A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and

cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and
closed funds. A portfolio can also consist of non publicly tradable securities, like real estate, art,
and private investments. Portfolios are held directly by investors and/or managed by financial
professionals and money managers. Investors should construct an investment portfolio in
accordance with their risk tolerance and their investing objectives. Investors can also have
multiple portfolios for various purposes. It all depends on one's objectives as an investor.

The Equity Portfolio

Objectives of Portfolio Management
The objective of portfolio management is to invest in securities is securities in such a way that one
maximizes one’s returns and minimizes risks in order to achieve one’s investment objective.

A good portfolio should have multiple objectives and achieve a sound balance among them. Any
one objective should not be given undue importance at the cost of others. Presented below are
some important objectives of portfolio management.

Stable Current Return: Once investment safety is guaranteed, the portfolio should yield a steady
current income. The current returns should at least match the opportunity cost of the funds of the
investor. What we are referring to here current income by way of interest of dividends, not capital
gains.
Marketability: A good portfolio consists of investment, which can be marketed without difficulty.
If there are too many unlisted or inactive shares in your portfolio, you will face problems in
encasing them, and switching from one investment to another. It is desirable to invest in
companies listed on major stock exchanges, which are actively traded.
Tax Planning: Since taxation is an important variable in total planning, a good portfolio should
enable its owner to enjoy a favorable tax shelter. The portfolio should be developed considering
not only income tax, but capital gains tax, and gift tax, as well. What a good portfolio aims at is tax
planning, not tax evasion or tax avoidance.
Appreciation in the value of capital: A good portfolio should appreciate in value in order to
protect the investor from any erosion in purchasing power due to inflation. In other words, a
balanced portfolio must consist of certain investments, which tend to appreciate in real value after
adjusting for inflation.
Liquidity: The portfolio should ensure that there are enough funds available at short notice to take
care of the investor’s liquidity requirements. It is desirable to keep a line of credit from a bank for
use in case it becomes necessary to participate in right issues, or for any other personal needs.
Safety of the investment: The first important objective of a portfolio, no matter who owns it, is to
ensure that the investment is absolutely safe. Other considerations like income, growth, etc., only
come into the picture after the safety of your investment is ensured.
Investment safety or minimization of risks is one of the important objectives of portfolio
management. There are many types of risks, which are associated with investment in equity
stocks, including super stocks. Bear in mind that there is no such thing as a zero risk investment.
More over, relatively low risk investment give correspondingly lower returns. You can try and
minimize the overall risk or bring it to an acceptable level by developing a balanced and efficient
portfolio. A good portfolio of growth stocks satisfies the entire objectives outline above.

Asset Allocation
-Asset allocation is an investment strategy that aims to balance risk and reward by apportioning
a portfolio's assets according to an individual's goals, risk tolerance and investment horizon. The
three main asset classes - equities, fixed-income, and cash and equivalents - have different levels
of risk and return, so each will behave differently over time.
-There is no simple formula that can find the right asset allocation for every individual. However,
the consensus among most financial professionals is that asset allocation is one of the most
important decisions that investors make. In other words, the selection of individual securities is
secondary to the way that assets are allocated in stocks, bonds, and cash and equivalents, which
will be the principal determinants of your investment results.
Investors may use different asset allocations for different objectives. Someone who is saving for
a new car in the next year, for example, might invest her car savings fund in a very conservative
mix of cash, certificates of deposit (CDs) and short-term bonds. Another individual saving for
retirement that may be decades away typically invests the majority of his individual retirement
account (IRA) in stocks, since he has a lot of time to ride out the market's short-term fluctuations.
Risk tolerance plays a key factor as well. Someone not comfortable investing in stocks may put
her money in a more conservative allocation despite a long time horizon.
THE FIXED INCOME PORTFOLIO
Fixed Income Security Risks
The biggest risks of bonds and other fixed-income investments are interest rate risk, credit risk
and inflation risk.
As a rule, bond prices and interest rates move inversely from each other. Bond prices usually fall
when interest rates rise, because new bonds with higher coupon rates are typically issued if
interest rates are higher. For example, if an investor buys a bond with a 3% coupon rate when
market interest rates are 3%, and tries to sell it when market interest rates rise to 4%, he gets a
lower price than he would have gotten if interest rates did not rise.
Since bonds are a form of debt, the bondholder is exposed to the risk of the debtor defaulting.
Moody’s, Standard & Poor and other bond-rating agencies publish ratings that assess the
likelihood of default for individual bonds on the market. There are two main divisions: investment
grade and non-investment grade. Non-investment grade bonds carry much higher credit risk, but
they usually have higher yield to compensate.
Inflation can be particularly harmful to investors in fixed-income securities because their yield is
a fixed amount. In case of inflation, the real value of this amount falls and investors may even lose
money on a fixed-income investment. The principal of these bonds is adjusted for inflation when
it is paid out to the bondholder.
Active Management vs Passive Management

Active Management
Active management is the use of a human element, such as a single manager, co-managers or a
team of managers, to actively manage a fund's portfolio. Active managers rely on analytical
research, forecasts, and their own judgment and experience in making investment decisions on
what securities to buy, hold and sell. The opposite of active management is passive management,
better known as "indexing.”
Active management seeks to produce better returns than those of passively managed index
funds.

A fund manager’s expertise, experience, skill and judgment is being utilized when investing in an
actively managed fund. For example, a fund manager may have extensive experience in the
automotive industry, so as a result, the fund may be able to beat benchmark returns by investing
in a select group of car-related stocks that the manager believes are undervalued. Active fund
managers have flexibility. There is typically freedom in the stock selection process as performance
is not tracked to an index. Actively managed funds allow for benefits in tax management. The
ability to buy and sell when deemed necessary makes it possible to offset losing investments with
wining investments.
Passive Management

-Passive management is a style of management associated with mutual and exchange-traded

funds (ETF) where a fund's portfolio mirrors a market index. Passive management is the opposite
of active management in which a fund's manager(s) attempt to beat the market with various
investing strategies and buying/selling decisions of a portfolio's securities. Passive management
is also referred to as "passive strategy," "passive investing" or " index investing."
-Followers of passive management believe in the efficient market hypothesis. It states that at all
times markets incorporate and reflect all information, rendering individual stock picking useless.
As a result, the best investing strategy is to invest in index funds, which have historically
outperformed the majority of actively managed funds.
--Passively managed fund is a fund whose investment securities are not chosen by a portfolio
manager, but instead are automatically selected to match an index or part of the market. This is
the opposite of an actively managed fund. An S&P 500 indexfund is a passively managed
fund that mimics the S&P 500 index.

Portfolio Rebalancing

Rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing

involves periodically buying or selling assets in a portfolio to maintain an original desired level of
asset allocation.
For example, say an original target asset allocation was 50% stocks and 50% bonds. If the stocks
performed well during the period, it could have increased the stock weighting of the portfolio to
70%. The investor may then decide to sell some stocks and buy bonds to get the portfolio back
to the original target allocation of 50/50.
Often, these steps are taken to ensure the amount of risk involved is at the investor's desired level.
As stock performance can vary more dramatically than bonds, the percentage of assets associated
with stocks will change with market conditions. Along with the performance variable, investors
may adjust the overall risk within their portfolios to meet changing financial needs.
6 Common Portfolio Protection Strategies
By Will Ashworth | Updated April 25, 2018

1. Diversification
One of the cornerstones of Modern Portfolio Theory (MPT) is diversification. In a market
downturn, MPT disciples believe a well-diversified portfolio will outperform a concentrated one.
Investors create deeper and more broadly diversified portfolios by owning a large number of
investments in more than one asset class, thus reducing unsystematic risk. This is the risk that
comes with investing in a particular company as opposed to systematic risk, which is the risk
associated with investing in the markets generally.
2. Non-Correlating Assets
Stock portfolios that include 12, 18 or even 30 stocks can eliminate most, if not all, unsystematic
risk, according to some financial experts.
Unfortunately, systematic risk is always present. However, by adding non-correlating asset classes
such as bonds, commodities, currencies and real estate to a group of stocks, the end-result is
often lower volatility and reduced systematic risk due to the fact that non-correlating assets react
differently to changes in the markets compared to stocks. When one asset is down, another is up.
Ultimately, the use of non-correlating assets eliminates the highs and lows in performance,
providing more balanced returns.
3. Stop Losses

Stop losses protect against falling share prices. Hard stops involve triggering the sale of a stock
at a fixed price that doesn't change. For example, when you buy Company A's stock for $10 per
share with a hard stop of $8, the stock is automatically sold if the price drops to $8.
4. Dividends
Investing in dividend-paying stocks is probably the least known way to protect your portfolio.
Historically, dividends account for a significant portion of a stock's total return. In some cases, it
can represent the entire amount. Owning stable companies that pay dividends is a proven
method for delivering above-average returns. When markets are declining, the cushion dividends
provide is important to risk-averse investors and usually results in lower volatility. In addition to
the investment income, studies show that companies that pay generous dividends tend to grow
earnings faster than those that don't. Faster growth often leads to higher share prices which, in
turn, generates higher capital gains.

INVESTMENT COMPANIES
An investment company is a corporation or trust engaged in the business of investing the pooled
capital of investors in financial securities. This is most often done either through a closed-end
fund or an open-end fund (also referred to as a mutual fund).
Mutual Fund

-a managed portfolio of stocks and/or bonds. You can think of a mutual fund as a company that
brings together a large group of people and invests their money on their behalf in this portfolio.
Each investor owns shares of the mutual fund, which represent a portion of its holdings.
Investors typically earn a return from a mutual fund in three ways:
1. Income is earned from dividends on stocks and interest on bonds held in the fund’s portfolio.
2. If the fund sells securities that have increased in price, the fund has a capital gain.
3. If fund holdings increase in price but are not sold by the fund manager, the fund's shares
increase in price. You can then sell your mutual fund shares for a profit in the market.
Advantages of Mutual Funds
Professional Management – The primary advantage of funds is not having to pick stocks and
manage investments. Instead, a professional investment manager takes care of all of this using
careful research and skillful trading.
Diversification – By owning shares in a mutual fund instead of owning individual stocks or
bonds, your risk is spread out across many different holdings. The idea behind diversification is
not to put all of your eggs in one basket.
Economies of Scale – Because a mutual fund buys and sells large amounts of securities at a time,
its transaction costs are lower than what an individual would pay for securities transactions.
Simplicity – Buying a mutual fund is fairly straightforward. Many banks or brokerage firms have
their own line of in-house mutual funds, and the minimum investment is often small.
Variety – Mutual funds today exist with any number of various asset classes or strategies. This
allows investors to gain exposure to not only stocks and bonds but also commodities, foreign
assets, and real estate through specialized mutual funds.
Transparency – Mutual funds are subject to industry regulation that ensures accountability and
fairness to investors.
Disadvantages of Mutual Funds

Active Management – Many investors debate whether or not the professionals are any better
than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses
money, the manager still gets paid. Actively managed funds incur higher fees, but increasingly
passive index funds have gained popularity. These funds track an index such as the S&P 500 and
are much less costly to hold.
Costs and Fees – Creating, distributing, and running a mutual fund is an expensive undertaking.
Everything from the portfolio manager's salary to the investors' quarterly statements cost money.
Dilution – It's possible to have poor returns due to too much diversification. Because mutual
funds can have small holdings in many different companies, high returns from a few investments
often don't make much difference on the overall return. Dilution is also the result of a successful
fund growing too big.

Liquidity – A mutual fund allows you to request that your shares be converted into cash at any
time, however, unlike stock that trades throughout the day, many mutual fund redemptions take
place only at the end of each trading day.
Taxes – When a fund manager sells a security, a capital-gains tax is triggered.