When the fund contains more than 65% equity, it is called as an equity fund. Thus such type of a fund would need equity portfolio management.
An equity portfolio manager’s task consists of two major steps:
a) Constructing a portfolio of equity shares or equity linked instruments that is consistent with
the investment objective of the fund and
b) Managing or constantly re-balancing the portfolio to produce capital appreciation and earnings that would reward the investors with superior returns.
How To Identify Which Kind Of Stocks To Include?
The equity portfolio manager has available to him a whole universe of equity shares and other instruments such as preference shares, warrants or convertible debentures issued by many companies. Even within each category of equity instruments, shares of one company may be very different in terms of their potential than shares of other companies. So how does the fund manager go about choosing the different types of stocks, in order to construct his portfolio?
The general answer is that his choice of shares to be included in fund’s portfolio must reflect the investment objective of the fund. more specifically, the equity portfolio manager will choose from a universe of invisible shares in accordance with:
a) The nature of the equity instrument, or a stock’s unique characteristics, and
b) A certain ‘investment style’ or philosophy in the process of choosing.
Thus, you may see a mutual fund’s equity portfolio include shares of diverse companies. However, in reality, the group of stocks selected will have certain unique characteristics, chosen in accordance with the preferred investment style, such that the portfolio as a whole is consistent with the scheme’s objectives.
Indian economy is going through a period of both rapid growth and rapid transformation. Thus, the industries with the growth prospects or blue chip shares of yesterday are no longer certain to continue to be in that category tomorrow. “New” sectors like software or technology stocks have matured and newer sectors such as biotechnology are now making an entry in the investment markets.
In this process of rapid change, the stock selection task of an active fund manager in India is by no means simple or limited. We will therefore, review how different stocks are classified according to their characteristics.
Ordinary shares:
Ordinary shareholders are the owners if the company and each share entitles the holder to ownership privileges such as dividends declared by the company and voting rights at the meetings. Losses as well as the profits are shared by the equity shareholders. Without any guaranteed income or security, equity share are a risk investment, bringing with them the potential for capital appreciation in return for the additional risk that the investor undertakes.
Preference Shares:
Unlike equity shares, preference shares entitle the holder to dividends at the fixed rates subject to availability of profits after tax. If preference shares are cumulative, unpaid dividends for years of inadequate profits are paid in subsequent years. Preference shares do not entitle the holder to ownership privileges such as voting rights at the meetings.
Equity Warrants:
These are long term rights that offer holders the right to purchase equity shares in a company at a fixed price (usually higher than the current market price) within specified period. Warrants are in the nature of options on stocks.
Convertible Debentures:
As the term suggests, these are fixed rate debt instruments that are converted into specified number of equity shares at the end of the specified period. Clearly, convertible debentures are debt instruments until converted; when converted, they become equity shares.
An equity portfolio manager’s task consists of two major steps:
a) Constructing a portfolio of equity shares or equity linked instruments that is consistent with
the investment objective of the fund and
b) Managing or constantly re-balancing the portfolio to produce capital appreciation and earnings that would reward the investors with superior returns.
How To Identify Which Kind Of Stocks To Include?
The equity portfolio manager has available to him a whole universe of equity shares and other instruments such as preference shares, warrants or convertible debentures issued by many companies. Even within each category of equity instruments, shares of one company may be very different in terms of their potential than shares of other companies. So how does the fund manager go about choosing the different types of stocks, in order to construct his portfolio?
The general answer is that his choice of shares to be included in fund’s portfolio must reflect the investment objective of the fund. more specifically, the equity portfolio manager will choose from a universe of invisible shares in accordance with:
a) The nature of the equity instrument, or a stock’s unique characteristics, and
b) A certain ‘investment style’ or philosophy in the process of choosing.
Thus, you may see a mutual fund’s equity portfolio include shares of diverse companies. However, in reality, the group of stocks selected will have certain unique characteristics, chosen in accordance with the preferred investment style, such that the portfolio as a whole is consistent with the scheme’s objectives.
Indian economy is going through a period of both rapid growth and rapid transformation. Thus, the industries with the growth prospects or blue chip shares of yesterday are no longer certain to continue to be in that category tomorrow. “New” sectors like software or technology stocks have matured and newer sectors such as biotechnology are now making an entry in the investment markets.
In this process of rapid change, the stock selection task of an active fund manager in India is by no means simple or limited. We will therefore, review how different stocks are classified according to their characteristics.
Ordinary shares:
Ordinary shareholders are the owners if the company and each share entitles the holder to ownership privileges such as dividends declared by the company and voting rights at the meetings. Losses as well as the profits are shared by the equity shareholders. Without any guaranteed income or security, equity share are a risk investment, bringing with them the potential for capital appreciation in return for the additional risk that the investor undertakes.
Preference Shares:
Unlike equity shares, preference shares entitle the holder to dividends at the fixed rates subject to availability of profits after tax. If preference shares are cumulative, unpaid dividends for years of inadequate profits are paid in subsequent years. Preference shares do not entitle the holder to ownership privileges such as voting rights at the meetings.
Equity Warrants:
These are long term rights that offer holders the right to purchase equity shares in a company at a fixed price (usually higher than the current market price) within specified period. Warrants are in the nature of options on stocks.
Convertible Debentures:
As the term suggests, these are fixed rate debt instruments that are converted into specified number of equity shares at the end of the specified period. Clearly, convertible debentures are debt instruments until converted; when converted, they become equity shares.