RELEVANCE OF PORTFOLIO MANAGEMENT IN DIFFERENT SECTORS OF FINANCIAL MARKETS :
Companies are owned by investors, whose objective is to
maximize their wealth. The ownership pattern in the companies in India shows that the
bulk owners are the financial institutiont, and mutual funds. The Non-Resident Indians
also invest in the companies. The ownership of individual shareholders, on an average,
does not exceed about 20 to 30%. The interests of financial and non-financial institutions
and corporates do not coincide with that of individual shareholders who are the truc
savers of the household sector. The corporates are the only intermediaries. The
corporate manager secures funds from bank and financial institutions next only to
promoters and hence their interests stand prominent in the minds of portfolio managers
in the corporate business.
The companies generally keep continuous contact and dialogth with bankers and financial
institutions in the matter of operations The role of individual investors and other categories
of investor is limited to the extent of annual general meeting only.
The performance of companies and their operations are guided by the Government and
SEBI Regulations, the company law and listing agreement with the stock exchange. The
prudential norms for raising resources, allocation of funds and declaration of dividends are
all governed by the law and Government notifications from time to time.
The relevance of portfolio management in different sectors of the financial markets can be
considered in the following ways :
(a) Individual portfolios : There are individual investors who invest in the financial
markets. They are employees, businessmen and professionals. They also want to
construct their portfolio. However, they do not have time and proper knowledge to
make analysis and take investment decisions. Therefore, portfolio management is
very much desirable for them. An individual portfolio may be constructed by following
the rules of portfolio management. For example, a Doctor, who has saved 10 lakhs
want to invest in the market. Thus, he needs to construct his portfolio.
The percentage in the portfolio may differ from individual to individual depending
upon his objectives, need and other constraints.
(b) Corporate’s Portfolio : Investment by corporates may be in physical assets and
financial assets. If it is investment in financial assets, the risk-return analysis of
Markowitz holds good. But if it is in physical assets as part of the business
operations, it is necessary to consider project risk and revenue sensitivity.
The percentage of debt-equity can differ from company to company depending upon
the age, size group and nature of business of the company. The optimal portfolio will
be decided which will give maximum return to the company.
(c) Banking Company’s Portfolio : The concept of portfolio is also relevant to the
banking companies. Banks accept deposits from the public and lend these funds to
the borrowers in the market. They carry out banking business as per Banking
Regulation Act 1949 and Reserve Bank regulates and controls their day to day
operations through the guidelines.
The banks collect huge amount of deposits which needs to be invested carefully.
Hence, these banks have to follow the concept of portfolio management.
The percentage of investment will vary from time to time as per RBI guidelines,
amount of deposits and market conditions. Banking companies have to keep CRR
and SLR as per rules. They have to invest preferably in Government Securities and
money market. They are also allowed to invest 5% of their time, and demand
liabilities in the share market. The investment in the market may change from time to
time depending upon liquidity, interest rates, repo rates and inflation rates.
(d) Mutual Funds Portfolio : Mutual Funds are the financial intermediaries in the
financial market. They collect large amount of funds from the public by selling units.
They manage the investible funds of the public with their expertise in portfolio
management. The investment policy of the fund may depend on the objectives of the
fund (income or growth). They invest fund in stock market, money market and debt
market. Normally, one third of the fund is used for investment in the money market
and Government Bonds market where the liquidity is maintained. Bulk of the fund will
be invested in fixed interest securities. If the objective is growth, the bulk of the
investment would be in equities and new i-,sues. The relative proportion will depend
on the importance of the objectives of income and growth. Thus, the relevance of
portfolio management is very much important to the mutual funds.
The percentage of investment may differ from time to time depending upon the
market conditions. The Asset Management Committee (Portfolio Managers) can
change the proportion of investment depending upon the need and circumstances.
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