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Portfolio Management Strategies

Broad Strategies for management of Portfolios

• Buy & Hold

• Rupee Cost Averaging
• Value Averaging
• Jacob’s Rebalancing Strategy
• Asset Allocation
• Fixed
• Flexible
• Tactical
• Strategic

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 Portfolio Management Strategies

Rupee Cost Averaging

• Also know as Systematic Investing or SIP …

• Rupee-cost averaging or SIP, invests a fixed amount regularly which
helps in lowering the average cost, in a market where the price/NAV of
the fund fluctuates up and down

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 Months NAV

Jan 15
Feb 17
Mar 17
Apr 18
May 18
Jun 17
Jul 18
Aug 19
Sep 20
Oct 19
Nov 21
Dec 20

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 Rupee Cost Averaging (RCA)
Amount Cumulative Value of
Month Invested No of units No of Holding
# (Rs) NAV (Rs) bought units (Rs)
1 1000 10.00 100.00 100.00 1,000.00
2 1000 12.50 80.00 180.00 2,250.00
3 1000 14.25 70.18 250.18 3,565.00
4 1000 11.75 85.11 335.28 3,939.56
5 1000 10.50 95.24 430.52 4,520.46
6 1000 9.00 111.11 541.63 4,874.68
7 1000 8.50 117.65 659.28 5,603.86
8 1000 7.65 130.72 790.00 6,043.48
9 1000 8.80 113.64 903.63 7,951.97
10 1000 9.25 108.11 1,011.74 9,358.61
11 1000 12.00 83.33 1,095.07 13,140.90
12 1000 15.00 66.67 1,161.74 17,426.12
Average Cost 12000/1162= 10.33

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 Value Averaging
Target
Month Value Value of Cumulative no
# (Rs) NAV (Rs) Holding Units to invest of units
1 1000 10.00 100.00 100.00 100.00
2 2000 12.50 1,250.00 60.00 160.00
3 3000 14.25 2,280.00 50.53 210.53
4 4000 11.75 2,473.68 129.90 340.43
5 5000 10.50 3,574.47 135.76 476.19
6 6000 9.00 4,285.71 190.48 666.67
7 7000 8.50 5,666.67 156.86 823.53
8 8000 7.65 6,300.00 222.22 1,045.75
9 9000 8.80 9,202.61 (23.02) 1,022.73
10 10000 9.25 9,460.23 58.35 1,081.08
11 11000 12.00 12,972.97 (164.41) 916.67
12 12000 15.00 13,750.00 (116.67) 800.00

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 JACOB’s Rebalancing Strategy

S.no. Months Value Nav no.of units cum units value of holding balance inv Balace in rcc Cum inv in bank 12% rate Inv in Bank
1 Oct 10000 15.9 629.09 629.09 10000.00 0.00 0 0 0 0
2 Nov 20000 16.9 552.53 1181.61 10647.96 9352.04 647.96 647.96 0 647.9617514
3 Dec 30000 17.5 536.21 1717.82 20635.71 9364.29 635.71 1283.67 6.479618 1290.149747
4 Jan 40000 17.0 635.12 2352.94 29202.93 10797.07 -797.07 486.60 12.9015 499.5033718
5 Feb 50000 17.0 588.24 2941.18 40000.00 10000.00 0.00 486.60 4.995034 491.5969081
6 Mar 60000 17.5 482.11 3423.29 51550.00 8450.00 1550.00 2036.60 4.915969 2041.517843
7 Apr 70000 17.6 563.50 3986.79 60106.12 9893.88 106.12 2142.72 20.41518 2163.139036
8 May 80000 17.1 691.58 4678.36 68174.05 11825.95 -1825.95 316.78 21.63139 338.4069622
9 Jun 90000 17.7 406.38 5084.75 82807.02 7192.98 2807.02 3123.79 3.38407 3127.177185
10 Jul 100000 17.9 511.85 5596.60 90854.24 9145.76 854.24 3978.03 31.27177 4009.302176
11 Aug 110000 18.0 524.38 6120.97 100576.45 9423.55 576.45 4554.48 40.09302 4594.572944
12 Sep 120000 20.1 -141.60 5979.37 122841.80 -2841.80 12841.80 17396.28 45.94573 17442.22633

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 Portfolio Management Strategies
Different approaches to management of Asset Allocation

• Original ‘base AA established’ – for goal / as per Profile

Fixed
• Regular rebalancing to adjust back to the original AA
Asset Allocation • The original AA remains fixed during the entire life of investment

• Original ‘base AA established’

Flexible • No rebalancing of the portfolio is done
Asset Allocation • With Portfolio horizon, AA keeps changing

• Rebalancing of AA according to the valuation of the markets

Tactical • Forecasting / predicting returns from markets / sectors / assets
Asset Allocation • Creating value from market situations / trends
• Original AA is restored when ST targets are met

Strategic • Original ‘base AA established’ – for goal / as per Profile

Asset Allocation • Regular rebalancing to adjust back to the original AA
• May be changed to reflect change in Profile / Life stage

Refer to Sheet (AE Module – ‘AA PMS’)

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 Managing Arun’s Portfolio

Step 1: The Portfolio is advised on the basis of risk

assessment score

Step 2: Monitoring
> Once in Six Months
> Significant change in Asset Allocation / Risk
Assessment

Step 3: Revisiting the Risk Profile Assessment

> On change in Personal Profile
> On change in Market conditions

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 Portfolio Construction / Management
Based on ERR

Mr. Kulbhushan
Profile:
• Persons who are aggressive in nature
• Persons beyond their personal situation / HNIs

Approach:
• Tactical Asset Allocation

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 Expected Rate of Returns
The Expected Rate of Returns can be decided by
two ways …

A) Risk-Return Matrix
A set of choices for different Asset Allocations
for realistic & worst scenarios

B) Returns Expectations
The decision of the Rate of Returns, say “12%”,
decided with client

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 Risk-Return Matrix
• The idea behind selecting / deciding asset allocation depends on the
risk of capital erosion (Risk Tolerance) & future wealth creation

• The ERR can be decided by the client with the help of the Risk-
Return Matrix

• The ERR gives the future values of Rs.100/- at different Asset

Allocations and for Realistic Scenario & Worst Scenario

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 Risk-Return Matrix: Assumptions
General
• Current P/E 20
• Debt Returns 7%

Scenario >> Realistic Worst

• Profit Growth Rate 15% 10%
• P/E 20 12

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 Risk-Return Matrix
Kulbhushan’s Choice

Portfolio Value for Rs.100/- invested today

Years >> 1 2 3 4 5 7 10 15 20 25 30

(A) Equity: 60% ; Debt 40%

Realistic 112 125 140 157 177 224 321

321 599 1,137 2,192 4,277

Worst 82 89 97 105 114 134 172

172 261 397 607 933

(B) Equity: 50% ; Debt 50%

Realistic 111 123 137 153 171 213 301 545 1,012 1,917 3,691

Worst 87 94 101 109 118 139 176 263 395 596 904

(C) Equity: 40% ; Debt 60%

Realistic 110 122 134 149 165 203 280 491 887 1,642 3,105

Worst 91 98 105 114 123 143 180 266 394 586 876

Capital Protection: (A) 4th Year onwards (B) 3rd Year onwards (C) 3rd Year onwards
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 Risk-Return Matrix
Kulbhushan’s Choice

Portfolio Returns for Rs.100/- invested today

Years >> 1 2 3 4 5 7 10 15 20 25 30

Equity: 60% ; Debt 40%

Realistic 11.80% 11.87% 11.94% 12.00% 12.07% 12.20% 12.38%

12.38% 12.67% 12.92% 13.15% 13.34%
5.58%
Worst -17.60% -5.47% -1.04% 1.26% 2.67% 4.31% 5.58% 6.60% 7.14% 7.48% 7.73%

Equity: 50% ; Debt 50%

Realistic 11.00% 11.07% 11.14% 11.22% 11.29% 11.43% 11.64% 11.97% 12.27% 12.54% 12.78%

Worst -13.50% -3.28% 0.39% 2.29% 3.44% 4.79% 5.83% 6.67% 7.11% 7.40% 7.62%

Equity: 40% ; Debt 60%

Realistic 10.20% 10.27% 10.34% 10.41% 10.48% 10.62% 10.84% 11.19% 11.53% 11.85% 12.13%

Worst -9.40% -1.14% 1.78% 3.28% 4.19% 5.25% 6.07% 6.73% 7.09% 7.33% 7.50%

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 Returns Expectations
To generate say 12% returns on my portfolio for a particular horizon

Asset Product / Instrument Returns Weight Port. Returns

MF Liquid Funds 6.00% 25.56% 1.53%

Debt
MF Income Funds 8.00% 10.00% 0.80%

Equity MF Equity Scheme 15.00% 64.44% 9.67%

Total 100.00% 12.00%

You may use the goal seek function in excel to determine the allocation

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 Managing Kulbhushan’s Portfolio
Step 1: Deciding the AA
• The Risk Return Matrix is shown to the customer and the Ideal
AA is decided
• The Assumptions can also be shown to the Clients

Step 2: Monitoring
• Once in Six Months
• Significant change in Asset Allocation (drastic change in markets)

Step 3: Revisiting the AA

In case of significant change in market conditions (PE) the Risk
Return Matrix can be used to decided the AA (Tactical approach)

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