Description
Portfolio Management
MEANING OF PORTFOLIO: Portfolio means combined holding of many kinds of financial securities i.e. Shares, debentures, government bonds, units and other financial assets. Making a portfolio means putting ones eggs in different baskets with varying elements of risk and return. The object of portfolio is to reduce risk by diversification and maximize gains. PORTFOLIO MANAGEMENT: Portfolio management means selection of securities and constant shifting of the portfolio in the light of varying attractiveness of the constituents of the portfolio. It is a choice pf selecting and revising spectrum of securities to it in with the characteristics of an investor. Markowitz analysed the implications of the fact that the investors, although seeking high-expected returns, generally wish to avoid risk. It is the basis of all scientific portfolio management. Although the expected return on a portfolio is directly related to the expected returns on components security, it is not possible to deduce portfolio riskness simply by knowing the riskness of individual securities. The riskness of the portfolio depends upon the attributes if individual securities as well as the inter relationship among securities. A professional, who manages other peoples or institutions investment portfolio with the object of profitability, growth and risk minimization is known as portfolio manager. He is expected to manage the investor’s assets prudently and choose particular investment avenues appropriate for particular times aiming at maximization of profit. Portfolio management includes portfolio planning, selection and construction, review and evolution. The skill in portfolio management lies in achieving a sound balance between the objectives of safety, liquidity and profitability. MODERN PORTFOLIO THEORY: Modern portfolio theory quantifies the relationship between risk and returns and assumes that an investor must be compensated for assuming risk. It tries to determine the statistical relationships between individual investments, which compromise a portfolio. The four basic steps in modern portfolio management are given below: a. Security valuation: It means identifying assets in terms of their expected risk and expected return. b. Asset allocation decision: It means deciding how assets are to be allocated to various classes of investment. c. Portfolio optimization: It is achieving the best returns for a particular level of risk by choosing selected investment avenues. d. Performance measurement: It is analyzing each assets performance into marketrelated and industry or individual share related risk. An investor may be able to analyze, classify and control both the kind and amount of expected risk and return from a given portfolio with the help of this theory.
ELEMENTS OF PORTFOLIO MANAGEMENT: Portfolio management is a dynamic process, which involves the following basic tasks: a. Identification of the objectives, constraints and preferences of investors for formulation of investment policy. b. Develop and implement strategies in tune with investment policy formulated. It will help the selection of asset classes and securities in each class depending upon their risk return attributes. c. Review and monitoring of the performance of the portfolio by continuous overview of the market conditions and performance of the companies. d. Evaluation of the portfolio for the results to compare with targets and make some adjustments for the future. OBJECTIVES OF PORTFOLIO MANAGEMENT: The basic objective of portfolio management is to maximize yield and minimize risk. The other objectives are as follows: a. Stability of income: An investor considers stability of income from his investment. He also considers the stability of purchasing power of income. b. Capital growth: capital appreciation has become an important investment principle. Investors seek growth stocks that provide a very large capital appreciation by way of rights, bonus and appreciation in the market price of a share. c. Liquidity: An investment is a liquid asset. It can be converted into cash with 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 salable investment. d. 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 are requires extensive diversification. Even investor wants that his basic amount of investment should remain safe. e. Tax incentives: 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, tax implications, yields and other returns. An investment programme without considering tax implications may be costly to the investor.
CONSTRUCTION OF PORTFOLIO:
There are two approaches for construction of portfolios: [a] Interior decorating approach and, Markowitz approach. a. Interior decorating approach: Interior-decorating approach is tailor-made to the investment objectives and constraints of each investor. In case of exterior building or room structure, the furnishing and interior decoration to be carried out inside the structure will depend upon the purpose for which it is to be used. Similarly, the portfolio will consist of securities, which will suit the individual’s investment objectives and constraints. An individual investor has to carefully develop his portfolio over a period of years to suit his needs and match his investment objectives. A serious minded investor will have to consider the following important categories of investment opportunities.
i. ii. iii. iv.
v.
vi.
Protective investments: These investments protect the investors against the uncertainties in life. The fife insurance policy is a good example of this type of investment opportunity. Tax oriented investment: Some investments provide tax incentives to the investors. For example, public provident fund, national savings certificates etc. Fixed income investments: These investments yield a fixed rate of return on the investments. For example, investment in preference shares, debentures, bank deposits etc. Emotional investments: These investments are made for the purpose of emotional security and satisfaction. Investors get some satisfaction from these investments. For example, investment made in house property, jewellery, household appliances etc. Speculative investments: These investments are made for the purpose of speculation. The motive behind it is to make quick gains out of fluctuations in the market. For example, investment in real estates, shares, commodity trading etc. Growth investments: These investments are made for the purpose of earning capital gains. These are not made for getting regular income. For example, investment in growth shares, real estates, land, gold etc.
With the help of these investments, we can attempt to develop a matrix for matching the individual characteristics of specific investments so that a suitable portfolio can be developed for each investor. In real life, building up a good portfolio is a simple thing. A young family which may have a lot of insurance and considerable growth portfolio should add some real estate by the time it reaches the midstream. At the middle-age sets, the investors should avoid making risky and speculative investments. They should make the necessary emotional investments, which will provide security and mental peace in the old age. When they are on the verge of retirement and even during retirement their portfolio should preferably consist of safe and income generating investments. b. Markowitz approach: Markowitz approach provides a systematic search for optiomal portfolio. It enables the investors to locate minimum variance portfolios i.e. portfolios with the least amount of risk for different levels of expected return. It is the process of combining assets that are less than perfectly positively correlated in order to reduce portfolio risk without sacrificing portfolio returns. It is more analytical than simple diversification because it considers correlations between assets returns for lowering risk. There are computer based packages available for determining the efficient portfolios. If we go through this process for different levels of expected returns, we can locate minimum variance portfolio. Application of the above package will tell us how much we can invest in each security to form an efficient portfolio for a given level of return. SELECTION OF SECURITIES: The purpose of active selection of securities is to identify to purchase or sell securities whose current market prices are below or above their true equilibrium values as estimated by a personal assessment of value. The objective of security analysis is to find securities, which plot above, or below the security market line [SML] securities above SML are under priced and would be considered desirable purchases by an investor who already holds a well-diversified portfolio. The securities plotting below the SML are overpriced and would either be sold, avoided or sold short by the investor. An investor who pursues an active stock selection approach must have some faith in market efficiency. Returns in excess of equilibrium returns will be generated on so called ‘mis priced’ securities only if the market eventually realizes that particular securities are mis priced.
RISK RETURN ANALYSIS:
Risk means possibility of loss or injury. Investors commonly identify the following types of risk: a. Business and financial risk. b. The purchasing power risk. c. Market risk. d. Interest rate risk. e. Social or regulation risk. These risk are certain hazards, which expose the investments. Normally, the higher the risk the higher is the return and vice versa. Every investment has some risk. These risk arise out of variability of returns and uncertainty of appreciation or depreciation of share prices and losses of liquidity. Each security has its own expected return and variance. The risk overtime 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. A risk less return on the capital of about 12% is the bank rate charged by the RBI. This risk less return refers to variability of return and no uncertainty in the repayment of capital. Risk return is subject to variation and the objective of the portfolio manager is to reduce that variability which reduces by choosing an appropriate portfolio. The problem of risk management is important in managing a portfolio.
EFFICIENT PORTFOLIO: Portfolio management involves construction of a portfolio based upon investors objectives, constrains, preferences for risk and return and his tax liability. It is reviewed and adjusted from time to time in tune with the market conditions. The evaluation is to be done in terms of targets set for risk and return and changes in the portfolio are to be made in order to meet the changing conditions. In order to construct an efficient portfolio, we have to conceptualize various combinations of investments in a basket and designate them as expected portfolios. Then expected returns from these portfolios are to be worked out. The risk on these portfolios is to be estimated by measuring the standard deviation of different portfolio returns. We can diversify into a number of securities whose risk return profiles vary in order to reduce the risk. The concept of efficient portfolio can be shown with the help of a diagram.
PORTFOLIOS AND SECURITIES: To build an efficient portfolio an expected return level is decided and securities are substituted until the portfolio combination with the smallest variance at return level is found. The return on portfolio weighted average of returns on its component securities. The weight each security is the fraction of the portfolios total value, which is invested in it. For example, a total of Rs. One lakh are invested in three securities, the proportion Xi invested in each and the rate of return Ri are given in the following table. The sum of the products of these is the portfolios rate of return. The calculation on the rate of return portfolio. SECURITY PORTFOLIO INVESTED RATE OF RETURN i 1. 2. 3. 4. Xi 0.5 0.3 0.2 1.0 Ri 0.10 0.20 0.05 XiRi 0.050 0.060 0.010 0.120
Thus the expected rate of return of a portfolio {Ep} is determined by using the following formulae: Ep = XiRi + Y2R2 + X3R3 =
SELECTING THE APPROPRIATE PORTFOLIO:
The investor has to select the most appropriate portfolio from among the many portfolios. He has the option of maximizing expected return for a given level of risk or minimizing risk for a given level of expected return. The Markowitz model allows a trade-off between expected returns and risk, which depends upon each investors risk preferences. The investor can select the risk combination that best satisfies unique personal preferences. Portfolios differ from each other, not just in the number and type of securities held but also in the combination of risk and return they offer. Therefore, we should know to present the investors choice to consider his willingness to exchange expected return and variance. Different investors have different preferences. Therefore, everyone will not choose the same portfolio. If they choose from among alternative portfolios on the basis of expected return and variance they will pick up efficient portfolios. DIVERSIFICATION: An investor can reduce the risk in his portfolio by a proper diversification into a number of scripts. He can select a few companies but of an optimum size so as to manage efficiently. He can apply the economies of scale in management. In this process, he will find that higher the risk, higher will be the return in the normal course of operations.
REVIEW AND REVISION OF PORTFOLIO: Investors have to review and revise their portfolios regularly. Some investors do not review their portfolio regularly due to lack of time and inclination to undertake review. Many investors have reluctance to sell their securities because they are likened to gold or real estate to be liquidated only during the time of financial distress. The world of investment is highly dynamic and rapidly changing. Therefore, every investor should review periodically their portfolios and revise them in the light of changing circumstances. Several changes are likely to take place in the world. Relative market value of various securities in the portfolio may change and new information may alter the risk return prospects of various securities. The funds available for the portfolio may be changed. In order to face these changes periodic review and revision of the portfolio is necessary. It helps the investors in the following ways: a. To maintain adequate diversification if the relative values of various securities are changed. b. To expand or contract the size of portfolio to absorb surplus funds or after withdrawal of funds. c. To reflect changes in investor risk disposition. d. To incorporate new information relevant for risk return assessment. The portfolio review and revision can be undertaken from time to time but the object is to maximize benefits in relation to its cost. It depends upon the changes in the investment environment, size of the portfolio and the investment approach followed by the investor. SCOPE OF PORTFOLIO MANAGEMENT: Portfolio management is the 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 of risk management should be considered:
a. The selection of level of risk and return that reflects the investor’s tolerance for risk and desire for return i.e. personal preferences and….
b. The management of investment alternatives to expand the set of opportunities available at the investors acceptable risk level. The very risk averse investor might choose shares, if they offer higher returns. Much more can be done to help the investor to secure the most desirable opportunities. Investment opportunities can be packaged together by forming portfolios. This will increase the number of investment opportunities available at any specified risk level. Thus, the potential for creating portfolios changes the whole problem of investment choice. Risk averse investors may be able to find a way to invest in shares and debentures to earn the higher returns from the opportunities from portfolios. 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 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 cash transactions in the form of cash and bank deposits, which are required for making day-to-day payments. The next preference goes to the short investments such as UTI units and post office deposits, which provides easy liquidity. The last choice goes to investment in a company shares and debentures. There are a number of choices and decisions to be taken on the basis of 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 preference. For most investor, 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 of track of investor’s money. Professionally managed funds include open-ended mutual funds, money market funds and closed ended mutual funds. A great variety of investment objectives, portfolio management styles and management expense levels are present in the professional fund management industry. Investors are often able to select a fund ideally suited to their personal needs, wealth levels and objectives.
doc_736061607.doc
Portfolio Management
MEANING OF PORTFOLIO: Portfolio means combined holding of many kinds of financial securities i.e. Shares, debentures, government bonds, units and other financial assets. Making a portfolio means putting ones eggs in different baskets with varying elements of risk and return. The object of portfolio is to reduce risk by diversification and maximize gains. PORTFOLIO MANAGEMENT: Portfolio management means selection of securities and constant shifting of the portfolio in the light of varying attractiveness of the constituents of the portfolio. It is a choice pf selecting and revising spectrum of securities to it in with the characteristics of an investor. Markowitz analysed the implications of the fact that the investors, although seeking high-expected returns, generally wish to avoid risk. It is the basis of all scientific portfolio management. Although the expected return on a portfolio is directly related to the expected returns on components security, it is not possible to deduce portfolio riskness simply by knowing the riskness of individual securities. The riskness of the portfolio depends upon the attributes if individual securities as well as the inter relationship among securities. A professional, who manages other peoples or institutions investment portfolio with the object of profitability, growth and risk minimization is known as portfolio manager. He is expected to manage the investor’s assets prudently and choose particular investment avenues appropriate for particular times aiming at maximization of profit. Portfolio management includes portfolio planning, selection and construction, review and evolution. The skill in portfolio management lies in achieving a sound balance between the objectives of safety, liquidity and profitability. MODERN PORTFOLIO THEORY: Modern portfolio theory quantifies the relationship between risk and returns and assumes that an investor must be compensated for assuming risk. It tries to determine the statistical relationships between individual investments, which compromise a portfolio. The four basic steps in modern portfolio management are given below: a. Security valuation: It means identifying assets in terms of their expected risk and expected return. b. Asset allocation decision: It means deciding how assets are to be allocated to various classes of investment. c. Portfolio optimization: It is achieving the best returns for a particular level of risk by choosing selected investment avenues. d. Performance measurement: It is analyzing each assets performance into marketrelated and industry or individual share related risk. An investor may be able to analyze, classify and control both the kind and amount of expected risk and return from a given portfolio with the help of this theory.
ELEMENTS OF PORTFOLIO MANAGEMENT: Portfolio management is a dynamic process, which involves the following basic tasks: a. Identification of the objectives, constraints and preferences of investors for formulation of investment policy. b. Develop and implement strategies in tune with investment policy formulated. It will help the selection of asset classes and securities in each class depending upon their risk return attributes. c. Review and monitoring of the performance of the portfolio by continuous overview of the market conditions and performance of the companies. d. Evaluation of the portfolio for the results to compare with targets and make some adjustments for the future. OBJECTIVES OF PORTFOLIO MANAGEMENT: The basic objective of portfolio management is to maximize yield and minimize risk. The other objectives are as follows: a. Stability of income: An investor considers stability of income from his investment. He also considers the stability of purchasing power of income. b. Capital growth: capital appreciation has become an important investment principle. Investors seek growth stocks that provide a very large capital appreciation by way of rights, bonus and appreciation in the market price of a share. c. Liquidity: An investment is a liquid asset. It can be converted into cash with 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 salable investment. d. 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 are requires extensive diversification. Even investor wants that his basic amount of investment should remain safe. e. Tax incentives: 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, tax implications, yields and other returns. An investment programme without considering tax implications may be costly to the investor.
CONSTRUCTION OF PORTFOLIO:
There are two approaches for construction of portfolios: [a] Interior decorating approach and, Markowitz approach. a. Interior decorating approach: Interior-decorating approach is tailor-made to the investment objectives and constraints of each investor. In case of exterior building or room structure, the furnishing and interior decoration to be carried out inside the structure will depend upon the purpose for which it is to be used. Similarly, the portfolio will consist of securities, which will suit the individual’s investment objectives and constraints. An individual investor has to carefully develop his portfolio over a period of years to suit his needs and match his investment objectives. A serious minded investor will have to consider the following important categories of investment opportunities.
i. ii. iii. iv.
v.
vi.
Protective investments: These investments protect the investors against the uncertainties in life. The fife insurance policy is a good example of this type of investment opportunity. Tax oriented investment: Some investments provide tax incentives to the investors. For example, public provident fund, national savings certificates etc. Fixed income investments: These investments yield a fixed rate of return on the investments. For example, investment in preference shares, debentures, bank deposits etc. Emotional investments: These investments are made for the purpose of emotional security and satisfaction. Investors get some satisfaction from these investments. For example, investment made in house property, jewellery, household appliances etc. Speculative investments: These investments are made for the purpose of speculation. The motive behind it is to make quick gains out of fluctuations in the market. For example, investment in real estates, shares, commodity trading etc. Growth investments: These investments are made for the purpose of earning capital gains. These are not made for getting regular income. For example, investment in growth shares, real estates, land, gold etc.
With the help of these investments, we can attempt to develop a matrix for matching the individual characteristics of specific investments so that a suitable portfolio can be developed for each investor. In real life, building up a good portfolio is a simple thing. A young family which may have a lot of insurance and considerable growth portfolio should add some real estate by the time it reaches the midstream. At the middle-age sets, the investors should avoid making risky and speculative investments. They should make the necessary emotional investments, which will provide security and mental peace in the old age. When they are on the verge of retirement and even during retirement their portfolio should preferably consist of safe and income generating investments. b. Markowitz approach: Markowitz approach provides a systematic search for optiomal portfolio. It enables the investors to locate minimum variance portfolios i.e. portfolios with the least amount of risk for different levels of expected return. It is the process of combining assets that are less than perfectly positively correlated in order to reduce portfolio risk without sacrificing portfolio returns. It is more analytical than simple diversification because it considers correlations between assets returns for lowering risk. There are computer based packages available for determining the efficient portfolios. If we go through this process for different levels of expected returns, we can locate minimum variance portfolio. Application of the above package will tell us how much we can invest in each security to form an efficient portfolio for a given level of return. SELECTION OF SECURITIES: The purpose of active selection of securities is to identify to purchase or sell securities whose current market prices are below or above their true equilibrium values as estimated by a personal assessment of value. The objective of security analysis is to find securities, which plot above, or below the security market line [SML] securities above SML are under priced and would be considered desirable purchases by an investor who already holds a well-diversified portfolio. The securities plotting below the SML are overpriced and would either be sold, avoided or sold short by the investor. An investor who pursues an active stock selection approach must have some faith in market efficiency. Returns in excess of equilibrium returns will be generated on so called ‘mis priced’ securities only if the market eventually realizes that particular securities are mis priced.
RISK RETURN ANALYSIS:
Risk means possibility of loss or injury. Investors commonly identify the following types of risk: a. Business and financial risk. b. The purchasing power risk. c. Market risk. d. Interest rate risk. e. Social or regulation risk. These risk are certain hazards, which expose the investments. Normally, the higher the risk the higher is the return and vice versa. Every investment has some risk. These risk arise out of variability of returns and uncertainty of appreciation or depreciation of share prices and losses of liquidity. Each security has its own expected return and variance. The risk overtime 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. A risk less return on the capital of about 12% is the bank rate charged by the RBI. This risk less return refers to variability of return and no uncertainty in the repayment of capital. Risk return is subject to variation and the objective of the portfolio manager is to reduce that variability which reduces by choosing an appropriate portfolio. The problem of risk management is important in managing a portfolio.
EFFICIENT PORTFOLIO: Portfolio management involves construction of a portfolio based upon investors objectives, constrains, preferences for risk and return and his tax liability. It is reviewed and adjusted from time to time in tune with the market conditions. The evaluation is to be done in terms of targets set for risk and return and changes in the portfolio are to be made in order to meet the changing conditions. In order to construct an efficient portfolio, we have to conceptualize various combinations of investments in a basket and designate them as expected portfolios. Then expected returns from these portfolios are to be worked out. The risk on these portfolios is to be estimated by measuring the standard deviation of different portfolio returns. We can diversify into a number of securities whose risk return profiles vary in order to reduce the risk. The concept of efficient portfolio can be shown with the help of a diagram.
PORTFOLIOS AND SECURITIES: To build an efficient portfolio an expected return level is decided and securities are substituted until the portfolio combination with the smallest variance at return level is found. The return on portfolio weighted average of returns on its component securities. The weight each security is the fraction of the portfolios total value, which is invested in it. For example, a total of Rs. One lakh are invested in three securities, the proportion Xi invested in each and the rate of return Ri are given in the following table. The sum of the products of these is the portfolios rate of return. The calculation on the rate of return portfolio. SECURITY PORTFOLIO INVESTED RATE OF RETURN i 1. 2. 3. 4. Xi 0.5 0.3 0.2 1.0 Ri 0.10 0.20 0.05 XiRi 0.050 0.060 0.010 0.120
Thus the expected rate of return of a portfolio {Ep} is determined by using the following formulae: Ep = XiRi + Y2R2 + X3R3 =
SELECTING THE APPROPRIATE PORTFOLIO:
The investor has to select the most appropriate portfolio from among the many portfolios. He has the option of maximizing expected return for a given level of risk or minimizing risk for a given level of expected return. The Markowitz model allows a trade-off between expected returns and risk, which depends upon each investors risk preferences. The investor can select the risk combination that best satisfies unique personal preferences. Portfolios differ from each other, not just in the number and type of securities held but also in the combination of risk and return they offer. Therefore, we should know to present the investors choice to consider his willingness to exchange expected return and variance. Different investors have different preferences. Therefore, everyone will not choose the same portfolio. If they choose from among alternative portfolios on the basis of expected return and variance they will pick up efficient portfolios. DIVERSIFICATION: An investor can reduce the risk in his portfolio by a proper diversification into a number of scripts. He can select a few companies but of an optimum size so as to manage efficiently. He can apply the economies of scale in management. In this process, he will find that higher the risk, higher will be the return in the normal course of operations.
REVIEW AND REVISION OF PORTFOLIO: Investors have to review and revise their portfolios regularly. Some investors do not review their portfolio regularly due to lack of time and inclination to undertake review. Many investors have reluctance to sell their securities because they are likened to gold or real estate to be liquidated only during the time of financial distress. The world of investment is highly dynamic and rapidly changing. Therefore, every investor should review periodically their portfolios and revise them in the light of changing circumstances. Several changes are likely to take place in the world. Relative market value of various securities in the portfolio may change and new information may alter the risk return prospects of various securities. The funds available for the portfolio may be changed. In order to face these changes periodic review and revision of the portfolio is necessary. It helps the investors in the following ways: a. To maintain adequate diversification if the relative values of various securities are changed. b. To expand or contract the size of portfolio to absorb surplus funds or after withdrawal of funds. c. To reflect changes in investor risk disposition. d. To incorporate new information relevant for risk return assessment. The portfolio review and revision can be undertaken from time to time but the object is to maximize benefits in relation to its cost. It depends upon the changes in the investment environment, size of the portfolio and the investment approach followed by the investor. SCOPE OF PORTFOLIO MANAGEMENT: Portfolio management is the 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 of risk management should be considered:
a. The selection of level of risk and return that reflects the investor’s tolerance for risk and desire for return i.e. personal preferences and….
b. The management of investment alternatives to expand the set of opportunities available at the investors acceptable risk level. The very risk averse investor might choose shares, if they offer higher returns. Much more can be done to help the investor to secure the most desirable opportunities. Investment opportunities can be packaged together by forming portfolios. This will increase the number of investment opportunities available at any specified risk level. Thus, the potential for creating portfolios changes the whole problem of investment choice. Risk averse investors may be able to find a way to invest in shares and debentures to earn the higher returns from the opportunities from portfolios. 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 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 cash transactions in the form of cash and bank deposits, which are required for making day-to-day payments. The next preference goes to the short investments such as UTI units and post office deposits, which provides easy liquidity. The last choice goes to investment in a company shares and debentures. There are a number of choices and decisions to be taken on the basis of 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 preference. For most investor, 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 of track of investor’s money. Professionally managed funds include open-ended mutual funds, money market funds and closed ended mutual funds. A great variety of investment objectives, portfolio management styles and management expense levels are present in the professional fund management industry. Investors are often able to select a fund ideally suited to their personal needs, wealth levels and objectives.
doc_736061607.doc