Portfolio Managemt Strategies | Types | And A Comparision

Whether it is a mutual fund or personal investment.  At last portfolio is a portfolio. No difference. Without strategic portfolio management, it’s very difficult to achieve the target. Investment into different asset classes like equity, debt, gold and cash will give the returns of different percentages and at different time periods. So, there is a need to manage, the balance between different asset classes. That’ where a strategic portfolio management plays a vital role.


STRATEGIES

Active Strategy

An active portfolio management strategy focuses on outperforming the related specific benchmark index that comprises of the assets in the portfolio. Either an individual investor /a broker /a mutual fund, the strategy remains same. Just outperforming the specific related Benchmark Index.

Suppose you might have come across the news that, BSE Midcap Index has fallen by 12% since the beginning of 2018. And’ all the Midcap Mutual Fund Schemes have fell lower than their respective benchmarks. But, Axis Midcap Scheme shown positive return of 0.74% from Jan’18 to June’18.

How it Works

Let’s better to explain with an example.

An investor  Mr. Gentleman aged 40 years has invested his savings of Rs. 10,00,000 in different asset classes as follows.

 

Initial

Asset Allocation

Amount Active

Asset Allocation

Amount
Equity

Debt

Gold

Cash

4,00,000

2,00,000

3,00,000

1,00,000

Equity

Debt

Gold

Cash

2,50,000

3,50,000

3,50,000

50,000

After allocating the total amount to gain under different classes, there was a signal of equity market down-trend. Then, to save his corpus, he planned to reduce the amount of equity exposure. So, he reduced the equity amount from 4  lakh rupees (40%) to 2.5 lakhs (25%). And, to safeguard his return, he transferred that amount to debt and Gold.

Here, the investor /portfolio manager has applied the active portfolio management strategy by timing the markets. And, trnsformed the existing portfolio to the new strategic portfolio comprised of same asset classes but with different asset allocation percentages. Sometimes, the strtegic portfolio management brings in new asset classes by the investors /portfolio managers, which they expected to be the best future performers.

After a year, his expectation got true and market had underperformed by 40%. That has similar effect on his equity investment. So he lost  Rs. Rs. 1,00,000 in equity and  instead of Rs. 1,60,000 if he might have invested Rs. 4,00,000. So, more exposer to the debt and gold has earned him more money in the form of interest and gold price appreciation. That’s how the strategic portfolio has saved him from big equity loss and earned extra money.

For each strategy there is always a second side of possibility. Let’s consider the scenario that markets moved forward and up by

 

Preferential Allotment Of Shares | Impact On The Current Market Price Of The Share

When a company has a debt, and wants to reduce it or would like to expand the existing business, there are many methods to raise the required funds. But of all, the easiest one is the allotment of preferential shares. Through the allotment of preferential shares companies can raise debt, without much must to follow norms /paper work. Whereas, the other methods of acquiring capital, needs procedural enhancement of norms and time. That means, they are very time consuming and complicated in comparison with an allotment of preferential shares directly to the second party.


Preferential allotment of Shares is the process, through which shares are allotted to the selected group of investors /institutions /companies on a preferential basis. Under this process shares are allotted to the investor with an agreement that, whenever the company decides to pay dividends, the holders of the preference shares will be the first to be paid.

  • Cumulative Preferred Stock
  • Non-Cumulative Preferred Stock
  • Participating Preferred Stock
  • Convertible Preferred Stock. This is also simply called as the Preferred Stock

Benefits and Drawbacks of Preferential Share Holder

Benefits

No brokerage expenses

Preferential shares are preferred over the common shares, while allotting dividend

In the case, if the company is not able to pay a dividend in the current year, the preferred shareholder has the right to claim that dividend in the subsequent years.

In the event of liquidation of a company, preferential shares takes precedence over the common stock. That is, in the case company goes bankrupt, preferred shareholders are paid off first, before the common stockholders. Capital is secure.

Drawbacks

The first and the foremost drawback is that, the preferred shareholder possesses limited voting rights while passing resolutions of the company. Whereas an equity share confers on its holder, a right to vote on all resolutions that require shareholder approval under the relevant act /law /the articles of association of the company. Also enjoy the right to appoint or remove the directors and auditors of the company, as well as approve the company accounts.

Preference shares are riskier than bonds, but less riskier than equity.

Preferential shares are preferred after the NCDs during company bankruptcy and the consequential liquidation.

Effect On EPS & Stock Price

Positive Effects

Few companies start to perform well after the allotment of preferred stock. This depends on the factors like, whom the stock is allotted and how successfully the raised fund is utilized for the growth of the business. If, the stock is issued to ‘well informed veteran investors’, then their participation will definitely drive the business towards its growth.

Negative Effects

Diluted Earnings Per Share takes into account all the outstanding convertible securities, like convertible debentures, convertible preferred shares, stock options and warrants. Hence diluted EPS gets affected by the preferred stock if it is convertible.

The preferred stockholders, usually exercise their right to convert the preferred stock into the common stock at a pre-agreed ratio. They do so, if stock price hikes after the issuance of preferred stock. Due to which, the number of shares increases. Thereby, reducing the EPS and in turn the stock price.

Hence, a convertible preferred stock can be considered as a dilute, which increases the number of shares, reduces EPS and hence the stock price.

Preferential shares are not accessible to common investors. Companies prefer high net worth individuals, institutions and other companies for preferential allotment. And, the whole process is carried out privately through a private placement of the offer. Hence available for only high net worth individuals. The minimum threshold amount to invest is Rs.10, 00,000 (Rs.10 lakhs). This can be considered as one of the distinctive features of a Preferential allotment of shares by the companies.

 

Hedging With Derivatives | An Advanced Stock Investment Strategy

This article is of little use to those investors who are expert derivative traders and know, how to use hedging for their portfolio against market risk. But, of utmost know to factor to the investors, who are away from the derivative segment and are likely to know about. Let’s read.


What is Hedging and Who is a Hedger

A strategic trading strategy in the derivative market, to protect the value of equity portfolio against price fluctuations is called hedging. When there is an uncertainty in the price movement of any stock, stock investors can hedge the price of a stock from a fall, by participating in the derivatives market. And, such investor is then called to be a Hedger.

Hedging is nothing, but securing the price of a stock by speculating market movement. In other words, it’s an advanced equity investment strategy, where the equity investments are protected in the market fall /fall in the price of a stock scenario. Hedging gives a sort of ‘peace of mind’ to the equity investors, by ensuring a more predictable outcome.

Hedging of a Stock doesn’t give more outcome, but it definitely gives a more predictable outcome.

What Are The Types Of The Risks Associated With Any Stock

While buying a stock every investor thinks and hopes that, it will move forward and there will be a hike in the stock price. But, nobody can make sure that the price hike is definite. There are certain risk factors, that may restrict the stock price, and push it down.

The stock price is always a function of many risk factors, which will decide its future. Some are specific to the particular stock and sector. And some are global. Market risk is considered as an external risk factor that will equally affect the entire industry. For example, currently the Diamond Industry, is facing such a type of Market Risk. Which is unavoidable by all the stocks of various companies that belong to this industry.

How To Hedge A Stock

Hedging is an art of ensuring the return of an equity investment apart from market risk. This is done by participating in the derivatives market, and execute exactly the opposite trade. That means, the trade which  opposite to the trade in equity segment. By doing so, one can ensure the return from either the equity /derivative market, as the two segments move in opposite directions. In this form, one can bypass the risk to those who are willing to bear it.

There are two types of derivative contracts, that help the investors to hedge their investments in the cash segment, that is equity. They are Futures and Options.

For example Mr. A holds 100 shares of a company XYZ. If the buy price is Rs. 10 per share, and the stock price is hovering around Rs 10 and Rs.12, for a month. Then Mr. A speculated the price movement towards negative direction. And, he decided to liquidate his holding predicting its future fall. But, his advisor and friend, Mr. B suggested him to hedge his holding  to ensure his future earnings at the cost of the premium to be paid to buy a contract in the derivatives segment. So, Mr. A postponed the idea of selling the shares at the current market price. And, decided to sell the stock at the expected Rs. 15 after 3 months.

Even though there are many contracts to hedge the stock value in derivative segment, the best one is the PUT Option, which he can utilize to sell his stock after 3 months and at the strike price.

Put Option gives the buyer to sell the stock  during a predetermined period and at the predetermined strike price, which is usually above the market price.

The cost of buying a Put Option increases with strike price. That means, higher the strike price, the higher the cost. So, it is always advisable to choose the strike price moderately to hedge the stock.  So, Mr. A chose to buy the 1 ATM Put of 100 shares with the 3 month expiration period.  He paid Rs. 100 towards premium and his strike price was Rs.11

As per his expectation the price of his stock fell to Rs.10. And, Mr.A exercised his option to Put his quantity of 100 shares at Rs. 11 each. The amount he received was Rs. 1100. So, the loss is only the amount that was paid towards commission while buying the stock. In India the Futures and Options, of all the listed stocks expire on the last Thursday of the contract month. If that Thursday is declared to be the holiday, the expiry day will be the preceding Wednesday.

If you like my article, leave your comment. I value your comments, and try to rectify my defaults.

Happy Investing!

 

Indiabulls Ventures | A Growth Stock

CMP: 27


Formerly known as Indiabulls Securities, Indiabulls Ventures is one of the group companies led by Indiabulls Private Limited.

‘Indiabulls’ is one of the India’s foremost diversified conglomerates with businesses spread over Real Estate, Financial Services, Securities and Power.

The company is currently active and performing well in the following sectors.

  • Equity/ Commodity/ Currency Broking
  • Marketing and Distribution of Residential Properties
  • Developing and Leasing of Commercial Properties

Bagging the highest quality grade BQ1 for its quality brokerage services, assigned by CRISIL, the company has a very loyal customer base. This is one of the indicative traits of a growth stock. Quality service assurance is a signal for its great future prospects. Currently the stock is available at its best to buy price. Just buy and hold for your future prospects.

Click here to check the Target Price of Indiabulls Ventures Ltd.

Indiabulls Ventures – Financial Ratio Analysis

Technical Analysis

 

CMP: Rs.27

Has tested the low of Rs. 20 levels, thrice. Has a clear indication that soon going towards the second highest level. Tested its 29 level for the first time since 6 months, currently trading at 27 levels, along with strong fundamentals, ‘Indiabulls Ventures’ is my pick for all the long-term investors, seeking exceptional growth rate.

Fundamental Analysis

 

Good dividend paying companies are ought to have good earnings. Have the capacity to earn and distribute the profits. A defined signal of its future growth.

The company has not paid any dividend since from the last payout of 25% interim. Can be considered as a positive sign towards its capital growth. In other words the company might have has employed the profits in its growth, expansion of the business or its service quality improvement. Fine sign of our capital growth.

Current P/E is 16.45. Before two quarters it might have been definitely less than this. Improvement in P/E along with other fundamentals is a clear sign of its future growth prospects.

With P/B of 2.5, the market is estimating its future prospects as positive and constant.

 

Return On Debt (ROD) | Its Impact On The Company Performance

‘Return On Debt’. Spells short. But it’s as important as any other financial ratio, and also tells a  lot about the financial health of a company. Especially when there are big number of debts that peeps out of the balance sheet. So easy to analyze, but difficult to manage, ROD ratio has its own impact on any company’s performance.


Let’s try to have a few important points – What it may otherwise indicate the impact of ROD on any company’s performance as well as on our returns.

What Is ‘ROD’ Or The ‘Return On Debt’ Ratio

The ROD is a financial ratio, that compares the company’s net earnings to its long-term debt.

‘Return On Debt’ = Net Earnings / Net Long Term Debt

Here, debt means either taken /issued by the company. And sometimes the both the cases. And this ‘long-term-debt’ is in various forms and in distinctive interest rates depending on the creditor or the issuer. Anyhow, what we need to calculate is the ratio of the net earnings of the company to its net debt.

This ratio shows the amount of net earnings that is generated, for each coin that a company holds in debt. And, this ROD can either be positive /negative.

A positive ROD has been always beneficial to the company. And, it indicates that some income is being generated by the debt issued /taken by the company. Where as a negative ROD is a threat.

We can locate the long term debt data on the balance sheet as well as the notes to financial statements. The information explains the amount of debt taken out /issued and the number of years related to it.

How Important Is ‘Return On Debt’ In Any Company’s Financial  Analysis

Mostly, the ratio of ‘ROD’ is not used in the simplest financial analysis. But, it’s an important calculation that needs to be performed, while evaluating company’s solvency. It is generally used by the owners of the company while making a decision on, which financing sources would be better for the company.

It’s common to carry a certain amount of debt by any company. But, the amount should be limited. The more the debt to its earnings level, the more the credit risk’ is.

Moreover, companies carrying a significant amount of debt related to capital and/or assets are more prone to economic downturns during a decline in earnings.

 

Value Stocks | Hidden Gems For Value Investing

Good Management and Coprporate Governance. Hopeful Sector. Upcoming Industry. Analysis Says – The Company Fundamentals are Strong. Excellent future prospects. Technicals are suggesting to buy. Yes. Definitely the stock falls in the ‘Value Stocks’ category.


The secret of many people to become millionaires! The success mantra of many Mutual Funds to out-perform! Value investing is nothing but chasing those hidden gems to own. Just invest and forget to hug your future fortune. That’s what ‘The Value Investing Is!

What Are ‘The Value Stocks’

All those stocks that tend to trade much below their intrinsic value can be considered as ‘Value Stocks‘. These stock’s current market price don’t match with either the fundamentals of the company or its earning levels. And, thus considered to be an undervalued stock by the ‘Value Investors’.

How To Spot A Value Stock

If the company is paying good dividend, earning levels are excellent and sales growth rate is OK, but the stock is available at low price. We can exactly say that the stock is a value stock.

Other characteristics would be, high dividend yield, low P/E (low price to earnings ratio) and low P/B (low price to book value)

Why To Invest In Value Stocks

As the value stocks /securities are trading at a lower price than how the company’s performance may otherwise indicate, there will be a breaking down point in the near or the far future of every value stock. Difficult to guess, but sure to be assessed. The target price will be at least its intrinsic value.

Investing in a value stock is an attempt to capitalize on market inefficiencies. By investing in a value stock, we can make sure that, we are going to encash the inefficiency of the market to recognize the stock’s underlaying value.

How To Invest In Value Stocks

Just spotting a stock with the required ratios is not enough to decide upon that the stock is undervalued and can invest without any further investigation. Of course, this would be the first step to develop a rough list of stocks – that may be our best choice of value picks. So, just the screen test and making a list of stocks that we expect to be undervalued is over.

Apart from this there are two more steps of analysis required to be done before investing. They are ‘Qualitative Analysis’ and ‘Quantitative Analysis’.

What Is Qualitative Analysis

The entire analysis of the company, side stepping the financial ratio analysis (quantitative analysis) is called the qualitative analysis. Here there are no financial ratios not their analysis. But, it involves analyzing the company in the vague light of distinctive practical matters, which directly or indirectly affect the company’s performance  and its stock value anyhow.

Factors like industry to which the company directly /indirectly related to, future scope of that industry, company management, corporate governance, company competitiveness with its competitors, government subsidies, quality of the goods produced, climatic conditions and finally the demand for its products /services etc, need to be analyzed in depth before deciding upon the stock to be a Value Stock. Unlike quantitative analysis, qualitative analysis needs more attention and is very time consuming.

Qualitative Analysis is best made by the investors, that is relevant to them. The companies they worked for, goods they sold once or well known with the products and their demand are best to be chosen for analysis.

It’s wise to buy companies, that you understand better

– Warren Buffet

What Is Quantitative Analysis

There is a myth among the common investors that ‘The Quantitative Analysis, is a little bit difficult ratio analysis performed by the expert analysts. But, the existed IT tools made it a crazy one minute analysis done by any common people. No financial expertise is required.

Once the ratio analysis is over, the next step is to analyze the impact of their values. All the investors with basic knowledge of how these financial ratios should be for the company’s out-performance in the near future, are said to be in good position in value stock picking.

Other Strategies To Invest In Value Stocks

Few value investors opt to invest in stocks of companies whose products or services have been in demand for a long time and are likely to be continued.

Innovation‘ – This sounds like a synonym of development. And of course the stepping stone of true development. But, this would be a great threat to certain companies and sometimes the whole industry too. History witnessed a few long-standing companies and industries victimized by new innovations. Their products /services became obsolete and the companies lost forever. Here, what we need is critical thinking skills. If there is a proof that, the company has been in the business for a longstanding period and has the ability to fast adapt the new changes and innovations, then we can be free to choose such businesses for further analysis. At this point it may be worthwhile to analyze management and the effectiveness of corporate governance to determine how the company reacts to new innovations and changing environments. Investment in such a business is considered to be always safe and  fruitful.

That’s all. Thank for reading this topic.

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