Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk.

SELECTION OF ASSET MIX

The most imp. Decision in portfolio mgt. is the asset mix decision. This is concerned with the proportion of stocks and bonds in the portfolio.

The appropriate proportion of stock & bond mix depends upon the risk tolerance and investment horizon of the investor.

Here, one has to specify the asset allocation, how much of your portfolio has to be invested in each of the following asset categories:

• Cash

• Bonds

• Stocks

• Real Estate

• Precious Metals

Meaning of Diversification – DO NOT LAY ALL THE EGGS IN ONE BASKET

The idea is to create a portfolio that includes multiple investments in order to reduce risk.

Example: Consider, for example, an investment that consists of only the stock issued by a single company. If that company’s stock suffers a serious downturn, your portfolio will sustain the full brunt of the decline.

So, by splitting your investment between the stocks of two different companies, you reduce the potential risk to your portfolio.

Why You Should Diversify

• Different reactions of different assets in different situations: It’s also important that you diversify among different asset classes. Because different assets – For Example : bonds and stocks – will not react in the same way to adverse events, a combination of asset classes will reduce your portfolio’s sensitivity to market swings.

  Generally, the bond and equity markets move in opposite directions, so, if your portfolio is diversified across both areas, unpleasant movements in one will be
  offset by positive results in another.

• Companies financial statements cannot even guarantee the return on the investments: Unfortunately, even the best analysis of a company and its financial statements cannot guarantee that it won’t be a losing investment. Diversification won’t prevent a loss, but it can reduce the impact of fraud and bad information on your portfolio.

Tips For Diversifying Your Portfolio

1. Spread the Wealth across different companies in different sectors. Create your own virtual mutual fund by investing in a handful of companies you know, trust, and perhaps even use in your day-to-day life.

2. Consider Index or Bond Funds: Consider adding index funds or fixed-income funds to the mix. Investing in securities that track various indexes make a wonderful long-term diversification investment for your portfolio. By adding some fixed-income solutions, you are further hedging your portfolio against market volatility and uncertainty.

3. Keep Building: Add to your investments on a regular basis. Lump-sum investing may not be the best option. Use Periodic investment approach, whereby u can invest on monthly basis into a specified portfolio of mutual funds or stocks instead of putting the lump-sum amount . This approach is used to smooth out the peaks and valleys created by market volatility.

4. Know When to Get Out: Stay current with your investment and remain in tune with overall market conditions. Know what is happening to the companies you invest in.

5. Keep a Watchful Eye on Commissions: Be aware of what you are paying and what you are getting for it. Remember, the cheapest choice is not always the best. Always do cost – benefit analysis before taking entry into a trade, because your cost .i.e brokerage , transaction charges and other levies are reducing your profit margins ultimately.

Investing can (and should) be fun. It can be educational, informative and rewarding. By taking a disciplined approach and using diversification, buy-and-hold and rupee-cost-averaging strategies, you may find investing rewarding even in the worst of times.

Indian mutual funds cannot take direct exposure to commodities, keep aside gold. These schemes invest in commodities-related companies such as metals and oil, in India or abroad. You can choose among the schemes that invest in ‘energy’, ‘agriculture’ or ‘mining’ verticals. Each such fund, dedicated to a particular sector or theme, will help investors to invest in companies that mine, manufacture, process commodities or manufacture inputs such as equipment for commodities mining and processing. In case of agriculture, fund managers focus on companies that manufacture agriculture inputs such as seeds, fertilisers, equipment. The rationale behind this logic is that these companies will clock profits whenever the underlying commodity prices see a spike. To choose winners when the tide turns in favour of commodities, one can look at MF schemes that help investors pick and choose companies in this space, both in India and overseas. “Investors should invest 5-15% of their equity allocation in such funds with 3-5 year time frame.”

Basic of Technical Analysis

Technical analysis is the study of price using charts in order to “anticipate” their future performance.

I have deliberately used the word “anticipate” rather than “forecast” or “predict”. The market can go up or down at any time; it is only the probability (of each move) that varies. Technical analysis isn’t a crystal ball that predicts the future, but it is an investing strategy that helps you spot stock patterns that have the potential to make huge moves.

In finance, technical analysis is security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume.

Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, inter-market and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns.

Technical analysis is widely used among traders and financial professionals and is very often used by active day traders.

The beauty of technical analysis is that it applies to all time frames (intraday, daily, weekly, monthly charts) and across equities, commodities (rice, gold, crude oil, aluminium etc). They believe in History tends to repeat itself.

Nifty Futures is also a financial instrument in which futures contracts are done on the basis of S&P Nifty index which is the benchmark of NSE. Nifty futures are a instrument type of market in which trading is done on the basis of the underlying index S&P CNX NIFTY. Which comprises of top 50 Companies.

Stock movements tend to be cyclical, news driven or range-bound for considerable periods of time. Not only do you have to identify the sector correctly, you should also be able to pick the right stock. And then there is this possibility – everything else rallies except what you have bought.

So if you are convinced about the markets but don’t want to go into the hassles of the finding the hot sector or the next hot stock then Index Investing is for you.

Some advantages of trading the nifty:

• Index is the barometer of the stock market. If the market does well, Nifty will anyway will rise and give good returns.

• All FIIs and Mutual funds have an exposure on index and index stocks.

• All good and bad news is reflected in index (nifty).

• You can play both sides of the market and profit from rallies as well as corrections.

• You can day trade in nifty (not recommended) or carry forward positions till expiry.

• Low brokerage and nil Demat costs, as it is only future transaction.

• Excellent liquidity: The daily turnover of nifty futures and options much higher than equities.

• Low volatility: no wild swings. Because the nifty index is made of 50 stocks, it is always less volatile than the individual stocks, which goes up or down 20% or more in a day.

• Low investment: as nifty is least volatile, Nifty margins are lowest as compared to stocks. This reduces investment amount substantially and substantially increase returns.

In India, there are two stock exchanges apart from Regional stock exchanges:

• National Stock Exchange (NSE)

• Bombay Stock Exchange (BSE)

In the Past, the trading on stock exchanges in India was based on open outcry system, whereby the brokers assemble at a central location usually the exchange trade ring and trade with each other. This was time consuming , inefficient and imposed limits on trading volumes and trading hours. In order to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line , fully automated screen based trading system (SBTS). Under this system, a trading member can punch into the computer the number of securities and the prices at which he would like to transact. The transaction is executed as soon as it finds a matching sell or buy order from a counter party.

NSE with the help of technology carried the trading platform from the trading hall of stock exchanges to the premises of trading members or brokers and further to the PCs at the residence of investors through the internet.

HOW TO INVEST IN STOCK MARKET

To invest in stock market, one has to open Trading account with an authorized broker. Also, one has to open Demat account either with the broker or any other depository participant.

One must do a survey of the brokerage charges being offered by the different authorized brokers and also the demat account maintenance charges (AMC) being offered by various registered depository participants.

Note: Demat account can be opened with Non-Banking financial Institutions like brokers, subsidiaries of banks and also with the banks offering the demat account services, whereas trading account services cannot be provided by banks directly.

All KYC (Know your client) forms have to be duly filled up. A copy of pan card, residence proof, passport size photograph, cancelled cheque etc are required to be submitted for opening of Trading and Demat account.

The investor is allotted with a unique client code which he must use at the time of each and every transaction.

One can either trade either by installing trading software on his PC from the broker with whom he has opened his trading account. This mode of trading is known as Online Trading.

Else, he can give orders for his trade to the dealer either over the phone or face–to-face, this mode of trading is known as Offline Trading.

To cushion the effect of a sluggish economy, here are a few things you can do (or advise your friends and family members to do):

• Take on a Side Business: Probably one of the best things you can do in a recession is maybe taking on a side job or business. A side business brings in some extra cash which you can add to your savings, or can help you supplement your income if you lose your main job, making your savings last longer.

• Increase Your Savings in Cash: In recession cash is the king. For your personal finance, this means making sure you have enough money set aside for an emergency fund. A good rule of thumb for deciding the size of emergency fund is that it should cover your expenses for as long as you think it will take you to find another job or source of income. We often hear advisors advocating you to keep three to six months of expenses as emergency fund, but if you are in an industry where jobs are scarce and would become scarcer in a recession, you may want to save more to prepare yourself for a longer job search.

• Check Your Investment Portfolio: When the economy is expanding, mostly stock value rises quickly and if you are not rebalancing your portfolio may become overweight on Equities. On the first sign of economic slowdown, it may be a good time to rebalance your portfolio to your long term asset allocation. For example, for a particular goal of yours you decided that 60% money should be invested in stock and remaining 40% in Debt. A stock may have given you good returns making your stock to debt ratio 80:20; this is a good time to bring it back to the original 60:40. This is necessary in uncertain times as the volatility in the stock markets increases and with a rebalanced portfolio you would be facing the price swings on portfolio allocations which are more in line with your original asset allocation.

• Decrease Debt: The last thing you want in a recession is to serve a lot of high interest credit card debt. Now is the good time to pay off your credit card dues and look for ways to lower the EMI’s you have committed. If is not possible to pay off the debt it is certainly not advisable to add to you debt obligations. That means that you must wait before buying that new car or house.

• Defer Large Purchases: Unless you feel 100% secure in your finances it is best to wait on large purchases like cars or houses when the economy is shaky. Adding monthly payment or depleting your cash reserves is something you would never want to do in times of uncertainty.

• Sort your Needs from Your Wants: Chances are in a recession you won’t get much warning if you lose your job, so it is best to have a plan in place before hand. One of the best steps to take is to set up a ‘what if’ budget that separates your needs from your wants. This would help you identify areas where you can reduce expenses immediately if your regular source of income dries up.

• Start Paying in Cash: Studies have show people spend less when paying in cash, rather than using credit or debit cards. If this works for you, it would be a great way to save more without feeling the pinch. However, do maintain a record of your daily spending.

And Last but not the least stay positive – growth may be sluggish now but will sky rocket again in the future. If you build your resilience and handle your finances smartly, you will thank yourself.