Portfolio management

Investment policy

Portfolio policy

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Portfolio policy should consider the following issues:Selection of proper asset classes The mix of the assets The range allowed for each asset mix Risk level of the securities in the asset class

Different types of investors

Individual investors- treat risk as possibility of losing money Institutional investors- Define risk as standard deviation or variability of returns Ind-categorized on their psychology like aggressive, confident, uncertain, extrovert Ins-categorized on the basis of beneficiaries like pension fund or provident fund

Different types of investors

Ind- investment policies of the investors can be laid down base on what the investors think is best for them Ins- the investment polices of the institutions are determine to a significant extent based on various legal requirements Ind- Generally become complex because they are subject to taxes Ins-Most of the major investment institution are, or the other hand exempt from the tax

Implementing investment strategies

Trade Motivation Assessing the market conditions Establishing initial trading strategies Trading information Flexibility Assess effectiveness


According to Jack Treynor, key motives for trading are value, information and cash- flow. Value trades are rarely TIMELY, i.e. only on a few occasions. The value traders can use time according to their convenience so that by extending the time of trading, they can reduce the cost of trading. Thus they are less sensitive to time compared to price. As information is liable to be spread across the market rapidly it loses value

Trading recommendations

A single trading strategy should not be used at all time. A trader should prioritize and make contingency plans. One should consider expected costs for portfolio decision making. Rationalization of brokerage services are essential Similarly , if the trader trades with several brokers m he can quickly realize the difference between each of them and apply his skills to select the best

Types of Goals

Short term high priority goals-HOME

Long term high priority goalsRETIREMENT

lower priority goals-TOUR TO ABROAD Money making goals-SUBSTANTIAL WEALTH

Investment Constraints

Liquidity- Emergency cash goal spending income taxes Estate transfer taxes Investment Flexibility Tax considerations in investing

Determinations of Investment policies
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Absence of policy Traditional policesIncome Income growth Growth Aggressive Growth

Determinations of Investment policies
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Multi asset total return policy selection of proper asset classes The mix of the assets The range allowed for each asset mix Risk level of the securities in the asset classes

Classical decision making theory

It revolves around three assumptions Asset integration-comparison between two prospective investments Risk aversion-people prefer less risk Rational expectation- people take rational decisions

Psychology of Risk

Reference dependence Mental accounting Biased Expectations

Significance of Behavioral Finance

Standard Finance Vs Behavioral Finance Behavioral asset Pricing Theory Risk Premiums Behavioral Portfolio Theory

Behavioral asset pricing model

It was developed by Shefrin and Statman. It was developed as an alternative to the Markowitz mean – variance Portfolio. The behavioral investors build their portfolio in a pyramid structured adding on a subsequent level. Each layer is associated with particular investment objective and also reveals the investors attitude towards risk

The Investment Professionals

Financial Advisors Security analysts money managers Market makers Security Designers Investment clubs

Individual investors
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Losing money Unfamiliar instruments Previous losses in familiar investments Contrary investment Risk potential Vs actual Risk and unfamiliarity

Contrary investment

The Contrarian approach of investment is doing opposite to what the other players in the market place are doing. In other words the investor adopting a contrary investment style sells off his holding when others are in a buying spree and buys when others are selling their investments

Models of Individual Investors
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The Barnewall two way model The Bielard, Biehl and Kaiser Five way model The life cycle model

The life cycle model

The life cycle model describes the stages in life as accumulation phased, consolidation phase, spending phase and gifting phase. The model further assumes that the risk tolerance of the individual and his ingestible surplus do not remain constant and the preference of the investor keeps changing during the different life stages of the investor

The Barnewall two way model
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Passive investors Active investors
The passive investors do not churn their portfolio frequently to get the returns on their portfolios, whereas the active investors continuously rebalance their portfolios to come up with a return of their satisfaction

The Bielard, Biehl and Kaiser Five way model

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Individualist-confident and careful Adventurer- go for big bets Guardian-anxious and careful, go for investment advisor Celebrity -swayed too much by the trend, do not have any expertise Straight Arrow-halfway between complete confidence and anxiety

The life cycle model
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Accumulation Phase Consolidation phase Spending phase Gifting phase

Institutional Investors

Institutional Investors are the financial institutions, which collect and invest money on a long term basis on behalf of individuals or corporate. They include pension funds, life insurance companies which write ling term insurance business, investment trusts, and unit trusts.

Institutional investors

The major institutional investors in India are Mutual funds, Financial Institutions, Insurance companies and commercial banks. The Foreign institutional investors are the most influential in the Indian market due to the volume of transactions executed by them which is more than any other transaction executed by any other market participant

Investment management
The process can be broken into two steps  Information process  Implementation process The former deals with the selection of the stocks whereas the latter deals with the proper execution of investment ideas and maintaining the values of the stocks

Drives of investment policies
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Asset liability matching Regulatory and Legal considerations Tax considerations Liquidity needs Unique needs, circumstances and preferences

Setting Objectives for the Institutional investors
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Stability of principal Income Growth of income Capital appreciation

Investment policies of institutional investors

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Pension and employee benefit funds Endowment funds Insurance funds Commercial banks Mutual funds

Commercial banks

A large part of the funds collected by the banks in India are invested n the central government securities as they are perceived to be safe as compared to the investment in the equity and equity linked products

Mutual funds

During 1999-2000 the Mutual funds in India managed to show a tremendous return owing to the surge in FMCG stocks and other Convergence stocks

Mutual funds
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Income schemes Growth schemes Income cum growth schemes Tax planning schemes Open end schemes Closed end schemes