Portfolio Management -

Meaning and Important

Concepts

What is a Portfolio ?
A portfolio refers to a collection of investment tools such
as stocks, shares, mutual funds, bonds, cash and so on
depending on the investor’s income, budget and
convenient time frame.

What is Portfolio Management ?

The art of selecting the right investment policy

for the individuals in terms of minimum risk
and maximum return is called as portfolio
management.

Portfolio management refers to managing an individual’s

investments in the form of bonds, shares, cash, mutual
funds etc so that he earns the maximum profits within
the stipulated time frame.
Portfolio management refers to managing money of an
individual under the expert guidance of portfolio
managers.

In a layman’s language, the art of managing an

individual’s investment is called as portfolio
management.

Need for Portfolio Management

Portfolio management presents the best investment
plan to the individuals as per their income, budget, age
and ability to undertake risks.

Portfolio management minimizes the risks involved in

investing and also increases the chance of making
profits.

Portfolio managers understand the client’s financial

needs and suggest the best and unique investment policy
for them with minimum risks involved.

Portfolio management enables the portfolio managers to

provide customized investment solutions to clients as
per their needs and requirements.
Types of Portfolio Management
Portfolio Management is further of the following types:
Active Portfolio Management: As the name suggests, in
an active portfolio management service, the portfolio
managers are actively involved in buying and selling of
securities to ensure maximum profits to individuals.
Passive Portfolio Management: In a passive portfolio
management, the portfolio manager deals with a fixed
portfolio designed to match the current market scenario.
Discretionary Portfolio management services: In
Discretionary portfolio management services, an
individual authorizes a portfolio manager to take care of
his financial needs on his behalf. The individual issues
money to the portfolio manager who in turn takes care of
all his investment needs, paper work, documentation,
filing and so on. In discretionary portfolio management,
the portfolio manager has full rights to take decisions on
his client’s behalf.
Non-Discretionary Portfolio management services: In
non discretionary portfolio management services, the
portfolio manager can merely advise the client what is
good and bad for him but the client reserves full right to
take his own decisions.

Who is a Portfolio Manager ?

An individual who understands the client’s financial
needs and designs a suitable investment plan as per his
income and risk taking abilities is called a portfolio
manager. A portfolio manager is one who invests on
behalf of the client.

A portfolio manager counsels the clients and advises him

the best possible investment plan which would
guarantee maximum returns to the individual.
A portfolio manager must understand the client’s
financial goals and objectives and offer a tailor made
investment solution to him. No two clients can have the
same financial needs.

Roles and Responsibilities of a Portfolio

Manager
A portfolio manager plays a pivotal role in deciding
the best investment plan for an individual as per his
income, age as well as ability to undertake risks.
A portfolio manager is responsible for making an
individual aware of the various investment tools
available in the market and benefits associated with each
plan. Make an individual realize why he actually needs to
invest and which plan would be the best for him.
A portfolio manager is responsible for designing
customized investment solutions for the clients. No
two individuals can have the same financial needs. It is
essential for the portfolio manager to first analyze the
background of his client. Know an individual’s earnings
and his capacity to invest. Sit with your client and
understand his financial needs and requirement.
A portfolio manager must keep himself abreast with
the latest changes in the financial market. Suggest
the best plan for your client with minimum risks involved
and maximum returns. Make him understand the
investment plans and the risks involved with each plan in
a jargon free language. A portfolio manager must be
transparent with individuals. Read out the terms and
conditions and never hide anything from any of your
clients. Be honest to your client for a long term
relationship.
A portfolio manager ought to be unbiased and a
thorough professional. Don’t always look for your
commissions or money. It is your responsibility to guide
your client and help him choose the best investment
plan. A portfolio manager must design tailor made
investment solutions for individuals which guarantee
maximum returns and benefits within a stipulated time
frame. It is the portfolio manager’s duty to suggest the
individual where to invest and where not to invest? Keep
a check on the market fluctuations and guide the
individual accordingly.
A portfolio manager needs to be a good decision
maker. He should be prompt enough to finalize the best
financial plan for an individual and invest on his behalf.
Communicate with your client on a regular basis. A
portfolio manager plays a major role in setting financial
goal of an individual. Be accessible to your clients. Never
ignore them. Remember you have the responsibility of
putting their hard earned money into something which
would benefit them in the long run.
Be patient with your clients. You might need to meet
them twice or even thrice to explain them all the
investment plans, benefits, maturity period, terms and
conditions, risks involved and so on. Don’t ever get hyper
with them.
Never sign any important document on your client’s
behalf. Never pressurize your client for any plan. It is his
money and he has all the rights to select the best plan for
himself.
 MONEY MARKET

Meaning and Features:

The money market is a market for short-term
instruments that are close substitutes for money. The
short term instruments are highly liquid, easily
marketable, with little change of loss. It provides for the
quick and dependable transfer of short term debt
instruments maturing in one year or less, which are used
to finance the needs of consumers, business agriculture
and the government.

Functions of a Money Market:

A money market performs a number of functions in an
economy.

1. Provides Funds:
It provides short-term funds to the public and private
institutions needing such financing for their working
capital requirements. It is done by discounting trade bills
through commercial banks, discount houses, brokers and
acceptance houses. Thus the money market helps the
development of commerce, industry and trade within
and outside the country.

2. Use of Surplus Funds:

It provides an opportunity to banks and other institutions
to use their surplus funds profitably for a short period.
These institutions include not only commercial banks and
other financial institutions but also large non-financial
business corporations, states and local governments.

3. No Need to Borrow from Banks:

The existence of a developed money market removes the
necessity of borrowing by the commercial banks from
the central bank. If the former find their reserves short of
cash requirements they can call in some of their loans
from the money market. The commercial banks prefer to
recall their loans rather than borrow from the central
banks at a higher rate of interests.

4. Helps Government:
The money market helps the government in borrowing
short-term funds at low interest rates on the basis of
treasury bills. On the other hand, if the government were
to issue paper money or borrow from the central bank. It
would lead to inflationary pressures in the economy.

5. Helps in Monetary Policy:

A well developed money market helps in the successful
implementation of the monetary policies of the central
bank. It is through the money market that the central
banks are in a position to control the banking .system
and thereby influence commerce and industry.

6. Helps in Financial Mobility:

By facilitating the transfer for funds from one sector to
another, the money market helps in financial mobility.
Mobility in the flow of funds is essential for the
development of commerce and industry in an economy.

7. Promotes Liquidity and Safety:

One of the important functions of the money market is
that it promotes liquidity and safety of financial assets. It
thus encourages savings and investments.

Instruments of the Money Market:

The money market operates through a number of
instruments.

1. Promissory Note:
The promissory note is the earliest types of bill. It is a
written promise on the part of a businessman today to
another a certain sum of money at an agreed future
data. Usually, a promissory note falls due for payment
after 90 days with three days of grace. A promissory note
is drawn by the debtor and has to be accepted by the
bank in which the debtor has his account, to be valid. The
creditor can get it discounted from his bank till the date
of recovery. Promissory notes are rarely used in business
these days, except in the USA.

2. Bill of Exchange or Commercial Bills:

Another instrument of the money, market is the bill of
exchange which is similar to the promissory note, except
in that it is drawn by the creditor and is accepted by the
bank of the debater. The creditor can discount the bill of
exchange either with a broker or a bank. There is also the
foreign bill of exchange which becomes due for payment
from the date of acceptance. The rest of the procedure is
the same as for the internal bill of exchange. Promissory
notes and bills of exchange are known as trade bills.

3. Treasury Bill:
But the major instrument of the money markets is the
Treasury bill which is issued for varying periods of less
than one year. They are issued by the Secretary to the
Treasury in England and are payable at the Bank of
England. There are also the short-term government
securities in the USA which are traded by commercial
banks and dealers in securities. In India, the treasury bills
are issued by the Government of India at a discount
generally between 91 days and 364 days. There are three
types of treasury bills in India—91 days, 182 days and
364 days.

4. Call and Notice Money:

There is the call money market in which funds are
borrowed and lent for one day. In the notice market, they
are borrowed and lent upto 14 days without any
collateral security. But deposit receipt is issued to the
lender by the borrower who repays the borrowed
amount with interest on call. In India, commercial banks
and cooperative banks borrow and lend funds in this
market but mutual funds and all-India financial
institutions participate only as lenders of funds.

5. Inter-bank Term Market:

This market is exclusively for commercial and
cooperative banks in India, which borrow and lend funds
for a period of over 14 days and upto 90 days without
any collateral security at market-determined rates.

6. Certificates of Deposits (CD):

Certificates of deposits are issued by commercial banks
at a discount on face value. The discount rate is
determined by the market. In India the minimum size of
the issue is Rs. 25 lakhs with the minimum subscription
of Rs. 5 lakhs. The maturity period is between 3 months
and 12 months.

7. Commercial Paper (CP):

Commercial papers are issued by highly rate companies
to raise short-term working capital requirements directly
from the market instead of borrowing from the banks.
CP is a promise by the borrowing company to repay the
load at a specified date, normally for a period of 3
months to 6 months.

Institutions of the Money Market:

The various financial institutions which deal in short term
loans in the money market are its members. They
comprise the following types of institutions:
1. Central Bank:
The central bank of the country is the pivot around which
the entire money market revolves. It acts as the guardian
of the money market and increases or decreases the
supply of money and credit in the interest of stability of
the economy. It does not itself enter into direct
transactions. But controls the money market through
variations in the bank rate and open market operations.

2. Commercial Banks:
Commercial banks also deal in short-term loans which
they lend to business and trade. They discount bills of
exchange and treasury bills, and lend against promissory
notes and through advances and overdrafts.

3. Non-bank Financial Intermediaries:

Besides the commercial banks, there are non-bank
financial intermediaries which lend short-term funds to
borrowers in the money market. Such financial
intermediaries are savings banks, investment houses,
insurance companies, provident funds, and other
financial corporations.

4. Discount Houses and Bill Brokers:

In developed money markets, private companies operate
discount houses. The primary function of discount
houses is to discount bills on behalf of other. They, in
turn, form the commercial banks and acceptance houses.
Along-with discount houses, there are bill brokers in the
money market who act as intermediaries between
borrowers and lenders by discounting bills of exchange
at a nominal commission. In underdeveloped money
markets, only bill brokers operate.

5. Acceptance Houses:
The institution of acceptance houses developed from the
me change bankers who transferred their headquarters
to the London Money Market in the 19th and the early 20
the century. They act as agents between exporters and
importers and between lender and borrower traders.
They accept bills drawn on merchants whose financial
standing is not known in order to make the bills
negotiable in the London Money Market. By accepting a
trade bill they guarantee the payment of bill at maturity.
However, their importance has declined because the
commercial banks have undertaken the acceptance
business.

All these institutions which comprise the money market

do not work in isolation but are interdependent and
interrelated with each other.

Indian Money Market:

A money market is a mechanism which makes possible
for borrowers and lenders to come together. Essentially
it refers to a market of short-term funds. It meets the
short-term requirements of the borrowers and provides
liquidity of cash to the lenders. In the words of Crowther,
money market is the name given to the various firms and
institutions that deal with various grade of money
Structure of Indian Money Market - Chart ↓
The entire money market in India can be divided
into two parts. They are organised money market
and the unorganized money market. The unorganised
money market can also be known as an unauthorized
money market. Both of these components comprise
several constituents.