Module: 3 - Process of Portfolio Management
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Portfolio Types And Their Needs

Portfolio are owned by individuals and organizations having dramatically different objectives and constraints. To illustrate how the portfolio investment process applies to different situations, the portfolio analyst concerns with the investor, definition of portfolio objectives, investment strategy, diversification and selection of investments as discussed below:

1. Study the Investor:To determine appropriate goals and policies, certain basic facts about the investor must be assembled and considered: (a) the age, health, responsibilities, other assets, portfolio needs; (b) the need for income, capital maintenance, liquidity; (c) the attitude towards risk; (d) the taxation status. The prospective investor's personal and financial information helps in deciding what kind of investment programme may be best suited to his needs.

2. Planning for Goals:Once the facts are reviewed, a suitable goal is established at this point in portfolio building process. This means thought and preparation in establishing a list of securities to meet the needs of the investor. Planning is a part of risk-aversion process. The investor must determine how much risk is to be taken and then plan how to achieve these goals.

3. Investment Strategy: Portfolio objectives will largely determine the investment strategy. The different objectives may be achieved by: (a) balancing fixed interest securities against equities; (b) balancing high dividend payment companies against high earnings growth companies as required; (c) finding the income or growth portfolio as required; (d) balancing transaction costs against capital gains from rapid switching; (e) balancing income tax payable against capital gains tax.

A major thesis of investment is the need to consider individual investments as components of an overall investment plan. Without limiting the range of instruments covered, it is convenient to call individual investment securities and the totality the portfolio. The basic problem of portfolio management is to establish an investment goal or objective and then decide how best to reach that goal with the securities available. This has been stated as an attempt by the investor to obtain the maximum return with minimum risk. In order to do a proper job of portfolio management, the investor must be aware of the investment process.

1) It is the portfolio that matters.
2) Larger expected portfolio returns come only with larger portfolio risk.
3) The risk associated with a security type depends on when the investment will be liquidated.
4) Diversification works
5) Each portfolio should be tailored to the particular needs of its owner.
6) Competition for abnormal returns is extensive

The process used to manage a security portfolio is conceptually the same as that used in any managerial decision. The portfolio process is as follows: