Why is a policy statement important to the planning process? What objectives and constraints should be detailed in a policy statement? What are the steps in the portfolio management process? How and why do investment goals change over a person's lifetime and circumstances? |
Investment is defend as current commitment of money or other resources in the hope of getting future benefits. Investment is the context of portfolio management, indicates purchase of shares, bonds, debentures and financial securities with the exception of future return. Assets are broadly classified into two groups: Real assets or Physical assets Financial assets Real assets or Physical assets: Real assets or Physical assets are earning producing assets; There assets are generally not divisible and are less liquid. On the other hand, financial assets represent claim against the earnings produced by real assets and are easily marketable and divisible. Types of financial assets: Fixed income securities Equity securities Derivatives or derivative securities Fixed income securities: Either provide to the owner fixed rate of return periodically or rate of return according to some predetermined formula. For Example: Debenture, Bond, Floating rate of return, Convertible bond. Equities Securities: Equity securities represent ownership in the corporation. The equity bond or common stock holders generally get voting right. However their claims to the corporate earning have least priority, they got their return after the corporation has met the claims of all other concern parties. Also their return is uncertain as it depends on the performance of the company. Derivatives or derivative securities: The return of the Derivatives or derivative security holder depends on the performance of the underlying asset. If the underlying asset performs according to the holders expectation then the holder of the derivatives will be able make profit otherwise either no profit or no loss. For Example: Options, Forward, Futures, Swaps etc. Options: Options provide the holders the right either to purchase as to sell the underlying asset as a certain asset as a certain price known as strike or exercise price on or before a certain date. The price paid to acquire the option is known as premium. After the expiry of the expiry to the certain date the option has no value. Stocks bonds debentures option etc are known as bond asset class. The investor first decides about the bond asset class and after that decides regarding the specific securities under each asset class. Their type of investment decision is known as top down approach. Allocation of ingestible funds among the different bond asset class is known as asset allocation. According to bottom up approach the investor first decide the securities which he or she is going to hold the investor selection the allocation of fund is different broad asset class is determined. Investment portfolio indicates how the investor has allocated the invest able fund is different financial as well as real assets. It is the collection of investment in different assets. Once a portfolio has been constructed it is regularly monitored and adjusted considering the changing economic condition as well as financial market. The objective of portfolio construction is the maximizing return and minimizing risk. Portfolio management can be done in two ways: Active portfolio management or active strategy under which the investor value or price the securities and then makes the decision of including or excluding the securities from the portfolio. Passive portfolio: Passive portfolio or strategy where the investor doesn’t perform any security analysis. Just maximize the stock market for corporation of the portfolio.
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