PORTFOLIO MANGEMENT BY GURU PRASAD

8/14/2019 PORTFOLIO MANGEMENT BY GURU PRASAD

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Portfolio policy Portfolio policy should consider the

following issues:-

Selection of proper asset classes

The mix of the assets

The range allowed for each assetmix

Risk level of the securities in theasset class


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Different types of investors

Individual investors- treat riskas possibility of losing moneyInstitutional investors- Definerisk as standard deviation or

variability of returnsInd-categorized on theirpsychology like aggressive,confident, uncertain, extrovertIns-categorized on the basis ofbeneficiaries like pension fund orprovident fund


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investors

Ind- investment policies of the investorscan be laid down base on what theinvestors think is best for them

Ins- the investment polices of theinstitutions are determine to a significantextent based on various legalrequirementsInd- Generally become complex becausethey are subject to taxesIns-Most of the major investment

institution are, or the other hand exemptfrom the tax


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Implementing investment

strategiesTrade Motivation

Assessing the market conditions

Establishing initial tradingstrategies

Trading information

FlexibilityAssess effectiveness


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Motivation According to Jack Treynor, key

motives for trading are value,information and cash- flow. Valuetrades are rarely TIMELY, i.e. only on afew occasions. The value traders canuse time according to theirconvenience so that by extending thetime of trading, they can reduce the

cost of trading. Thus they are lesssensitive to time compared to price.As information is liable to be spread

across the market rapidly it loses value


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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

essentialSimilarly , if the trader trades with severalbrokers m he can quickly realize the differencebetween each of them and apply his skills toselect the best


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Types of Goals Short term high priority goals-HOME

LOAN

Long term high priority goals-RETIREMENTlower priority goals-TOUR TO ABROADMoney making goals-SUBSTANTIAL WEALTH


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Investment Constraints Liquidity- Emergency cash

goal spending

income taxesEstate transfer taxesInvestment Flexibility

Tax considerations in investing


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Determinations of

Investment policies Absence of policyTraditional polices-

Income

Income growth

Growth

Aggressive Growth


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Determinations of

Investment policies Multi asset total return policy

selection of proper asset classes

The mix of the assets

The range allowed for each assetmix

Risk level of the securities in theasset classes


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Classical decision making

theory It revolves around three

assumptions

Asset integration-comparisonbetween two prospectiveinvestments

Risk aversion-people prefer lessrisk

Rational expectation- people take

rational decisions


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Psychology of Risk Reference dependence

Mental accounting

Biased Expectations


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Significance of Behavioral

Finance Standard Finance Vs Behavioral

Finance

Behavioral asset Pricing TheoryRisk PremiumsBehavioral Portfolio Theory


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Behavioral asset pricing

model It was developed by Shefrin and

Statman. It was developed as an

alternative to the Markowitz mean variance Portfolio. The behavioralinvestors build their portfolio in apyramid structured adding on a

subsequent level. Each layer isassociated with particular investmentobjective and also reveals the investorsattitude towards risk


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The Investment

Professionals Financial Advisors

Security analysts

money managersMarket makersSecurity Designers

Investment clubs


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Individual investors

Losing money

Unfamiliar instruments

Previous losses in familiarinvestments

Contrary investment

Risk potential Vs actual

Risk and unfamiliarity


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Contrary investment

The Contrarian approach ofinvestment is doing opposite to

what the other players in themarket place are doing. In otherwords the investor adopting a

contrary investment style sells offhis holding when others are in abuying spree and buys whenothers are selling theirinvestments


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Models of IndividualInvestors

The Barnewall two way model

The Bielard, Biehl and Kaiser Five

way model

The life cycle model


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The life cycle model describes thestages in life as accumulation

phased, consolidation phase,spending phase and gifting phase.The model further assumes thatthe risk tolerance of the individual

and his ingestible surplus do notremain constant and thepreference of the investor keepschanging during the different lifesta es of the investor


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The Barnewall two way model

Passive investors Active investors

The passive investors do not churn theirportfolio frequently to get the returns ontheir portfolios, whereas the active investorscontinuously rebalance their portfolios tocome up with a return of their satisfaction


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The Bielard, Biehl and Kaiser Five waymodel

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


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Accumulation Phase

Consolidation phase

Spending phase

Gifting phase


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Institutional Investors

Institutional Investors are thefinancial institutions, which collect

and invest money on a long termbasis on behalf of individuals orcorporate. They include pension

funds, life insurance companieswhich write ling term insurancebusiness, investment trusts, andunit trusts.


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Institutional investors

The major institutional investors in Indiaare Mutual funds, Financial Institutions,

Insurance companies and commercialbanks. The Foreign institutionalinvestors are the most influential in theIndian market due to the volume of

transactions executed by them which ismore than any other transactionexecuted by any other marketparticipant


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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 withthe proper execution of investmentideas and maintaining the values of thestocks


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Drives of investmentpolicies

Asset liability matching

Regulatory and Legal

considerationsTax considerations

Liquidity needs

Unique needs, circumstances andpreferences


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Setting Objectives for theInstitutional investors

Stability of principal

Income

Growth of income

Capital appreciation


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Investment policies ofinstitutional investors

Pension and employee benefitfunds

Endowment funds Insurance funds

Commercial banks

Mutual funds


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Commercial banks

A large part of the funds collectedby the banks in India are invested

n the central governmentsecurities as they are perceived tobe safe as compared to the

investment in the equity andequity linked products


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Mutual funds

During 1999-2000 the Mutualfunds in India managed to show a

tremendous return owing to thesurge in FMCG stocks and otherConvergence stocks


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Mutual funds

Income schemes

Growth schemes

Income cum growth schemes

Tax planning schemes

Open end schemes Closed end schemes

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