PORTFOLIO MANAGEMENT

Portfolio management is about weighing up risks and returns, diversifying our holdings and considering overall portfolio performance. Portfolio management is also about the ongoing monitoring of the stocks you own, and determining when to sell stocks.

PORTFOLIO MANAGEMENT THEORY

The theory can perform a very thorough analysis of a stock. The prospects for the industry may be great, the company might be in a strong financial position, but things can still go wrong. Companies can be involved in legal disputes, key customers can drop off, changes to legislation can have undesirable effects. Bad fortune can strike a company out of the blue.To compensate for unforeseen circumstances, we need to spread our investment capital amongst a number of stocks. By purchasing a basket of stocks, if one or more dont live up to our expectations our other stocks will keep the boat afloat.Not only should we buy shares in different companies to spread our risk, but we should also buy stocks in different industries. It can be tempting to fill up your portfolio with mining stocks in the middle of a resource boom but common sense needs to prevail. Its a good idea to keep some of your investment capital in cash at all times. That way if the stock market has a correction (a significant fall) then you might be poised to buy shares in great companies at cheap prices.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 of selecting and revising spectrum of securities to it in with the characteristics of an investor. Management means utilization of resources in the best possible manner. Portfolio management involves maintaining a proper combination of securities which comprise the investors portfolio in such a manner that they give maximum returns with minimum risk. This requires forming of a proper investment policy which is a policy of formation of guidelines for allocation of available funds among the various types of securities. A professional who manages other peoples or institutions investment portfolio with the object of profitability, growth and risk minimization is known as 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. The skill in portfolio management lies in achieving a sound balance between objectives of safety, liquidity and profitability.

PORTFOLIO MANAGEMENT IN DIFFERENT SECTORS OF FINANCIAL MARKETS:

Companies are owned by investors, whose Objectives is to maximize their wealth. The ownership pattern in the companies in India shows that the bulk owners are thee financial institutions and mutual funds. The non-resident Indians also invest in the companies. The ownership of the individual shareholders, on an average, does not exceed about 20% to 30%. The interest of financial and nonfinancial institutions and corporate do not coincide with that of individual shareholders who are the true savers of the household sector. The corporate are the only intermediaries. The corporate manager secure funds from banks and financial institutions next only to promoters and hence their interests stand prominent in the minds of portfolio managers in the corporate business. The companies generally keep continuous contact and dialogue with bankers and financial institutions in the matter of operations. The role of individual investors and other categories of investors is limited to the extent of annual general meeting only. The performance of companies and their operations are guided by the Government and SEBI Regulations, the company law and listing agreement with the stock exchange. The prudential norms for raising resources allocation of funds and declaration of dividends from governed by the law and Government notifications from time to time. The relevance of portfolio management in different sectors of the financial markets can be considered in following ways:

1.Individual portfolio:
There are individual investors who invest in the financial markets. They are employees, businessmen and professionals. They also want to construct their portfolio. However, they do not have time and proper knowledge to make analysis and take investment decisions. Therefore portfolio management is very much desirable for them. An individual portfolio may be constructed by following the rules of portfolio management. For example , A doctor who has saved Rs. 10 lakhs want to invest in the market . Thus he needs to construct his portfolio. The percentage in portfolio may differ from individual to individual depending upon his objectives, need and other constraints.

In this respect the portfolio mananger can make his portfolio as under:

Doctors Portfolio
Investment 1 2 3 4 5 Equity Debt Fixed Deposits NSC PPF Total Amount Rs.(lakhs) 300 200 250 150 100 1,000 Percentage (%) 30 20 25 15 10 100

2. Corporates Portfolio:
Investment by corporate may be in physical assets and financial assets. If it is investment in financial assets, the risk-return analysis of Markowitz holds good. But if it is in physical assets as part of the business operations, it is necessary to consider project risk and revenue sensitivity. A corporate portfolio can be as follows:

Corporates Portfolio Investment 1 2 3 4 5 Preference Capital Equity Capital Reserve and Surplus Debentures Term loans Total Amount Rs.(lakhs) 500 1000 500 300 200 2500 Percentage (%) 20 40 20 12 08 100

The percentage of debt-equity can differ from company to company depending upon the age, size group and nature of business of the company. The optimal portfolio will be decided which will give maximum return to the company.

The Corporate Portfolio Management approach provides the following benefits: 1.Increased decision making transparency through a more consistent evaluation of all business units and options . 2.A consistent approach to risk measurement. 3.A systematic way of including different views of risk in decision-making process 4. A clear enhancement to the due diligence process 5. Better understanding of value creation among new investment opportunities 6.Consideration of the correlation and diversification effects of the organizations different businesses and investment options. 7.Guidance for strategic planning (e.g. identification of where the company needs to move to improve its risk-return position) 8. Consideration of qualitative and non-financial implications

These benefits can easily be recognized across most organizations, regardless of size or industry. Our experience has shown us that a great deal of the information and expertise required by the Corporate Portfolio Management approach is already available within an organization. The key is to ensure that management understands and continually evaluates the risk-return position of both their organizations assets and new investment opportunities to create the most value in the long-term.

3. Banking Companys Portfolio:

The concept of portfolio is also relevant to the banking companies. Banks accept deposits from the public and lend these funds to ther borrowers in the market. They carry out banking business as per Banking Regulation Act 1949 and Reserve Bank regulates and controls their day to day operations through the guidelines. The banks collect huge amount of deposits which needs to be invested carefully. Hence, these banks have to follow the concept of portfolio management. An example of the banks portfolio is given below:

Banks Portfolio
Investment 1 2 3 4 Cash Reserve Ratio (5%) Statutory Liquidity Ratio (25%) Advances Investment Total Amount Rs.(lakhs) 800 4000 8000 3200 16000 Percentage (%) 05 25 50 20 100

The percentage of investment will vary from time to time as per RBI guidelines, amount of deposits and market conditions. Banking companies have to keep CRR and SLR as per the rules. They have to invest preferably in Government Securities and money market. They are also allowed to invest 5% of their time, and demand liabilities in the share market. The investment in the market may change from time to time depending upon liquidity, interest rates, repo rates and inflation rates. Portfolio Management Services (PMS) is a sophisticated investment vehicle that offers a range of specialised investment strategies to capitalise on opportunities in the market. Personalised Advice Experienced Fund Managers give you sound investment advice and strategies that help you invest smartly. You get the best fund managers in the industry who craft customised stock portfolios that work wonders.

With PMS products distributed by Deutsche Bank we get:

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More choice in terms of portfolios to suit individual client needs and risk appetite Ability to structure products that meet specific investment objectives Choice of alternate investment products that were traditionally available to the very wealthy

Professional Management PMS products distributed by Deutsche Bank combine the benefits of professional money management with the flexibility, control and potential tax advantages of owning individual stocks or other securities. The Portfolio Managers take care of all the administrative aspects of portfolio with a monthly or semi annual reporting on the overall status of the portfolio and performance. Continuous Monitoring The expert Fund Managers and research team keep a constant watch on money. The team of experts in these fund houses know exactly how money is performing through continuous monitoring as a customer are always informed through:
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Communications that include relevant information on major market events Quarterly or semi-annual performance updates

Hassle Free Operation As a PMS customer we get hassle-free operations. With total portfolio transparency, in-depth market information for better decision making and direct access to the portfolio management team, PMS brings high service standards

4. Mutual fund portfolio:

Mutual Funds are the financial intermediaries in the financial market. They collect large amount of funds from the public by selling units. They manage the investible funds of the public with their expertise in portfolio management. The investment policy of the fund may depend on the objectives of the fund ( income or growth). They invest fund in stock market, money market and debt market. Normally one third of the fund is used for investment in fixed interest securities. If the objective is growth, the bulk of the investment would be in equities and new issues.

The relative proportion will depend on the objectives of income and growth. Thus the relevance of portfolio management is very much important to mutual funds. The example of mutual fund portfolio is given below:

Mutual Funds Portfolio

Investment 1 2 3 4 5 Equity Debt Money market Bank deposits IPO Total Amount Rs.(lakhs) 4000 6000 4000 4000 2000 20000 Percentage (%) 20 30 20 20 10 100

The percentage of investment may differ from time to time depending upon the market conditions. The Asset Management Committee can change the proportion of investment depending upon the need and circumstances.

HSBC Mutual Fund Portfolio

Portfolio disclosures for fixed income securities At HSBC Global Asset Management it has always been endeavour to provide more information relating to investments. HSBC provides more details with respect to fixed income portfolios to enable assess the associated risks better. These include the risk profile of individual securities, Mark to Market (MTM) component of the fund and Yield to Maturity (YTM) of the portfolio.

Risk profile of individual securities There are two broad risks attached to fixed income instruments viz interest rate risk and credit risk. The additional portfolio disclosures made with regard to individual securities pertain to interest rate risk. These can be categorised as under:
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Maturity months in case of fixed rate instruments:

In all cases lower the maturity months, lower is the interest rate risk of the portfolio as a whole. In a rising interest rate scenario, an investor is looking for investments that reprice to the new higher levels quicker. Hence the fund manager tries to lower the average maturity/duration of the portfolio. The converse is true in a falling interest rate scenario.
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Interest reset months in case of floaters:

In all cases lower interest reset months, lower is the interest rate risk of the portfolio as a whole. Floating rate instruments that are based on Mibor (the overnight call money rate) reprice daily (except holidays) and reflect current liquidity conditions. G-sec-based floaters usually reset over a three-month/sixmonth period and reflect the G-sec yields over that period. Therefore floating rate instruments based on Mibor are better equipped to capture short-term interest rate movements.
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Average maturity in case of non-standard assets which have multiple principal repayments.

In all cases lower average maturity, lower is the interest rate risk of the portfolio as a whole. In the case of non-standard assets (which are mostly securitised assets), the principal plus interest payments tend to be more frequent (in most cases, where the underlying assets are retail loans like cars, personal loans, this frequency is monthly). So even though, for eg the actual maturity is one year (also called door-to-door maturity), the interest rate risk is substantially lower since the average maturity (as disclosed) is lesser given payback is monthly.

Mark to Market (MTM) : Marking to Market means recording the price or value of a security in a portfolio on a daily basis to reflect current market value of the security . MTM component of the fund discloses the valuation of assets using traded price or a derived price from the corresponding yield curve. It is further explained as Core MTM (as a percentage of net assets) component would mean bonds/instruments which have residual maturity greater than six months and are valued as per Crisil Bond valuer. Core MTM therefore are those securities which get priced on the Crisil valuer even though they may not be traded in the market on a given day. The fund Manager is usually taking an interest rate view by holding such securities and seeks to make a capital gain by holding/trading such securities. As interest rates go up, a fund manager would try to lower the Core MTM and vice-versa. MTM (as a percentage of net assets) as per SEBI definition. On a day, this would mean Core MTM plus any other securities for which traded prices have been recorded on the exchange and whose price has been used in the portfolio. As per the SEBI guideline, MTM component of a Liquid Fund should be < 10 per cent on a weekly average basis. Higher MTM in excess of the Core MTM reflects the liquidity of the instruments in the portfolio. Yield to Maturity (YTM) of the Portfolio: A rate of return measuring the total performance of a fund (coupon payments as well as capital gain or loss) from the current date until maturity of the instruments in the portfolio. This means that if the portfolio in its current form is held till maturity, then the return that an investor will get is equal to the Yield to Maturity of the Portfolio. It however assumes that any flows (in the form of coupons/part of principal repayments) received before maturity are being reinvested at the YTM rate. If the reinvestment rate is lower, then the total return could be lower than YTM. CRISIL has taken due care and caution in providing yields for valuation of corporate bonds in the portfolio of HSBC Mutual Fund following SEBI Guidelines and relying on the details furnished by HSBC (the AMC of HSBC Mutual Fund). CRISIL does not guarantee the accuracy, adequacy or completeness of the valuation performed by HSBC Mutual Fund, and is not responsible for any errors or for the results obtained from the use of the same. CRISIL especially states that it has no financial liability whatsoever to HSBC Mutual Fund/its unit holders or other users of the yields other than as agreed to between the parties.