Portfolio Revision – Meaning, its Need and Strategies

What is a Portfolio?

Portfolio and Portfolio revision – A combination of various investment products like bonds, shares, securities, mutual funds and so on is called a portfolio.

In the current scenario, individuals hire well trained and experienced portfolio managers who as per the client’s risk-taking capability combine various investment products and create a customized portfolio for guaranteed returns in the long run.

It is essential for every individual to save some part of his/her income and put into something which would benefit him in the future. A combination of various financial products where an individual invests his money is called a portfolio.

What is Portfolio Revision?

The art of changing the mix of securities in a portfolio is called portfolio revision.

The process of the addition of more assets in an existing portfolio or changing the ratio of funds invested is called portfolio revision.

The sale and purchase of assets in an existing portfolio over a certain period of time to maximize returns and minimize risk are called as Portfolio revision.

Need for Portfolio Revision

• An individual at a certain point in time might feel the need to invest more. The need for portfolio revision arises when an individual has some additional money to invest.
• Change in investment goals also gives rise to revision in the portfolio. Depending on the cash flow, an individual can modify his financial goal, eventually giving rise to changes in the portfolio i.e. portfolio revision.
• The financial market is subject to risks and uncertainty. An individual might sell off some of his assets owing to fluctuations in the financial market.

Portfolio Revision Strategies

There are two types of Portfolio Revision Strategies.

1. Active Revision Strategy

   Active Revision Strategy involves frequent changes in an existing portfolio over a certain period of time for maximum returns and minimum risks.

   Active Revision Strategy helps a portfolio manager to sell and purchase securities on a regular basis for portfolio revision.

2. Passive Revision Strategy

   Passive Revision Strategy involves rare changes in the portfolio only under certain predetermined rules. These predefined rules are known as formula plans.

   According to a passive revision strategy, a portfolio manager can bring changes in the portfolio as per the formula plans only.

What are Formula Plans?

Formula Plans are certain predefined rules and regulations deciding when and how much assets an individual can purchase or sell for portfolio revision. Securities can be purchased and sold only when there are changes or fluctuations in the financial market.

Why Formula Plans?

• Formula plans help an investor to make the best possible use of fluctuations in the financial market. One can purchase shares when the prices are less and sell off when market prices are higher.
• With the help of Formula plans an investor can divide his funds into the aggressive and defensive portfolio and easily transfer funds from one portfolio to others.

Aggressive Portfolio

Aggressive Portfolio consists of funds that appreciate quickly and guarantee maximum returns to the investor.

Defensive Portfolio

The defensive portfolio consists of securities that do not fluctuate much and remain constant over a period of time.

Formula plans facilitate an investor to transfer funds from aggressive to defensive portfolio and vice versa.