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Portfolio_Revision.pptx

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Senthil Kumar

Portfolio revision involves changing the mix of securities in a portfolio to ensure it remains optimal over time as financial markets change. The objectives of revision are maximizing returns and minimizing risk. Revision is needed due to changes in markets or an investor's situation. Constraints on revision include transaction costs, taxes on capital gains if securities are sold too quickly, statutory regulations for large institutional investors, and the inherent difficulty of the revision process.

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Portfolio Revision: Meaning, Objectives, Need, Strategies
• what is meant by portfolio revision • The financial markets are continually changing. In this dynamic environment, a portfolio that was optimal when constructed may not continue to be optimal with the passage of time. • It may have to be revised periodically so as to ensure that it continues to be optimal. • A portfolio is a mix of securities selected from a vast universe of securities.
Meaning of Portfolio Revision • Portfolio revision involves changing the existing mix of securities. • This may be effected either by changing the securities currently included in the portfolio or by altering the proportion of funds invested in the securities. • New securities may be added to the portfolio or some o the existing securities may be removed from the portfolio. Portfolio revision thus leads to purchases and sales of securities.
objective • The objective of portfolio revision is the same as the objective of portfolio selection like maximizing the return for a given level of risk or minimizing the risk for a given level of return. • The ultimate aim of portfolio revision is the maximization of returns and minimization of risk
Need for Portfolio Revision • The primary factor necessitating portfolio revision is changes in the financial markets since the creation of the portfolio. • • The need for portfolio revisions may arise some because of some investor-related factors also. These factors may be listed as:
• Availability of additional funds for investment. • Change in risk tolerance. • Change in investment goals. • Need to liquidate a part of the portfolio to provide funds for some alternative use. • The portfolio needs to be revised to accommodate the changes in the investor’s position. • • Thus, the need for portfolio revision may arise from changes in the financial market or changes in then investors’ position, namely his financial status and preferences.
Constraints in Portfolio Revision • Portfolio revision or adjustment necessitates purchases and sale of securities. • • The practice of portfolio adjustment involving purchase and sale of securities gives rise to certain problems that act as constraints in portfolio revision. Some of these are as follows:
1. Transaction Cost • Buying and selling securities involve transaction costs such as commission and brokerage. • • Frequent buying and selling of securities for portfolio revision may push up transaction costs thereby reducing the gains from portfolio revision. • • Hence, the transaction costs involved in portfolio revision may act as a constraint to the timely revision of the portfolio
Taxes • . • Tax is payable on the capital gains arising from sales of securities. • • Usually, long term capital gains are taxed at a lower rate than short term capital gains. To qualify as long term capital gain, a security must be held by an investor for a period of not less than 12 months before the sale. • • Frequent sale of securities in the course of periodic portfolio revision or adjustments will result in short term capital gains which would be taxed at a higher rate compared to long term capital gains. • • The higher tax on short term capital gains may act as a constraint to frequent portfolio revisions. •
3. Statutory Stipulation • s • The largest portfolios in every country are managed by investment companies and mutual funds. • • These institutional investors are normally governed by certain statutory stipulations regarding their investment activity. • • These stipulations often act as constraints in timely portfolio revision. •
4. Intrinsic Difficulty • Portfolio revision is a difficult and time- consuming exercise. • • The methodology to be followed for portfolio revision is also not clearly established. • • Different approaches may be adopted for the purpose. The difficulty of carrying out revision itself may act as a constraint to portfolio revision.
Portfolio_Revision.pptx

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Portfolio_Revision.pptx

  • 2. • what is meant by portfolio revision • The financial markets are continually changing. In this dynamic environment, a portfolio that was optimal when constructed may not continue to be optimal with the passage of time. • It may have to be revised periodically so as to ensure that it continues to be optimal. • A portfolio is a mix of securities selected from a vast universe of securities.
  • 3. Meaning of Portfolio Revision • Portfolio revision involves changing the existing mix of securities. • This may be effected either by changing the securities currently included in the portfolio or by altering the proportion of funds invested in the securities. • New securities may be added to the portfolio or some o the existing securities may be removed from the portfolio. Portfolio revision thus leads to purchases and sales of securities.
  • 4. objective • The objective of portfolio revision is the same as the objective of portfolio selection like maximizing the return for a given level of risk or minimizing the risk for a given level of return. • The ultimate aim of portfolio revision is the maximization of returns and minimization of risk
  • 5. Need for Portfolio Revision • The primary factor necessitating portfolio revision is changes in the financial markets since the creation of the portfolio. • • The need for portfolio revisions may arise some because of some investor-related factors also. These factors may be listed as:
  • 6. • Availability of additional funds for investment. • Change in risk tolerance. • Change in investment goals. • Need to liquidate a part of the portfolio to provide funds for some alternative use. • The portfolio needs to be revised to accommodate the changes in the investor’s position. • • Thus, the need for portfolio revision may arise from changes in the financial market or changes in then investors’ position, namely his financial status and preferences.
  • 7. Constraints in Portfolio Revision • Portfolio revision or adjustment necessitates purchases and sale of securities. • • The practice of portfolio adjustment involving purchase and sale of securities gives rise to certain problems that act as constraints in portfolio revision. Some of these are as follows:
  • 8. 1. Transaction Cost • Buying and selling securities involve transaction costs such as commission and brokerage. • • Frequent buying and selling of securities for portfolio revision may push up transaction costs thereby reducing the gains from portfolio revision. • • Hence, the transaction costs involved in portfolio revision may act as a constraint to the timely revision of the portfolio
  • 9. Taxes • . • Tax is payable on the capital gains arising from sales of securities. • • Usually, long term capital gains are taxed at a lower rate than short term capital gains. To qualify as long term capital gain, a security must be held by an investor for a period of not less than 12 months before the sale. • • Frequent sale of securities in the course of periodic portfolio revision or adjustments will result in short term capital gains which would be taxed at a higher rate compared to long term capital gains. • • The higher tax on short term capital gains may act as a constraint to frequent portfolio revisions. •
  • 10. 3. Statutory Stipulation • s • The largest portfolios in every country are managed by investment companies and mutual funds. • • These institutional investors are normally governed by certain statutory stipulations regarding their investment activity. • • These stipulations often act as constraints in timely portfolio revision. •
  • 11. 4. Intrinsic Difficulty • Portfolio revision is a difficult and time- consuming exercise. • • The methodology to be followed for portfolio revision is also not clearly established. • • Different approaches may be adopted for the purpose. The difficulty of carrying out revision itself may act as a constraint to portfolio revision.