It involves changing existing mix of securities. This
can be done by changing the securities currently included in portfolio or by altering the proportion of funds invested in securities. It leads to purchases & sales of securities Objective of portfolio revision is to maximizing the return for a given level of risk or minimization the risk for the given level of return Need for Portfolio Revision Availability of additional funds for investments Change in risk tolerance Change in investment goals Need to liquidate a part of the portfolio to provide funds for some alternative use Constraints of Portfolio Revision Transaction Cost Taxes Statutory Stipulation Intrinsic Difficulty Portfolio Revision Strategies Active Revision Strategy Passive Revision Strategy Active management It is one in which the composition of the portfolio is dynamic The portfolio manager periodically changes: The portfolio components or The components proportion within the portfolio Passive Management Strategy It is a process of holding a well diversified portfolio for a long term with buy and hold approach. It refers to the investors attempt to construct a portfolio that resembles the overall market returns. Formula Plans It consists of predetermined rules regarding when to buy or sell & how much to buy or sell. These predetermined rules call for specified actions when there are changes in the securities market. Investment funds i). Aggressive (Equity shares) ii). Conservative or defensive (bonds & debentures). Assumptions Investor fund allocated to Fixed Income securities and Common Stocks PF Aggressive in Low Market & Defensive when market is rising Stocks are bought and sold change in Prices Follow one formula which he chosen Select the good stocks Types of Formula Plans Rupee Cost Averaging Plan Constant Rupee Plan Constant Ratio Plan Variable Ratio Plan Rupee Cost Averaging Plan Passive long term strategy The investor should select regular commitment of buying shares ate regular intervals. Rupee Cost Average Plan Quarters Price (Rs.) shares Bought Total No. of Share s Invest. (Rs) Cum. Invest. Mkt. Value Un realize d Profits (Rs.) Averag e Cost (Rs.) Avg. Price (Rs.) 1 2 3 4 5 6 7 (2x4) 8 [ 7-6] 9 [ 6/ 4 ] 10 15.1. 06 112 90 90 10080 10080 10080 ---- 112 112 15.4. 06 142.5 70 160 9975 20055 22800 2745 125.3 127 15.7. 06 162 62 222 10044 30099 35964 5865 135.6 139 15.10.0 6 130 77 299 10010 40109 38870 (1239) 134.1 137 15.01. 07 152 66 365 10032 50141 55480 5339 137.4 140 Constant Rupee Plan Two Portfolios Aggressive & Conservative It enables the shift of investment from bonds to stocks and vice-versa by maintaining a constant amount invested in the stock portion of portfolio. Constant Rupee Plan Period Mkt. Price (Rs) Total No. of Shares Value of Stock Portfolio Value of Defensive Portfolio Total 1 50 200 10000 10000 20000 2 44 200 8800 10000 18800 3 40 200 8000 10000 18000 4 40 250 10000 8000 18000 Bought 50 Shares 5 44 250 11000 8000 19000 6 50 250 12500 8000 20500 7 50 250 10000 10500 20500 Sold 50 Shares Constant Ratio Plan It attempts to maintain a constant ratio between the aggressive and conservative portfolios. It is fixed by the Investor. Attitude towards Risk Constant Ratio Plan Mkt. Price (Rs) Total No. of Shares Value of Stock Portfolio Value of Defensive Portfolio Total PF Value Ratio of Stock Portion to Defensive Portion 50 100 5000 5000 10000 1 48 100 4800 5000 9800 0.96 45 100 4500 5000 9500 0.9 Rs. 248 transferred form bond portion and 5.5 shares purchased 45 105.5 4748 4752 9499.5 1 40.5 105.5 4273 4752 9024.75 0.9 Bought 5.9 shares by transferring Rs.239 from bond portion 40.5 111.4 4512 4511 9023 1 44.5 111.4 4957 4511 9468 1.1 5 Shares are sold and invested in bonds to make the equal 1:1 Variable Ratio Plan At various levels of market price, the proportions of the stocks and bonds change. Whenever the price of the stock increases, the stocks are sold and new ratio is adopted by increasing the proportion of defensive or conservative portfolio. Long term trend estimation Variable Ratio Plan Share Price (Rs.) Value of Stock Portfolio Value of Defensive Portfolio Total PF Value Ratio of Stock Portion to Defensive Portion PF Adjustm ent Shares in Stock Portion 100 10000 10000 20000 50 --- 100 90 9000 10000 19000 47.4 --- 100 80 8000 10000 18000 44.4 --- 100 80 12640 5400 18040 70.1 Bought 58 158
90 14220 5400 19620 72.5 158
100 15800 5400 21200 74.5 Sold 50 Shares 158 100 10800 10800 21600 50.0 108 Costs of Revision Trading fees Market impact Management time Tax implications Window dressing 18 Trading Fees Commissions Transfer taxes 19 Market Impact The market impact of placing the trade is the change in market price purely because of executing the trade Market impact is a real cost of trading Market impact is especially pronounced for shares with modest daily trading volume 20 Management Time Most portfolio managers handle more than one account Rebalancing several dozen portfolios is time consuming 21 Tax Implications Individual investors and corporate clients must pay taxes on the realized capital gains associated with the sale of a security Tax implications are usually not a concern for tax-exempt organizations 22 Window Dressing Window dressing refers to cosmetic changes made to a portfolio near the end of a reporting period Portfolio managers may sell losing stocks at the end of the period to avoid showing them on their fund balance sheets 23