes if person can think of trading in commodity if he can
generate high risk appetite for him for certain amount of money. He also
can go for another asset class like insurance, if he thinks there is a need forthat.
In case of moderate risk taking people, they keep less amount of money in
their bank accounts as their vision is too invest more and get more returns
and keep doing that. They like to mostly get the experience in share market
and new asset classes like commodity trading.
PORTFOLIO DESIGNED FOR AN AGGRESSIVE PERSON:
Share market- 65% [Rs. 65 lakhs]
Mutual funds- 15% [Rs. 15 lakhs]
Fixed deposits- 10% [Rs. 10 lakhs]
Bank savings- 3% [Rs. 3 lakhs]
Commodity- 2% [Rs. 2 lakhs] [Not for trading]
-
8/11/2019 Portfolio Management of an Individual
23/43
-
8/11/2019 Portfolio Management of an Individual
24/43
The profits are calculated on the basis of ' h igh wate rmark ing ' concept.
This means, that the fee is paid only on the basis of positive returns on the
investment. In addition to these criteria, the manager also gets around 15-
20% of the total profit earned by the client. The portfolio managers can alsoclaim some separate charges gained from brok erage, cus todia l services ,
and t ax payments .
MEASURING PORTFOLIO RETURNS
Portfolio returns come in the form of current income and capital
gains. Current income includes dividends on stocks and interest paymentson bonds. A capital gain or capital loss results when a security is sold, and
is equal to the amount of the sale price minus the purchase price. The
return of the portfolio is equal to the net of the capital gains or losses plus
the current income for the holding period.
Unrealized capital gains or losses on securities still held are also added to
the return to evaluate the holding period return of the portfolio. The portfolioreturn is adjusted for the addition of funds and the withdrawal of funds to
the portfolio, and is time-weighted according to the number of months that
the funds were in the portfolio.
-
8/11/2019 Portfolio Management of an Individual
25/43
Below is the formula for calculating the portfolio return for 1 year:
Portfoli
o
Return
=
Dividends + Interest + Realized Gains or Losses + Unrealized
Gains or Losses
Initial Investment + (Added Funds x Number of Months in
Portfolio / 12) - (Withdrawn Funds x Number of Months
Withdrawn from Portfolio / 12)
Realized gains (or losses) are gains or losses actualized by the selling of
the securities, whereas unrealized gains or losses are securities that are
still owned but are marked to market to determine the portfolio's return.
Comparing Portfolio Returns :
There are several ways of comparing portfolio returns with each other andwith the market in general. A simple comparison is to simply compare their
returns. However, returns by themselves do not account for the risk taken.
If 2 portfolios have the same return, but one has lower risk, then that would
be the preferable, more efficient portfolio.
There are 3 common ratios that measure a portfolios risk -return trade-off:
Sharpes ratio
Treynors ratio
Jensens Alpha
-
8/11/2019 Portfolio Management of an Individual
26/43
Sharpe Ratio:
The Sharpe ratio (aka Sharpes measure), developed by William F. Sharpe,
is the ratio of a portfolios total return minus the risk -free rate divided by the
standard deviation of the portfolio, which is a measure of its risk. The
Sharpe ratio is simply the risk premium per unit of risk, which is quantified
by the standard deviation of the portfolio.
Risk Premium = Total Portfolio Return Risk-free Rate
Sharpe Ratio = Risk Premium / Standard Deviation of Portfolio
The risk-free rate is subtracted from the portfolio return because a risk-free
asset has no risk premium since the return of a risk-free asset is certain.
Therefore, if a portfolios return is equal to or less than the risk -free rate,
then it makes no sense to invest in the risky assets.
Hence, the Sharpe ratio is a measure of the performance of the portfolio
compared to the risk taken the higher the Sharpe ratio, the better the
performance and the greater the profits for taking on additional risk.
Example Calculating The Sharpe Ratio
If a fund has a return of 12% and a standard deviation of 15% , and if
the risk-free rate is 2% , then what is its Sharpe ratio?
Solution:
Sharpe Ratio = ( 12% 2% ) / 15% = 10% / 15% = 66.7% (rounded)
-
8/11/2019 Portfolio Management of an Individual
27/43
Treynor Ratio
While the Sharpe ratio measures the risk premium of the portfolio over the
portfolio risk, or its standard deviation, Treynors ratio, popularized by Jack
L. Treynor, compares the portfolio risk premium to the diversifiable risk of
the portfolio as measured by its beta.
Treynor Ratio =
Total Portfolio Return Risk-Free Rate
Portfolio Beta
Note that since the beta of the general market is defined to be 1, the
Treynor Ratio of the market would be equal to its return minus the risk-free
rate.
Example Calculating The Treynor Ratio
If a portfolio has a return of 12% and a beta of 1.4 , and if the risk-free
rate is 2% , then what is its Treynor ratio?
Solution:
Treynor Ratio = ( 12 2) / 1.4 = 10 / 1.4 = 7.14 (rounded)
Note that here we used whole numbers for the return and risk-free rate
because it simplifies the math and because it makes no difference when
comparing portfolios if the same method is used consistently.
-
8/11/2019 Portfolio Management of an Individual
28/43
Jensen's Alpha (Aka Jensen Index):
Alpha is a coefficient that is proportional to the excess return of a portfolio
over its required return, or its expected return, for its expected risk as
measured by its beta. Hence, alpha is determined by the fundamental
values of the company in contrast to beta, which measures the return due
to its volatility. Jensens alpha (aka Jensen index), developed by Michael C.
Jensen, uses the capital asset pricing model (CAPM) to determine the
amount of the return that is firm-specific over that which is due to market
risk, which causes market volatility as measured by the firms beta.
Jensens Alpha = Total Portfolio Return Risk-Free Rate [Portfolio
Beta x (Market Return Risk-Free Rate)]
Jensens alpha can be positive, negative, or zero. Note that, by definition,
Jensens alpha of the market is zero. If the alpha is negative, then the
portfolio is underperforming the market.
Formula investment plans are long-term investment strategies based on afixed formula of dollars to investments that is applied over a period of time
and does not involve security analysis or market timing. While easy to
implement, their main drawback is that profits will probably be less than
that resulting from active analysis and management. There is potentially an
infinite number of formula plans, or variations of them, but the most
common formula plans are: dollar-cost averaging, constant-dollarinvestment, constant-ratio investment, and variable-ratio investment.
-
8/11/2019 Portfolio Management of an Individual
29/43
Summary
How successful any of these plans are in actuality will depend on the
specific details of the plans and the investment horizon. However,
they are more likely to be successful the longer the investment
horizon, especially if a large part of the portfolio is invested in risky
assets.
CURRENT STATUS OF PORTFOLIO MANAGEMENT IN INDIA:
Now-a-days, portfolio management is very popular concept because everyinvestor wants to increase his investment. In the earlier days, it was not sogood. People make optimize profits but now investors are taking the help ofthe professionals and they help them in various decisions. Select the rightblend of projects that can increase ROI, market share and achieve asustainable growth portfolio.
They apply an investment plan to maintain a balancebetween investment risk and return. They follow certain rules to allocate themajor portion of resources to invest whether in extremely volatile marketslike share and equity market or in treasury notes, money market funds.
They provide a good investment option, excellent return at manageablerisk. So any individuals, a beginner or an experienced investor or a monthlyearner for living can take the advantages of portfolio management service.
With the considerable investments required to expand new products andthe risks involved, portfolio Management in India is becoming aprogressively more important tool to make strategic decisions aboutproduct development and the investment of company reserves.
-
8/11/2019 Portfolio Management of an Individual
30/43
All professionals and business leaders in the investment services have
become mindful that only right technologies and active financial
management can achieve financial goals.
Portfolio management in India has provided the vital insights to expand
competitive initiation in this complex financial market. The portfolio
management team involves managers who try to increase the market
return by actively managing financial portfolio through investment decisions
based on research and individual investment choices. They actively
manage closed-end funds because they have years of actual daily trading
experience. These managers are highly skilful and adept at carrying on
profound research. They can perform with passion and innovation in
investment services. So they can give fruitful financial advice to expand
financial gains.
Investment services involve different financial instruments such as pension
fund, mutual fund, equity and share, investment on property, commodity,
IT, stock, and bond, financial derivatives. These instruments have a certain
level of risk and give returns in the long run. The returns can be positive
only when it is invested professionally.
Many Companies dealing in Portfolio Management are Kotak Securities,
Unicon Portfolio Management, UTI, Karvy, Reliance etc.
-
8/11/2019 Portfolio Management of an Individual
31/43
FUTURE PROSPECTUS OF THE PORTFOLIO MANAGEMENT
SERVICES IN INDIA
Now, if we talk about the future prospective of portfolio services, then we
see every investor want to see growth in its investment and returns. He/
she want higher return than risk. They want their investments are
diversified in such a manner so that the risk of one may compensated by
another and for this they have to take the services of the experts.
So, we can say that the future of the portfolio management is very brightbecause in todays world everyone wants to invest in a wisely manner and
so that it may reduce their risk. So, on the every step they have to take the
help of the professionals or experts. In Mutual fund, there are also the
experts who manage the asset mix of the investors but there are some
shortcomings in the mutual fund like flexibility is not there. So portfolio
managers provide these facilities to their clients and they feel satisfied from
their managers.
Moreover, many companies are providing the facilities of portfolio
management and many other are entering into these services. So, we can
say that in the near future, portfolio management services will grow very
fast and from this many investors are taking benefits from this. There are
specialised portfolio managers who are taking care for it and chargescommission for their services and many other companies are entering for
providing better services to the investors. So, in the near future it will
definitely increase.
-
8/11/2019 Portfolio Management of an Individual
32/43
STUDY OF A COMPANY
Here, we take the example of Ko tak Secur i t ies
Kotak Securities: Portfolio Management Services
-
8/11/2019 Portfolio Management of an Individual
33/43
Kotak Securities is one of Indias oldest portfolio management companies
with over a decade of experience. It is also one of the largest, with Assets
under Management of over Rs. 3300 Crores.
Kotak Portfolio Management from Kotak Securities comes as an answer to
those who would like to grow exponentially on the crest of the stock market,
with the backing of an expert.
Kotak Securities is a SEBI registered Portfolio Manager for providing both
Discretionary as well as Non Discretionary portfolio management service.
Kotak Securities is a depository participant with National SecuritiesDepository Limited (NSDL) and Central Depository Services Limited
(CDSL).
Unlike many other companies, Kotak Securities Ltd. has a Centralised Risk
Management System and an in-house Research Team which allows it to
offer the same levels of service to customers across all locations. Kotak
Securities was awarded as the most customer responsive company in theFinancial Institution sector by AVAYA Global Connect Award both in 2006
and 2007.
Kotak Portfolio Management offers various schemes to suit individual
investment objectives.
-
8/11/2019 Portfolio Management of an Individual
34/43
Fol lowing are the pro du cts offered by Ko tak Secur i t ies
o GUARDIAN PORTFOLIO
With the Guardian Portfolio Kotak Securities invests in both gold and
equity. At any point of time around 20 per cent of the assets will be
invested in the gold. The allocation to gold may go up to 50 per cent
depending upon the market condition and the rest will be invested in the
equity market. The minimum investment is Rs 10 lakhs.
o BEP Large cap focus por t fo l io
In the BEP Large cap focus portfolio, investments will be made in mis-
priced large cap stocks that have a high growth potential and can withstand
macro level risks to sustain in an adverse environment.
Large Caps are dominant players in their respective sectors, and hencehave the strength and the ability to maintain margins in a tough operating
environment.
o GEMS PORTFOLIO
GEMS are a 30-month closed-end product. The scheme intends to create a
focused portfolio of stocks from across sectors and market capitalization
ranges. Its main feature is its special mandate to participate in the pre-FPO
(follow-on public offer) placements and private placements of listed
companies. Investments of up to 30 per cent of the overall assets can be
made in such opportunities.
-
8/11/2019 Portfolio Management of an Individual
35/43
o ORIGIN
Origin portfolio aims to invest in growth oriented companies with
sustainable business models backed by strong management capabilities
with emphasis on smaller capitalized companies with a market
capitalization not exceeding Rs. 2500 crore at the time of investment.
o INVEST GUA RD PORTFOL IO
The Invest guard Plan is a CPPI Model which invests across shares and
fixed income products, moving from shares into fixed interest investments
when the funds value drops below a predetermined floor. When markets
start to move up, the product increases its holdings in shares, tapping into
these growth opportunities.
o CORE PORTFOLIO
Core Portfolio aims to capture the long term upside of the India Growth
Story by diversifying across the major themes. The investments are in all
equity and equity related instruments with emphasis on companies in the
business areas driven by consumerism, outsourcing, real estate and core
infrastructure players and is essentially a mix of small, medium and large
capitalization companies.
The Portfolio Management Service combines competent fund
management, dedicated research and technology to ensure a rewarding
experience for its clients. Special relationship managers are appointed to
manage your investments in the best possible manner and make sure that
you get maximum returns of your investments.
-
8/11/2019 Portfolio Management of an Individual
36/43
Kotak PMS has a dedicated fund management and research team that
frequently meets management of companies and is well-placed to spot
such opportunities.
BENEFITS OF CHOOSING PORTFOLIO MANAGEMENT SERVICES
(PMS) INSTEAD OF MUTUAL FUNDS:
While selecting Portfolio management service (PMS) over mutual funds
services it is found that portfolio managers offer some very services which
are better than the standardized product services offered by mutual funds
managers.
Such as :
Asset Allocation : Asset allocation plan offered by Portfolio management
service helps in allocating savings of a client in terms of stocks, bonds or
equity funds. The plan is tailor made and is designed after the detailed
analysis of client's investment goals, saving pattern, and risk taking
capacity.
Timing : Portfolio managers preserve client's money on time. Portfolio
management service (PMS) help in allocating right amount of money in
right type of saving plan at right time. This means, portfolio manager
provides their expert advice on when his client should invest his money in
equities or bonds and when he should take his money out of a particularsaving plan. Portfolio manager analyzes the market and provides his expert
advice to the client regarding the amount of cash he should take out at the
time of big risk in stock market.
-
8/11/2019 Portfolio Management of an Individual
37/43
Flexibility: Portfolio Managers plan saving of his client according to their
need and preferences. But sometimes, portfolio managers can invest
client's money according to his preference because they know the market
very well than his client. It is his client's duty to provide him a level of
flexibility so that he can manage the investment with full efficiency and
effectiveness.
In c o m p a ri s o n t o m u t u al f u n d s, portfolio managers do not need to follow
any rigid rules of investing a particular amount of money in a particularmode of investment.
Mutual fund managers need to work according to the regulations set up by
financial authorities of their country. Like in India, they have to follow rules
set up by SEBI.
CASE STUDY: FINANCIAL PLANNING INTERRUPTED
Any financial planner worth his salt will vouch for the importance ofdiversification while building a portfolio. Furthermore, the diversificationneeds to work at various levels. For example, within each asset class, it ispertinent to be invested across multiple instruments; similarly, the portfolioshould be diversified across various asset classes as well.
We have taken a case study of a client whose portfolio was anything butdiversified. And this wasn't his only problem. To make matters worse, heseemed to have contravened every basic tenet of financial planning,making his portfolio an ideal candidate for a makeover.
-
8/11/2019 Portfolio Management of an Individual
38/43
The facts of the case:
The client is 40 years of age, and the sole earning member in his
family.
His wife is a homemaker and his sons are aged 10 and 5
respectively.
He is employed with a multinational corporation and his salary
income more than makes up for his expenses i.e. the monthly cash
inflows outweigh outflows.
The client's investments/financials are as follows:
He has invested in 3 properties (including the one in which he
resides), which account for 83% of his assets.
Equities (stocks and investments in only 2 diversified equity funds)
account for 16% of assets.
The balance (1%) is held in cash/savings bank accounts.
He has opted for 2 child ULIPs (unit linked insurance plans), the total
annual premium for which is Rs 120,000
On the liabilities front, he has an outstanding home loan and also a loan
against his mutual fund investment.
As can be seen, property i.e. real estate as an asset class accounts for a
disproportionately high portion of the asset portfolio.
-
8/11/2019 Portfolio Management of an Individual
39/43
Furthermore, all the properties are in the same city, depriving the client of
any diversification opportunity.
While it is important to have property in one's
portfolio, it certainly shouldn't account for
such a high proportion. Also given that
property as an asset class tends to be rather
illiquid (a distress sale when liquidity needs
are urgent could lead to a loss-making proposition), only accentuates theunenviable situation. A downturn in property prices could spell disaster for
the client.
How much should property account for in your portfolio?
The remedy for this situation lies in introducing other assets like equitiesinto the portfolio and thereby converting the portfolio into a more balanced
one. Studies have shown that equities as an asset class (if invested
smartly) can outperform others like real estate, gold and fixed income
instruments over longer time frames. Considering that the client's needs
(planning for retirement and providing for children's education) are long-
term in nature, the presence of a higher equity component should be
treated as vital.
The solution - put on hold any plans to buy more property. With 3
properties, the client has adequately taken care of that.
-
8/11/2019 Portfolio Management of an Individual
40/43
The surplus cash inflows should now be utilized to beef up the portfolio's
equity component. But the same needs to be done in a planned manner.
Sadly, the client has not even set himself any concrete objective in terms of
planning for retirement or providing for children's education. In other words,it's yet another case of investing randomly without setting any objectives.
To complicate matters, the client has erred by investing nearly Rs 3 m in
just 2 diversified equity funds, again pointing to lack of diversification.
Identify your financial goals at the outset
The solution - set tangible objectives (in monetary terms) and then investsin well-managed equity funds in a disciplined manner for achieving the
same. This will help on various levels. First, the enhanced equity
component will ensure that the portfolio becomes well-diversified across
asset classes. Second, it will make the equity investments diversified
across multiple schemes. Finally, it will aid in gainfully utilizing the surplus
monies.
On the insurance front, the client is woefully underinsured. Considering that
he is the sole earning member in the family, the ideal choice would have
been to opt for a term plan.
Term plans are pure risk cover plans; they offer the opportunity to obtain a
high insurance cover at relatively lower premiums. After getting himself
adequately insured, savings-based products like ULIPs should have found
place in the portfolio. The client should rectify the anomaly by buying a term
plan and fortifying his insurance portfolio.
-
8/11/2019 Portfolio Management of an Individual
41/43
Term Plans - Comparative premium chart
The liability side could do with some rework as well. While the home loan
can aid in tax-planning (interest and principal repayments qualify for
deduction from gross total income), we aren't quite convinced about the
loan against mutual fund investment. The client is sufficiently liquid and
certainly doesn't need to shoulder the burden of a redundant loan
repayment. He would be better off paying off the loan at the earliest.
The client's financial status and condition make rather interesting reading.
On the surface, we have an individual, whose income streams more thanmake up for his expenses, whose asset portfolio seems rather well-
stocked. In other words, it's a seemingly picture perfect situation. But
scratch the surface, and a radically different picture emerges.
The investments are lop-sided in favor of a single asset class (i.e.
property). Despite the needs being long-term in nature, the client is virtually
unprepared to meet those needs; in fact, he hasn't even quantified hisneeds - which should be the starting point for the exercise. He doesn't have
an adequate insurance cover and has in his books avoidable liabilities.
The case only underscores the difference between having finances and
being financially sound. And missing out on the latter could well mean that
one is headed for a financial disaster.
Source: Yahoo Finance
-
8/11/2019 Portfolio Management of an Individual
42/43
CONCLUSION
From the above discussion it is clear that portfolio functioning is based on
market risk, so one can get the help from the professional portfoliomanager or the Merchant banker if required before investment. Becauseapplicability of practical knowledge through technical analysis can help aninvestor to reduce risk.
Casino make money on a roulette wheel, not by knowing what number willcome up next, but by slightly improving their odds with the addition of a 0and 00. Yet many investors buy securities without attempting to controlthe odds. If we believe that this dealings is not a Gambling we have tostart up it with intelligent way. Through it is basically a future estimation orexpectation, one should know the standard norms and related rules forlowering the risk.
After the overall study about this topic it shows that portfolio managementis a dynamic and flexible concept which involves regular and systematicanalysis, proper management, judgment, and actions and also that theservice which was not so popular earlier as other services has become abooming sector as on today and is yet to gain more importance andpopularity in future as people are slowly and steadily coming to know aboutthis concept and its importance.It also helps both an individual the investor and FII to manage their portfolioby expert portfolio managers. It protects the investors portfolio of fundsvery crucially.Portfolio management service is very important and effective investmenttool as on today for managing investible funds with a surety to secure it. Asand how development is done every sector will gain its place in this world
of investment. It can be concluded, that future of portfolio management isbright provided proper regulations prevail and investors needs are satisfiedby providing variety of schemes.
-
8/11/2019 Portfolio Management of an Individual
43/43
BIBLIOGRAPHY
PRASANNA CHANDRA SECURITY ANLYSIS AND PORTFOLIOMANAGEMENT.
V.A. AVADHANI SECURITY ANLYSIS AND PORTFOLIOMANAGEMENT.
GORDON AND NATRAJAN FINANCIAL SERVICES AND MARKETS.
IGNOU MBA COURSE MATERIAL
WEBLIOGRAPHY
www.npd-solutions.com/ portfolio .html http://www.ipcc.ca/services/portfolioplanning.aspx http://www.indianchild.com/management/portfolio-management.htm http://www.kotaksecurities.com/whatweoffer/portfoliomanagement.ht
ml http://www.botinternational.com/portfolio_management.htm http://www.articlesbase.com/investing-articles/portfolio-management-
is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGr http://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id
=14 http://www.sushilfinance.com/capitalmarket/Services/portfolio-
management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3
http://hubpages.com/hub/Kotak-Securities-PMS http://www.investopedia.com/terms/p/portfoliomanagement.asp www.moneycontrol.com
http://www.kotaksecurities.com/whatweoffer/portfoliomanagement.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliomanagement.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliomanagement.htmlhttp://www.botinternational.com/portfolio_management.htmhttp://www.articlesbase.com/investing-articles/portfolio-management-is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGrhttp://www.articlesbase.com/investing-articles/portfolio-management-is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGrhttp://www.articlesbase.com/investing-articles/portfolio-management-is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGrhttp://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id=14http://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id=14http://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id=14http://www.sushilfinance.com/capitalmarket/Services/portfolio-management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3http://www.sushilfinance.com/capitalmarket/Services/portfolio-management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3http://www.sushilfinance.com/capitalmarket/Services/portfolio-management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3http://hubpages.com/hub/Kotak-Securities-PMShttp://www.investopedia.com/terms/p/portfoliomanagement.asphttp://www.investopedia.com/terms/p/portfoliomanagement.asphttp://hubpages.com/hub/Kotak-Securities-PMShttp://www.sushilfinance.com/capitalmarket/Services/portfolio-management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3http://www.sushilfinance.com/capitalmarket/Services/portfolio-management-services-india.asp?id=4&MNU=2&SubMNU=2&sel=3http://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id=14http://www.uniconindia.in/ProdAndServ/PortfolioManagement.aspx?id=14http://www.articlesbase.com/investing-articles/portfolio-management-is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGrhttp://www.articlesbase.com/investing-articles/portfolio-management-is-becoming-multifaceted-in-india-2766839.html#ixzz140SWdkGrhttp://www.botinternational.com/portfolio_management.htmhttp://www.kotaksecurities.com/whatweoffer/portfoliomanagement.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliomanagement.html