Activities in Portfolio Management
Portfolio management (PM) activities are the systematic methods for analyzing or evaluating a set of projects for achieving the optimal balance among stability and growth, risks and returns; and attractions and drawbacks. It focuses on achieving this balance by using the limited resources available in best possible manner.
Portfolio management is also referred as investment management which comprises of managing the investment securities options. There are 7 crucial activities in portfolio management. They are:
Laying down the objectives of investment and the difficulties engaged in it
Portfolio strategy formulation
preferring the asset mix
Execution of portfolio
Securities selection
Rating of performance
Revision of portfolio
The two primary objectives of any investment would be the expectation regarding returns and the ability of the investor to presume a level of risk. Investors would aim to accomplish a steady income involving growth and higher returns. Risk levels could be moderate, aggressive or conservative. Return and risk are related directly. Greater is the risk, the more higher would be the returns and the lower is the risk, the lower would be the returns. The difficulties or constraints in laying down the objectives of investment could be related to liquidity requirements of the investor, investment horizon, post-tax returns, law and regulations of the country and his personal circumstances.
Preferring the asset mix
The second activity in portfolio management is to settle the proportion of the various asset categories in the portfolio of investor. The various asset categories lets in stocks, bonds & debentures, investment in real estate, precious metals like gold and silver, cash investments, etc. Investments are aspired at various purposes like education to build human capital, purchase of house, meeting medical & sustaining expenses etc. The choice of proper asset mix will be established upon the expectation of returns and the risk perception of the investor.
Portfolio strategy formulation
After the choice of asset mix is done, the succeeding step for the investor is to devise a portfolio strategy. Passive portfolio strategy and active portfolio strategy are the two broad alternatives that are available to formulate. An active portfolio strategy requires professionals in investments and investors who are aggressive to get higher returns and earnings. Passive portfolio strategy requires creating a well-diversified portfolio, the risk of which is per-determined and holding the portfolio unaltered over a period of time.
Securities selection
The selection of debt securities like debentures and bonds have to be evaluated believing the components like yield to maturity, default risk, tax shield and liquidity. The selection of equity shares requires technical, fundamental and random analysis. These analysis are aspired at volume of trading, price behavior, trend, growth prospects, level of earnings, prevailing stock price, risk exposure, etc.
Execution of portfolio
After the formulation of investment objectives, preferring asset mix, explicating portfolio strategy and securities selection, the portfolio has to be executed by purchasing or selling transactions or both. A proper understanding and trade motivation, knowledge of trading game, likely losers and winners, nature of key players in the market etc. will aid in this respect.
Revision of portfolio
The portfolio therefore executed after formulation has to be reviewed and monitored periodically. This is essential since the risk-return levels of the various securities in the portfolio would have altered over time, the targets of the investor would have altered, risk perception of the investor would have altered and the targets would have floated away. The revision of portfolio requires portfolio upgrading and portfolio re balancing.
Rating of performance
The rating of performance is with respect to the rate of return and risk. It requires measuring the returns brought forth , risk adhered to and the overall performance of the portfolio.
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