Process of Investment/

Portfolio Management
Process of Investment/Portfolio
Management
• There are various avenues for investment available to
investors.
• All these avenues carry different returns and risks.
• It is seldom seen that investors put all of their funds in one
type of investment.
• They generally prefer to invest in more than one type of
security.
• Such investment in a group of securities is known as a
portfolio.
• And the process of creating such a portfolio is known as
portfolio management.
Portfolio Management

• Portfolio management is carried out in certain

steps in a systematic manner.

• Following steps are involved with portfolio

management.
▫ Investment Policy
▫ Security Analysis
▫ Valuation
▫ Portfolio Construction
▫ Portfolio Evaluation
Portfolio Management
• Investment Policy
▫ Investible funds
 The volume of funds
 Mode (savings or borrowings)
▫ Objectives
 Depends from person to person
 Required rate of return
 Risk taking capacity
 Preference for regularity of income or capital
appreciation
Portfolio Management
▫ Knowledge
 Regarding various investment avenues
 Of the risk-return associated with each alternative
 Of the stock market structure
 Of the over all economic scenario
• Security Analysis
▫ Market Analysis
 To study the trends in sock market
 To analyze the situation of inflation, GDP, prevailing
economic scenario, interest rates, and so on.
Portfolio Management
▫ Industry analysis
 Growth rates of various industries
 Share of various industries in GDP
 Identifying industries with higher growth potentials
▫ Company Analysis
 Examine the performance of select companies
 Screening the earnings, profitability, operating
efficiency, capital structure and management of the
companies of interest.
 These factors usually have a direct bearing on the
market price of the company.
Portfolio Management
• Valuation
▫ Intrinsic value
 Find the intrinsic value of share through book value
and price earnings ratio and other sophisticated
models.
 Comparing book value to the prevailing market price
and taking appropriate investment decision.
▫ Future Value
 Future value of securities can be estimated through
trend analysis and historical behaviour of prices.
Portfolio Management
• Portfolio Construction
▫ Gaining advantage of diversification
 Equity-debt diversification
 Industry diversification
 Company diversification
▫ Selection of securities
▫ Deciding proportion of each security
Portfolio Management
• Portfolio Evaluation
▫ Appraisal
 Analyse the securities from time to time
 Keeping a track on economic changes and its impact
on returns and risk of securities.
▫ Revision
 Depends on appraisal
 Replacing low yielding securities with higher yields.