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WHAT IS PORTFOLIO MANAGEMENT?
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It is occasional to find investor investing their entire savings in a single security. Instead, they invest in a group of securities. Such a group is called a portfolio. Creation of portfolio to reduce risk without sacrificing returns is known as portfolio management.

Even in the most casual of workplaces, managers review their employees annually. And for good reason, employers compensate employees for performing well, and employees need to know how well their supervisors think they’re doing and whether they’re on track to meet their career goals.

Similarly your investment portfolio requires regular reviews too. You need to supervise, just as your manager supervises you, to make sure it’s on track and working to meet your goals. You need to analyze your portfolio periodically because the market and economic movements may cause your initial allocations to change.   

PHASES OF PORTFOLIO MANAGEMENT

      1. Security analysis:  There are numerous numbers of securities available for investment to an investor. An Investor having handful amount of surplus can enjoy the diversity of investment opportunities. As said, with "great powers comes great responsibilities", so as with an ample number of securities you have a lot valuation to do.

A security can be analyzed by two methods, Fundamental and Technical Analysis. Fundamental analysis involves the valuation of a security from its grass roots starting from the economic indicators, then the effects of such indicators to the industry and lastly the company’s financial statements which involve calculations of Earnings Per Share (EPS), dividend payout ratio, market share etc. Technical analysis is a tool which believes that share price movements are systematic and exhibit consistent patterns. It helps to identify the trends and patterns and predict future price movements.

       2. Portfolio Analysis: A portfolio is a group of securities held together as an investment. Investors invest their funds in a portfolio of securities rather than in a single security because they are risk averse. By constructing a portfolio, investors attempt to spread risk by not putting all your eggs into one basket. Thus, diversification of one’s holdings is intended to reduce risk in investment.

Security analysis provides the investor with a set of worthwhile or desirable securities. From this set of securities an indefinitely large number of portfolios can be constructed by choosing different sets of securities and also by varying the proportion of investment in each security. Each individual security has its own risk-return characteristics which can be measured and expressed quantitatively. Each portfolio constructed by combining the individual securities has its own specific risk and return characteristics which are not just the aggregates of the individual security characteristics.

 

Portfolio analysis phase of portfolio management consists of identifying the range of possible portfolios that can be constituted from a given set of securities and calculating their return and risk for further analysis.

          3. Portfolio Selection: Portfolio analysis provides the input for the next phase in portfolio management which is portfolio selection. The goal of portfolio construction is to generate a portfolio that provides the highest returns at a given level of risk. A portfolio having this characteristic is known as an efficient portfolio. The inputs from portfolio analysis can be used to identify the set of efficient portfolios. From this set of efficient portfolios, the optimal portfolio has to be selected for investment.

          4. Portfolio Revision: Having constructed the optimal portfolio, the investor has to constantly monitor the portfolio to ensure that it continues to be optimal. As the economy and financial markets are dynamic, changes take place almost daily. As time passes, securities which were once attractive may cease to be so. New securities with promises of high returns and low risk may emerge. The investor now has to revise his portfolio in the light of the developments in the market. This revision leads to purchase of some new securities and sale of some of the existing securities from the portfolio. The mix of securities and their proportion in the portfolio changes as a result of the revision. Portfolio revision may also be necessitated by some investor - related changes such as availability of additional funds, change in risk attitude, need of cash for other alternative use etc.

            5.   Portfolio Evaluation: The objective of constructing a portfolio and revising it periodically is to earn maximum returns with minimum risk. Portfolio evaluation is the process which is concerned with assessing the performance of the portfolio over a selected period of time in terms of returns and risk. This involves quantitative measurement of actual realized and the risk born by the portfolio over the period of investment. These have to be compared with objective norms to assess the relative performance of the portfolio. Alternative measures of performance evaluation have been developed for use by investors and portfolio managers.

Portfolio evaluation is useful in yet another way. It provides a mechanism for identifying weaknesses in the investment process and for improving these deficient areas. It provides a feedback mechanism for improving the entire portfolio management process.

  The portfolio management is an ongoing process. It starts with security analysis, then it leads to portfolio construction, and continues with portfolio revision and evaluation.

 

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