Portfolio managers are defined as persons who, in pursuance of a contract with client, advise/ direct undertake on their behalf the management/ administration of portfolio of securities/ funds of clients. The term portfolio means the total holding of securities belonging to any person. The portfolio management can be: Discretionary: the first type of portfolio management permits the exercise of discretion in regard to investment/ management of the portfolio of the securities /funds. Non-discretionary: the non-discretionary portfolio manager should manage the funds in accordance with the direction of client. In order to carry on portfolio management services, a certificate of registration from SEBI is mandatory for all portfolio managers. But for category 1 and 2 merchant banker a separate registration is not required to act as a portfolio manager. They have, however, To carry on the portfolio management activity within the framework of SEBI regulations applicable to portfolio managers. The SEBI Continue reading
Portfolio Management
Duration and Portfolio Immunization
Portfolio Duration Duration is a significant measurement of how sensitivity the change in price of a bond in the change of interest rate. It is broadly linked to the length of time before the bond is mature. Duration assists investors during the investment decision making process by expressing the relation between interest rate and price variables of the bond. Therefore, duration is useful measurement for investors because it protects investment from interest rate risk. When the duration of bond is lower that means investors can obtain the cash earlier and reinvest it at prevailing interest rate. As a result, the lower the duration of a bond, the lesser sensitive changes in the interest rate. Majority of investors are familiar with maturity which is the point of time when investors get back the principal of bond. However, duration is defined as the length of time before the maturity of the bond. Continue reading
Diversification of Risk in Portfolio Management
Average investors are risk averse. Therefore, they will be ready to invest into securities under the presumption of an adequate compensation for risk taking. The compensation for the risk taken should be in the form of minimal rate of return for the invested financial assets, and the rate is named the required rate of return. It has two components: Delayed consumption compensation (investors could have purchased goods and services with the assets they are to invest) and Risk acceptance compensation. Diversification is used to stabilize the potential return, and thus increase the value of the investment. Diversification stands for he investment of capital into several different securities or projects, all together called the portfolio. Each security or project entails certain risk; however, the only thing that matters to the investors who diversify their investments is the total risk (portfolio risk) and the portfolio return. There are two types of risks Continue reading
Definition of Portfolio Management
Portfolio Management Definition It is a process of encompassing many activities of investment in assets and securities. The portfolio management includes the planning, supervision, timing, rationalism and conservatism in the selection of securities to meet investor’s objectives. It is the process of selecting a list of securities that will provide the investor with a maximum yield constant with the risk he wishes to assume. The portfolio management is growing rapidly serving broad array of investors — both individual and institutional — with investment portfolio ranging in asset size from few thousands to crores of rupees. Despite growing importance, the subject of portfolio and investment management is new in the country and is largely misunderstood. In most cases, portfolio management has been practiced as a investment management counseling in which the investor has been advised to seek assets that would grow in value and / or provide income. Portfolio management is Continue reading
The Role of Portfolio Management in an Efficient Market
You have learned that a basic principle in portfolio management is the diversification of securities. Even if all stocks are priced fairly, each still poses firm-specific risk that can be eliminated through diversification. Therefore, rational security selection, even in an efficient market, calls for the selection of a well-diversified portfolio, providing the systematic risk level that the investor wants. Even in an efficient market investors must choose the risk-return profiles they deem appropriate. The efficient market hypothesis (EMH) states that a market is efficient if security prices immediately and fully reflect all available relevant information. If the market fully reflects information, the knowledge of that information would not allow an investor to profit from the information because stock prices already incorporate the information. In an efficient market, no securities are consistently over-priced or under-priced. While some securities will turn out after any investment period to have provided positive Continue reading
Financial and Economic Meaning of Investment
Investment is the employment of funds with the aim of getting return on it. In general terms, investment means the use of money in the hope of making more money. In finance, investment means the purchase of a financial product or other item of value with an expectation of favorable future returns. Investment of hard earned money is a crucial activity of every human being. Investment is the commitment of funds which have been saved from current consumption with the hope that some benefits will be received in future. Thus, it is a reward for waiting for money. Savings of the people are invested in assets depending on their risk and return demands. Investment refers to the concept of deferred consumption, which involves purchasing an asset, giving a loan or keeping funds in a bank account with the aim of generating future returns. Various investment options are available, offering differing Continue reading