International Journal of Research (IJR) Vol-1, Issue-10 November 2014 ISSN 2348-6848

Financial Portfolio management: Overview and Decision Making in investment Process Neelam Kapoor

Asst.Prof. B.Sc,MBA,UGC-NET

7-Laxmi Nivas Near Chaman Hotel Nayapura,Kota (Rajasthan)-324001, India

Email: [email protected]

ABSTRACT:

In the globalization era, Portfolio including them in strategic planning and Management play an important role in portfolio reviews. investment of securities. portfolio management is both an art and a science. It KEYWORDS: is much more than the selection of securities from a catalog by a financial consultant or Portfolio Management; Risk; Securities; the application of a formula to a set of Financial Data; Investment; Diversification financial data input supplied by a security analyst. It is a dynamic decision-making 1. INTRODUCTION : process, one that is continuous any systematic but also one that requires large A Portfolio Management refers to the amounts of astute managerial judgment science of analyzing the strengths, about the securities markets and the weaknesses, project, what is the goals of individual for whom portfolio is managed. project, what is the resources of project to be portfolio management is a decisive element implemented and opportunities and threats for the good performance of new product for performing wide range of activities development and compliance with business related to the one’s portfolio for maximizing objectives because it not only defines new the return at a given risk. Portfolio product projects but also defines revisions, Management process start with raw inputs updates, and even decisions regarding the such as what is the how much capital is discontinuation of products that are required for such project. After analyzing the produced and commercialized. This article factors investor evaluate the project or proposes a framework with the specific security in financial term such as Return of objective of presenting an approach that portfolio, risk of portfolio etc ,after that the could be useful to portfolio management. organization according to organization The framework proposed in this article strategy will chose the security or project. presents a holistic perspective of portfolio management, suggesting the use of a set of Portfolio Management consists of two word formal management methods for not only i.e. Portfolio and Management. The evaluating product projects but also meaning of this is as follows. extending to organizational aspects and

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International Journal of Research (IJR) Vol-1, Issue-10 November 2014 ISSN 2348-6848 →Portfolio: Portfolio is group of financial OBJECTIVES AND assets such as shares, , bond, debt IMPORTANCE :- instruments, cash equivalent etc. A portfolio is planned to stabilize the risk of non- The simple fact that securities carry differing performance of various pools of investment. degrees of expected risk leads most investors to the notion of holding more than one →Management: Management is security at a time, in an attempt to spread organization and coordination of the risks by not putting all their eggs into one activities of an enterprise in accordance with basket. Most investor hope that if they hold well -defined policies and in achievement of several assets, even if one goes bad, the its pre defined goal and objective. others will provide some protection from an extreme loss.Portfolio Management routed Now lets comprehended the meaning of the through Diverfiction ,it efforts to spread and term portfolio management. minimize risk take the form of diversification. The more traditional forms of →Portfolio Management : It guides the diversification have concentrated upon investor in a method of selecting the best holding a number of security types. It is most available securities that will provide the valuable objective of efficient portfolio expected for any given degree would agree that a portfolio consisting of of risk and also to migate the risk . It is a two is probably less risl than one strategic decision which is addressed by top holding either stock alone. level management. The objective of portfolio management is Portfolio is combination of security such as to invest in securities is securities in such a Stocks Bonds and Money market way that one maximizes one’s returns and Instruments.The process of blending together minimizes risks in order to achieve one’s the broad Asset classes so as to obtain investment objective. optimum return with minimum risk is called portfolio management. Diversification of A good portfolio should have multiple investments helps to spread risk over many objectives and achieve a sound balance assets. Major tasks involved with Portfolio among them. Any one objective should not Management are as follows. be given undue importance at the cost of others. Presented below are some Taking decisions about investment mix and important objectives of portfolio policy management.

Matching investments to objectives 1. Security principal of investment: The first important for individuals and objective of a portfolio, no matter institution who owns it, is to ensure that the investment is absolutely safe. Other Balancing risk against performance considerations like income, growth, etc., only come into the picture after the safety of your investment is ensured 2. Consistency of Return : Once investment safety is guaranteed, the

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International Journal of Research (IJR) Vol-1, Issue-10 November 2014 ISSN 2348-6848 portfolio should yield a steady investment. The investor shall be current income. The current returns aware of the fact that there is no should at least match the such thing as a zero risk investment. opportunity cost of the funds of the More ever relatively low risk investor. What we are referring to investment give correspondingly a here current income by way of lower return to their financial interest of dividends, not capital portfolio. gains. 7. Favorable tax status : Since taxation 3. Capital Growth : A good portfolio is an important variable in total should appreciate in value in order planning, a good portfolio should to protect the investor from any enable its owner to enjoy a erosion in purchasing power due to favorable tax shelter. The portfolio inflation. In other words, a balanced should be developed considering not portfolio must consist of certain only income tax, but capital gains investments, which tend to tax, and gift tax, as well. What a appreciate in real value after good portfolio aims at is tax adjusting for inflation. planning, not tax evasion or tax 4. Marketability: A good portfolio avoidance. consists of investment, which can be marketed without difficulty. If there are too many unlisted or inactive shares in your portfolio, you will Investment safety or minimization of risks face problems in encasing them, and is one of the important objectives of switching from one investment to portfolio management. There are another. It is desirable to invest in many types of risks, which are associated companies listed on major stock with investment in equity stocks, including exchanges, which are actively super stocks. Bear in mind that there is no traded. such thing as a zero risk investment. More over, relatively low risk investment give correspondingly lower returns. You can try and minimize the overall risk or bring 5. Liquidity: The portfolio should it to an acceptable level by developing a ensure that there are enough funds balanced and efficient portfolio. A good available at short notice to take care portfolio of growth stocks satisfies the of the investor’s liquidity entire objectives outline above. requirements. It is desirable to keep a line of credit from a bank for use 3. INVESTMENT PROCESS : in case it becomes necessary to participate in right issues, or for any The selection of securities is made with a other personal needs. view to provide the investor the maximum yield for a given level of risk or ensure minimize risk for a given level of return. However, selection of securities is based 6. Diversification of portfolio : Portfolio upon the attitude of investor towards risk and management is designed to reduce other parameters. We can classify investor the risk of investment and provide under three broad categories namely Risk optimum or highest return on averse, Risk Seeking and Risk Neutral.

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International Journal of Research (IJR) Vol-1, Issue-10 November 2014 ISSN 2348-6848 1. Risk Averse: In this category making an investment in securities are as we include those investor follows. who demands maximum return a given for risk and they will take calculated FINANCIAL INVESTMENT PROCESS risk. 2. Risk Seeking : In this 1. Understand Your financial category we include those Health : This involves investor who is willing to determining investors take more risk for given financial position objective return and they will take and his attitude towards risk high risk and called risk and return. Investor prepare owner. a summary budget for 3. Risk Neutral : In this category investment and investor also we include those investor make a financial tool plan who is indifferent to risk and for investment. they will unknown about 2. Understanding Financial risk. Goals : This stage depends on financial goals of Prior to entering into an Investor.according to nature investment, our locally-based of portfolio and nature of staff ensures that the potential investor,planner can choose investee meets the minimum best alternative investment. standards of eligibility. We 3. Investment Plan : Investment investigate the compatibility of plan is a road map of the investee both in terms of investment process. In this development impact and from a investor is to indentify financial strength perspective. security after performing Furthermore, enivronmental, Economic, Industry and social and corporate governance of the issues as well as client security. protection practices form an 4. Portfolio Construction : integral part in the investment Investor after analysis screening, due diligence, audits, various factors construct monitoring and reporting. portfolio of available securities. Investor is to Regardless of the attitude of an investor , ascertain assets i.e. securities in order to construct a portfolio we need in which investment is to be to make investment in securities. This done and proportion of the bring us the most crucial aspect of same. constructing a portfolio, i.e. investment 5. Portfolio Review and Re- process. The investment process describes balance : Periodic review of how an investor should make decision the portfolio to ensure that it with regard to the type of security ,how fulfils the set out objectives much to invest in such security and when and thus making changes. to invest. The basic steps involved in Investor for measure the final performance of the

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International Journal of Research (IJR) Vol-1, Issue-10 November 2014 ISSN 2348-6848 portfolio in terms of risk and analysis is the foundation of the portfolio return and stated decisions. objectives. 6. APPROACHES IN PORTFOLIO 4. SCOPE OF PORFOLIO CONSTRUCTION MANAGEMENT : : In the portfolio theory 1. Portfolio management is a investor apply many tools and techniques continuous process. It is a for maximum benefits at lower risk. There dynamic activity. The are two approaches that followed by following are the basic investor in portfolio construction operations of a portfolio management. 1. Traditional Approach : 2. Monitoring the performance of portfolio by Traditional approach evaluates the entire incorporating the latest financial plan of the individual. The market conditions. traditional approach basically deals with 3. Identification of the investor’s two major decisions objective, constraints and preferences. *Determining the objectives of the 4. Making an e valuation of portfolio portfolio income (comparison with targets and *Selection of securities to be included in achievement). the portfolio. 5. Making revision in the portfolio. →Steps in Traditional Approach 6. Implementation of the strategies in tune with 1. Analysis of constraints: Investors investment objectives. analysis constraints that are as follows. 5. ASSUMPTIONS OF *income Needs : Need for current PORTFOLIO THEORY : income and need for constant income

1. Investor are risk-averse : This implies * Liquidity that instead of investing the entire wealth in a single assetm or security the investors * Safety of the principal hold a well-diversified portfolio. A risk averse investor constitute a portfolio with * Time horizon a view to provide maximum yield for a given level of risk or to ensure minimum * Tax consideration risk for a given level of return. *Temperament 2. Return of securities are normally distributed : This implies that the mean and variance or standard deviation 2. Determination of objectives : The common objectives are stated below

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International Journal of Research (IJR) Vol-1, Issue-10 November 2014 ISSN 2348-6848 *Current income maintain the percentage allocation of the asset classes and keep the security holding *Growth in within its place over the established holding period. In the active approach the * Capital appreciation investor continuously assess the risk and return of the securities within the assets * Preservation of capital classes and changes them accordingly.

Portfolio risk can be reduced by the 3. Selection of portfolio : simplest kind of diversification. In the case of common stocks diversification *Objectives reduces the unsystematic risk or unique risk. Analysts says that if 15 stocks are *growth of income added in a portfolio of the investor , the unsystematic risk can be reduced to zero. *Capital appreciation But at the same time if the number exceed 15, additional risk reduction cannot be * Safety of principal gained. But diversification cannot reduced systematic or undiversifiable risk. * Risk and return analysis →The Markowitz Model : 4. Diversifocation Harry Markowitz published an article on *According to the investor’s need for portfolio selection in the journal of income and risk tolerance level portfolio is in march 1952.His publication indicated the diversified importance of correlation among the . different stocks return in the construction of a stock portfolio. After the publication of this *In the bond portfolio, the investor has to paper, numerous investment firms and strike a balance between the short term and portfolio managers developed ‘Markowitz long term bonds . algorithms’ to minimize risk.

2. Modern Approach :

Modern approach gives more attention to Markowitz Model of portfolio management the process of selecting the portfolio. The have followings assumptions. selection is based on the risk and return analysis. Returns includes the market *The individual investor estimates risk on return and dividend. Investor are the basis of variability of returns i.e the assumed to be indifferent towards the variance of the returns form of return. The final steps is asset allocation process that is to choose the *Investor’s decision is solely based on the portfolio that meets the requirement of expected return and variance of returns only the investor. Investor can adopt passive approach or active approach towards the *For a given level of risk, investor prefers management of the portfolio. In the higher return to lower return. passive approach the investor would

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International Journal of Research (IJR) Vol-1, Issue-10 November 2014 ISSN 2348-6848 *Likewise, for a given level of return common sectors to scrutinize would be investor prefers lower risk than higher risk. technology, but many other firms in various sectors that are pursuing an aggressive growth strategy can be considered. As you 7. TYPES OF PORTFOLIO : might have gathered, risk management becomes very important when building and Stock investors constantly hear the wisdom maintaining an aggressive portfolio. Keeping of diversification. The concept is to simply losses to a minimum and taking profit are not put all of your eggs in one basket, which keys to success in this type of portfolio. in turn helps mitigate risk, and generally leads to better performance or return on investment. Diversifying your hard-earned 2.The Defensive Portfolio: dollars does make sense, but there are different ways of diversifying, and there are Defensive stocks do not usually carry a high different portfolio types. We look at the beta, and usually are fairly isolated from following portfolio types and suggest how to broad market movements. Cyclical stocks, get started building them: aggressive, on the other hand, are those that are most defensive, income, speculative and hybrid. It sensitive to the underlying economic is important to understand that building a "business cycle." For example, during portfolio will require research and some recessionary times, companies that make the effort. Having said that, let's have a peek "basics" tend to do better than those that are across our five portfolios to gain a better focused on fads or luxuries. Despite how bad understanding of each. the economy is, companies that make products essential to everyday life will 1.The Aggressive Portfolio : survive. Think of the essentials in your everyday life, and then find the companies An aggressive portfolio or basket of stocks that make these consumerstaple products. includes those stocks with high risk/high The opportunity of buying cyclical stocks is reward proposition. Stocks in the category that they offer an extra level of protection typically have a high beta, or sensitivity to against detrimental events. Just listen to the the overall market. Higher beta stocks business stations and you will hear portfolios experience larger fluctuations relative to the managers talking about "drugs," "defense" overall market on a consistent basis. If your and "tobacco." These really are just baskets individual stock has a beta of 2.0, it will of stocks that these managers are typically move twice as much in either recommending based upon where the direction to the overall market - hence, the business cycle is and where they think it is high-risk, high-reward description. going. However, the products and services of Most aggressive stocks are in the early these companies are in constant demand. stages of growth, and have a unique value A defensive portfolio is prudent for most proposition. Building an aggressive portfolio investors. A lot of these companies offer a requires an investor who is willing to seek dividend as well which helps minimize out such companies, because most of these downside capital losses. names, with a few exceptions, are not going to be common household companies. Look 3.The Income Portfolio : online for companies with earnings growth that is rapidly accelerating, and have not An income portfolio focuses on making been discovered by Wall Street. The most money through dividends or other types of

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International Journal of Research (IJR) Vol-1, Issue-10 November 2014 ISSN 2348-6848 distributions to stakeholders. These Another classic speculative play is to make companies are somewhat like the safe an investment decision based upon a rumor defensive stocks but should offer higher that the company is subject to a takeover. yields. An income portfolio should generate One could argue that the widespread positive cash flow. Real estate investment popularity of leveraged ETFs in today's trusts(REITs) and master limited markets represent speculation. Again, these partnerships (MLP) are excellent sources of types of investments are alluring: picking the income producing investments. These right one could lead to huge profits in a short companies return a great majority of their amount of time. Speculation may be the one profits back to shareholders in exchange for portfolio that, if done correctly, requires the favorable tax status. REITs are an easy way most homework. Speculative stocks are to invest in real estate without the hassles of typically trades, and not your classic "buy owning real property. Keep in mind, and hold" investment. however, that these stocks are also subject to the economic climate. REITs are groups of stocks that take a beating during an 5. The Hybrid Portfolio : economic downturn, as building and buying activity dries up. Building a hybrid type of portfolio means venturing into other investments, such as An income portfolio is a nice complement to bonds, commodities, real estate and even art. most people's paycheck or other retirement Basically, there is a lot of flexibility in the income. Investors should be on the lookout hybrid portfolio approach. Traditionally, this for stocks that have fallen out of favor and type of portfolio would contain blue have still maintained a high dividend policy. chip stocks and some high grade government These are the companies that can not only or corporate bonds. REITs and MLPs may supplement income but also provide capital also be an investable theme for the balanced gains. Utilities and other slow growth portfolio. A common fixed income industries are an ideal place to start your investment strategy approach advocates search. buying bonds with various maturity dates, and is essentially a diversification approach 4.The Speculative Portfolio : within the bond asset class itself. Basically, a hybrid portfolio would include a mix of A speculative portfolio is the closest to a stocks and bonds in a relatively fixed pure gamble. A speculative portfolio allocation proportions. This type of approach presents more risk than any others discussed offers diversification benefits across multiple here. Finance gurus suggest that a maximum asset classes as equities and fixed income of 10% of one's investable assets be used to securities tend to have a negative correlation fund a speculative portfolio. Speculative with one another. "plays" could be initial public offerings (IPOs) or stocks that are rumored to be takeover targets. Technology or health care firms that are in the process of researching a breakthrough product, or a junior oil company which is about to release its initial production results, would also fall into this category.

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International Journal of Research (IJR) Vol-1, Issue-10 November 2014 ISSN 2348-6848 8. REFERENCES : 8.CA Rajat Mahan,Bharat,New delhi,2012,Print 1. V Pattabhi Ram,SD Bala, Strategic Financial Management, Snow White ,New 9.Taxmann’s,New Public Issue Delhi 2013,print Guidelines,Taxmann,2009,Print

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