Managing Retail Investment Portfolio

How an individual can Manage Investment Portfolio

This post only focuses on investment portfolio management by an Individual. There are several theories that are being propounded for the management of an Investment Portfolio. Before we move ahead let us try to understand what a portfolio is and how a portfolio investment approach differs from individual security analysis.

What is a portfolio?

A portfolio is a collection of two or more assets. When you buy a stock of company X and one stock of company Y or may be a bond of company A, you have a portfolio to take care of. The several types or classes of assets could be bought and that too in differing proportions to be included in your portfolio.

How portfolio investment is different from individual security analysis?

For the purpose of portfolio analysis and management we cannot look into each security in isolation as we do for security analysis. In security analysis we try to study an individual stock or bond and look whether it is fit to invest into or what will be its growth trajectory in the time to come (may be in long-run or short run). Whereas in Portfolio Management we look into the effect of collection of securities into a portfolio, how well they behave when clubbed with each other and how the value of complete portfolio works out to be for e.g. if a portfolio has 3 stocks each from a different company and the total value of the portfolio is $30 (value of 3 stocks), now the fourth stock is added into the portfolio by paying $10 the minimum expected value of portfolio is $40 and it should grow with time, next year we expect the value (market value + returns attained) of the portfolio to be $50 but other things being constant, now the actual value (market value + returns attained) is $ 38 that means the portfolio has lost value of $ 2 after inclusion of the fourth stock and the fourth stock is not working well with the previous three stocks.

To be honest you need to understand your own needs and investing ability and the risk bearing capacity to manage your investments. No given theory or suggested methods could best suit an investor’s individual needs, only the individual can understand and make an educated effort  to actively manage the portfolio all the suggestions and theories could well act as a guideline and could be adopted in varying proportion to suit the individual or retail investor’s specific needs.

The retail investor though is advised to follow the principles of investing in equities as these principles are really helpful in protecting and maintaining the value of the holding but the limit of usability and the flexibility in the way of execution of each of these principle has to be devised by the retail investor. Before we start discussion about key points to remember in portfolio management, let us review key principles of portfolio theory –

1.       Principle of Diversification – Securities bought should be from different sectors and different industries and should be bought at different price ranges and at different intervals. Variations in types of securities i.e. debt, long-term debt, equity and might be inclusion of precious metal and property to diversify completely will not be wrong and is advised. In India though use of property as an investment asset is not considered as part of investment portfolio. The securities bought should have varying degree of correlation so if the prices of one security take the beating the prices of the other might go up to compensate for your loos.

 

2.       Mix of Debt & Equity – The investment portfolio should hold some debt (long-term or short-term) and equities. The proportion of the two (debt vs. equity) depends upon the individual’s needs.

 

3.       Value Investing (Long –term investing) – It is proposed and their exist sufficient evidence to suggest that long-term investing results into capital appreciation and capital gain, which is actually seek by most of the individual investors. Long-term holding may result into rise in market prices of the stock but it is not a guarantee that if you hold stocks long enough, may be 5-10 years the prices will rise sometimes there are economic situations or may be other scenarios where the stock at given point of time may be selling at a price lower than the purchase price. It is advisable that investments should be made for long-term and day-trading or short-term trading should be avoided as sufficient data will not be available to take short-term buying and selling decisions. The exercise becomes very risk and almost non-scientific in short-term.

 

4.       Risk and Return – The concept of Risk and return could not be avoided and had to be ardently followed. The ability to take risk and search for the higher returns has always deluded investors but any retail investor is advised to take a well-educated decision. Key point to remember is that there is no return without taking any risk and to generate returns the risk could not be avoided. The concept of proportional risk and return also is the matter of debate as the search for significant evidence to suggest that there exists certain securities for which equitable risk and return exists.

 

5.       No use of leverage – Money to be invested in a portfolio, especially in a stock portfolio should not be borrowed or funds invested should not have interest charges attached to it, in the hope that prospective returns from the investments are going to be higher than the attached cost of funds or interest charges.

 

6.       Do not try to time the market – Most of the new naïve investors make this mistake as they try to enter into the stock market when the market has a bull run or in other words the stock prices are soaring and indices are skyrocketing. These investors enter in the hope and in search of short-term profits or expectations are to make a windfall. They buy stocks when the prices are moving up or soaring with the expectation that prices will further go up and the investors on their recent purchases will be able to make an abnormal profit that will facilitate major incomes after offsetting any brokerage charges and tax liability.

 

Usually these naïve investors are not lucky and they fail to predict the stock market movement and they keep holding their investments in the hope of further rise in prices whereas the momentum is lost and the prices started to fall.

 

Steps in Portfolio Management

 

 



 

The above process of portfolio management has to be carried out actively by the investor and an investor has to be proactive in investing and associated decision making. Point to remember is that you are responsible for your own money and value of the assets, key objective being positive movement in the value of assets!

The 3 step process seems easy but it is actually very difficult to follow and implement.

Tips for Effective Portfolio Management

1.       Invest for long-run and try to generate maximum value both in terms of capital gains (positive changes in market price of the security) and dividend income as well as interest from debt securities received over the period of time.

2.       Try to diversify to the maximum, use your knowledge and do active research for diversification. Focus should be to avoid buying too many securities of the same type and from the same company or from different companies from the same industry.  Diversification tries to minimize risk and proper diversification helps in avoiding unsystematic or company or specific security related risk.

3.       Try to match risk return profile on your portfolio. Remember no returns without risk and you cannot maximize returns at a given level of risk. Risk profiling and matching the returns for a given level of risk is important and the investor has to select optimum level of risk and based upon level of risk, he should accept the returns.

4.       A natural tendency is to look at returns only or to study returns over a period of time and then decide whether to invest or not to invest but this is an inefficient practice and should be avoided. The more educated practice is to look at your capacity to invest and ability to depart with the invested amount, if your ability to lose money is less than try to invest in less risky assets such as bonds, fixed deposits, mutual funds or debentures and be ready to accept lower rate of returns. In other words look at risk first and then try to see most optimal level of returns available for the given level of risk.

5.       Portfolio churning or pruning of securities has to be carried out at regular interval. Churning ratio should not be very high, efforts should be made to select securities with strong fundamentals and good grounding within the industry and the economy so you do not have to change or buy & sell them often. Remember more transactions means high brokerage and may be associated tax to be paid as hardly in the globe, any frequent stock transactions are independent of brokerage and associated tax liability.

How to maximize your returns from the portfolio

Consider that all the principles and tips for safe investment are being followed and now is the time of selecting the assets and looking at how the securities are to be picked so most appropriate balance within the portfolio is achieved. The starting point is your investment objectives and ability to take risk and ability to depart with liquidity or the lock-in (time when you cannot take out the money out of the security) period suitable to your level of income or expected future level of income.

The discussion to follow focuses on maximizing the returns and how you can distribute your investments in different level of securities (based upon capitalization and associated risk) to maximize the associated returns from your portfolio. This strategy is just indicative and has to be customized as per an individual’s risk appetite and objectives.

The major assumptions for this indicative strategy are –

1.       Insurance policy for life and health are different and has been treated differently. Both term plans and endowment plans are to be considered separately and not to be considered as part of this investment strategy.

2.       Real Estate investments are different and could not be directly considered as part of the suggested investment strategy.

3.       Pension products or recurring deposits are not considered as they are the essentials and they are must to have in convenient proportions before setting off the proposed investment strategy.

The indicative strategy uses an investment value (initial outlay) of $100,000. To start we will try to create some safety net by investing 30% or $ 30,000 in debt securities or mutual funds dealing with debt or income funds. Next level of investment will be to put 20% money in equity linked mutual funds or growth funds, point to consider is that high risk funds investing in buyouts or Greenfield ventures should be avoided.

Out of remaining 50% or $50,000 we will invest $30,000 in highly capitalized well consolidated stocks of recognized corporation and would hold these stocks for long-term so as to generate value or capital appreciation.

30%+30%+20% = 80% is invested or $80,000 is invested and we are left with $20,000 to play with this is also the amount with which we would like to maximize our returns but catch is also risk will be increased. This 20% could be made less and even the above proportions are suggestive not watertight or specific and an investor can adjust these investment categories as per their comfort levels and needs.

The remaining 20% should be invested into small caps or upcoming companies that showcases potential for growth both in business and customer demand for its stock and product offerings in consumer market and has high difference in their Maximum Market Value and Minimum Market Value in last 52 weeks. These shares are to be bought and observed over the period of time and should be churned (bought and sold) every month and if price prospects on fortnightly observation seems favourable could be kept in the portfolio for a month to a quarter but long-term holding should be avoided as these stocks are potentially risky and the risk increases with the time period of holding.

Portfolio Pruning and churning (time frames)

The Portfolio pruning and churning are two differentiated activities to be carried out at different time intervals and to be evaluated as per the specific need of the specific portfolio. Churning is a major activity and could be forced by several factors such as economic conditions or may be change in the legal requirements or might be made compulsory due to changes in statutory requirements. Churning means to change a portfolio or to make evaluation about portfolio performance and see how the expected returns could be maximized. An individual could plan certain strategies to alter an entire portfolio as well could go ahead and change the weights of the securities (stocks, bonds and certificates etc.) or the types of investment vehicles (mutual funds – types, fixed deposits or corporate bonds. Even period of investment could also be altered and capital market or money market securities could be included or excluded as per the specific needs of an individual) or types of investments (debts vs. equity). In simple words the properties of the original portfolio could be changed and the newly emerged portfolio might not have any resemblance to the original one.

The pruning means not to make major alteration in the portfolio but to take out non-performing assets or underperforming assets or securities and replace them with potentially more profitable assets. The basic properties or the features of the portfolio are to be kept same only certain securities are to be replaced.  The process is quite similar to weeding and an individual has to make sure that after pruning the portfolio grows and all securities perform to the best level.

The Portfolio pruning process is an ever going process and has to be carried out at least once very fortnight or on continuous basis as the need arises. This is important to make sure your portfolio stays in shape and expected returns are not compromised. While pruning make sure the strict vigilance is kept over the penny stocks or small caps and they are replaced or kept under straight proportion (lower value) in relation to the total value or the worth of the portfolio.

The Portfolio churning could be done once a year and almost all securities has to undergo the process where a retail investor has to match the performance of the complete portfolio with the performance of the market as well as each of the security with other alternatives available in the specific industry (i.e. Steel, IT, Banking and Telecom) or the asset category (Mutual Funds, Money Market Securities or Stocks).

Some theorists propounds that FDs (auto renewal) or Large Caps should not be touched in short run and kept for longer periods as their value will rise and you will get magical returns… It is not recommended to keep any Asset or Asset Category to be kept unchecked. Though the advice is not to sell any asset if the prices are found extraordinarily high or low and replace them with something which might not be an exact match or the replacement for the asset you have sold. Recommended is to check and if financial sensibilities and indicators show that the financial asset is secured and still profitable then to keep it and if possible try to diversify the portfolio by buying or bringing in more assets or assets categories.

It has to be noted that more observant you are, more aware and vigilant you are, more secured will be your portfolio and higher will be the expected returns.

 

 

 



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Decoding Human Resource Management

Introduction

The term Human Resource Management contains three separate associations that are first Human or Man or Individual second is Resources or Assets or Capital the last one is Management or Supervision or Administration. If we put the given three terms together it means Man Asset Administration or to make it simpler Supervising Human Capital.

Human resource management is related to managing the most important factor that is “MAN”, which is not only an important task but a very challenging one too. It is important because all other organizational factors are managed by this factor (MAN), and it is challenging because human nature is very unpredictable, no two people are alike in their nature – and this makes the world of human beings a rewarding experience.

The importance of the study of human resource management can be stated by the fact that an organization itself consists of many human groups which work together as a team for the accomplishment of some specific goals for which the organization has come into existence. Thus, we can say that human resource management is concerned with any activity relating to human elements or relations in organization and it is this main factor that makes an organization a success.

Meaning and Definition:

Simply put, human resource management is a management function that helps managers’ recruit, select, train and develops members for an organization. Apparently, HRM is concerned with the people’s dimension in organizations.

Definitions:

As stated by C.B. Mamoria: “Human resource management is that phase of management which deals with the effective control and use of manpower as distinguished from other sources of power.”

According to Edward Flippo: “ personnel management is the planning, organizing, directing and controlling of the procurement, development, compensation, integration, maintenance and separation of human resources to the end that individual, organizational and societal objectives are accomplished.”

To understand the term HRM meticulously we need to see it as a system in which participants seeks to attain both individual and group goals. Following on the footsteps of management HRM also proclaims the attainment of super-ordinate goals while helping the involved individuals to attain their respective objectives.

Figure 1: HRM as a System for Goal Attainment

Scope of HRM:

The scope of HRM is very vast. Particularly, the activities included are – 

•    HR Planning
• Job analysis and design
• Recruitment and selection
• Orientation and placement
• Training and development
• Performance appraisal and job evaluation
• Employee and executive remuneration
• Motivation of the workforce
• Communication within the organization
• Welfare, safety, and health, industrial relations etc.

Figure 2: Scope of HRM

Importance of HRM:

·         Proper management of human resources enhancing their dignity by satisfying their social needs.

·         Maintaining a balance between the jobs available and the job seekers.

·         Providing suitable efficient effective and most productive employment to human resources.

·         Making maximum utilization of the resources in an effective manner and paying the employees a reasonable compensation.

·         Doing away with improper use of human resources and providing them with workable environment and protecting their health.

·         Helping human resources make healthy decisions and protecting their interests.

·         Promoting team work and team spirit among the employees.

·         Providing opportunities for personal and professional development.

·         Maintain healthy relationship between different work groups so that work is effectively performed.

·         Improving the employees working skills and capacity.

·         Reallocation of work so as to enhance working capacities of workforce.

·      Creating right attitude in human resources by motivating them.

·         Effective utilization of available human resources so as to facilitate organization attain its objectives.

·         Securing willing cooperation of the employees and fulfilling their own social and other needs.

 

The HR manager:

The HR manager is a generalist rather a non-specialist who oversees or governs as well as coordinates programmes cutting across all functional areas. The HR manager is typically a top-ranking individual in an organization who oversee how human beings involved in each of the operational department are functioning as well as what are the requirements of each of the operational unit moreover how each functional unit could be made more effective and efficient by providing most apt and job-fit human resources.

 

 

 

 

Figure 3: The Tasks of a HR Manager

The following qualities can make a successful HR manager:

The HR manager ought to be fair and firm, sensitive and thoughtful, tactful and resourceful, practical and imaginative, sympathetic and considerate, knowledgeable about labour laws, have a wide spectrum of information along with broad social outlook, and have competenceand confidence, should also be trust worthy, should have excellent image in the corporate as well as among employees, good communication skills, should have good convincing skills, and an adorable balancing nature and personality.

Conclusion

Till date taken not so seriously the human resource department has become very important in this modern era as now it has become a well known fact that in order to survive in this fierce competitive world onlythe Human factor cannot be copied by your competition so human assets or human resources has to be managed well so as to have competitive advantage or an edge over your competitors. We need to understand that the true value generator for any organization is human resources andit should also be noted that in order to succeed the Human Resources are to be managed strategically. We need to remember that the ‘The true essence of any organization is its members.’

Equity Investing Pointers for a Lay Man

Equity Investing Pointers for a Lay Man

Investing is a must exercise for everybody looking at the growing rate of inflation and ever-expanding demands of family and society standards. Everybody is making an effort to uplift standards of living, which in a way is a good sign but it is a daunting task for those bread earners who put in hard-work and long-working hours to make sure that their family has a comfortable and secured life.

Investments are essential for securing your retired life as well as to meet contingency requirements. As it is known in common parlance there are several vehicles of investment and there are several instruments available to invest i.e. Bonds, Equity Shares, Debentures, Saving Certificates and Fixed Deposits.

Most of the Investments could be categorized into either Debt (loan resulting into interest receipt and principal payment) or Equity (risk based, ownership based resulting into capital or value appreciation). An individual investor could make or select any type of investment depending upon his or her risk preference (high risk VS. low risk) or ability to invest (amount of money)and preference for being invested (time horizon). To understand the basic premise let us take an example –

Ms. A could invest $ 10,000 for 5 years in a 5 year bond, as she wanted to take less-risk and could easily do away with $10,000 for 5 years as there is no evident need for her to use that money. Whereas Ms. B has invested $100,000 in equity shares, she wants more returns by taking higher risk and she has not time frame in mind as she has sufficient income and liquidity (availability of cash) to meet all her present and future requirements.

The above example helps to put some light on basic investment philosophy. This article focuses primarily in Equity investments or stocks as some call them. We need to clarify one thing about investments in equity, that they cannot be termed or considered as your savings though they might have been taken from your savings or may be from your current income or cash flow but the equity investments are neither savings nor similar to savings. Up to extent money parked into your debt instruments or fixed deposits could be considered as savings as it is almost cash like or cash equivalent, could be easily converted into cash as and when needed. The quick conversion to cash or being a cash equivalent both features are non-existent in equity investments.

Undeniably some products are available in the market that prompts you to invest your savings into equity but the product in itself is risky and associated with changes in value (value might go up or down) of the investment (product or asset). We do not expect value of our savings to go down!

Starting with General Guidelines for a beginner, following are the few tips to be kept in mind so you can make some educated decision whether the equity investments are for you or not.

1.       Do you have capacity to lose money! Sorry but there are chances that you might end up losing some money on your investment as the equity prices could not be controlled as the rate of interest on your savings account.

2.       Your capacity to take risk or appetite for risk – If you can invest some money and just wait and actively monitor the situation without withdrawing the funds then only consider parking your money into equity. Plus make sure the negative changes in the value of your investment do not have significant impact on your behavior or financial position.

3.       Could you manage your investment actively and ready to do some research – if you have time and you can be proactive in managing your money than only equity investments are for you otherwise debt makes more sense. Undeniably you can use mutual funds but still you need to manage your money or have information to select most appropriate mutual fund or switch between the schemes or securities.

4.       Long Term – The term or the time-frame is the key to generate value in equity investments so you should have the capacity to lock in you money for at least 5 years, remember that may generate some tax advantage for you as well. Remember to set long-term goals and how your investments in equity should work so the goals could be realized effectively.

5.       Make yourself aware of Dos and Don’ts of the stock market. Reading is the Key! Avoid picking scrips or companies to invest based upon emotions or hunches. Another Important Don’t is not to take a loan to invest in stock market (equity investment). Make a point to diversify your portfolio by buying good quality stocks of different companies ranging over different sectors or industries. Stocks should be bought from banking sector, IT sector, Telecom, Infrastructure and FMCG.

Pointers to Make an Investment in Equity:

If you have read so much and have reached to this stage than it means you are serious ready to invest in equity. There are several jargons and terminology i.e. Fundamental Analysis, Technical Analysis, Economic Analysis and Dow Theory etc., that are being used and some of them seems to be bit complicated rather high-end for a lay man to use.

Here an Effort has been made to provide you simplistic pointers that can facilitate you in making right selection for your equity investment portfolio. Most of this information could be collected via websites or stock exchange apps or may be via magazines or journals. This information is primarily available in public domain.

Following is the information or pointers that you should try to study or find out information about them so you can make a well judged investment.

1.       History of the Company – Past is always a Guiding Force as it tells a lot about how the company has progressed over a period of time.

2.       Basic Understanding of the Company’s Business – Invest if you understand the company’s business and the product of the company seems to be in the demand for a long-period.

3.       Reputation and Experience of the promoters and Board of directors

4.       Customers and Type of Markets being served by the company – Loyal Customers and International Customers is an asset.

5.       High & Low price of a Year or at least for last 6 months – Newer Buy at the peak price try to buy as close as possible to the lowest price

6.       Revenue of the Company for last 5 years – It will give you an idea how much company makes in a year and its capacity to generate income. You could also do year –on – year comparison.

7.       Net Profit after Tax for last 5 years – This is what will be distributed to the shareholders as earnings per share (EPS)

8.       P/E Ratio – Price Earning Ration in simple words it means current market price per share divided by Earning per Share. E.g. Stock is trading at INR 100 and Earning per share last year has been INR 5 then P/E ratio is 100/5= INR 20/-

9.       Competitions for the Company – More Competition more are the challenges that the company has to face in the market.

10.   Focus on the Future of the Company – Vision that the company holds for the future and concrete planning for growth.