Portfolio Management comprises of many activities that are targeted at optimizing the investment of client’s funds. There are basically five phases in the portfolio management and each of these phases makes up an integral part of the Portfolio Management and the success of it depends on the effectiveness in implementing these phases.
There are many types of securities available in the market including equity shares, preference shares, debentures and bonds. Apart from it, there are many new securities that are issued by companies such as Convertible debentures, Deep Discount bonds, floating rate bonds, flexi bonds, zero coupon bonds, global depository receipts, etc.
It forms the initial phase of the portfolio management process and involves the evaluation and analysis of risk return features of individual securities. The basic approach for investing in securities is to sell the overpriced securities and purchase underpriced securities. The security analysis comprises of Fundamental Analysis and technical Analysis.
A portfolio refers to a group of securities that are kept together as an investment. Investors make investment in various securities to diversify the investment to make it risk averse. A large number of portfolios can be created by using the securities from desired set of securities obtained from initial phase of security analysis.
By selecting the different sets of securities and varying the amount of investments in each security, various portfolios are designed. After identifying the range of possible portfolios, the risk-return characteristics are measured and expressed quantitatively. It involves the mathematically calculation of return and risk of each portfolio.
During this phase, portfolio is selected on the basis of input from previous phase Portfolio Analysis. The main target of the portfolio selection is to build a portfolio that offer highest returns at a given risk. The portfolios that yield good returns at a level of risk are called as efficient portfolios. The set of efficient portfolios is formed and from this set of efficient portfolios, the optimal portfolio is chosen for investment.
The optimal portfolio is determined in an objective and disciplined way by using the analytical tools and conceptual framework provided by Markowitz’s portfolio theory.
After selecting the optimal portfolio, investor is required to monitor it constantly to ensure that the portfolio remains optimal with passage of time. Due to dynamic changes in the economy and financial markets, the attractive securities may cease to provide profitable returns. These market changes result in new securities that promises high returns at low risks.
In such conditions, investor needs to do portfolio revision by buying new securities and selling the existing securities. As a result of portfolio revision, the mix and proportion of securities in the portfolio changes.
This phase involves the regular analysis and assessment of portfolio performances in terms of risk and returns over a period of time. During this phase, the returns are measured quantitatively along with risk born over a period of time by a portfolio. The performance of the portfolio is compared with the objective norms. Moreover, this procedure assists in identifying the weaknesses in the investment processes.