Portfolio Analysis a Key Component of PMS Process

1. Analysis Of Portfolio Investment On Aggregate Level

It is the first step of the portfolio analysis. The key purpose behind this step is to evaluate the portfolio as a whole. That is in one need to check the portfolio relative to the benchmark. In the simpler manner, one need to evaluate how the portfolio stands and performs against the benchmark what are the weights allocated towards each security is it replicating the benchmark exactly or its different from it. The exercise helps to take a tour of the approximate performance of the portfolio as well as the expected performance of the portfolio which expresses the probability of beating the benchmark or at least going side by side with the benchmark performance so that you should not be losing the money you invested. This is done by checking the characteristics of the portfolio that is the number of the securities, valuation of the portfolio, valuation of benchmarks etc. The step is very important to get a bird's eye view over stock portfolio to understand its potential.

2. Relation of Portfolio Components With One another

It's very important to understand the relation between the holdings as the relation is capable of expressing the impact of the key events in the market or on a macroeconomic level on the portfolio as a whole. Therefore analyzing the relation between the portfolio components stands as the important step in the process of portfolio analysis as well as portfolio management. The impact of the macro and micro factors on the individual securities and its correlation with other securities in the portfolio can be a key to succeed in the market down trends as each and every time when mishaps occur with one security or possibility of so is fore casted, one can easily take decisions on the other securities which are interdependent or correlated with each others.

3. In-Depth Analysis of Portfolio Components

This is the most important step of the portfolio analysis. To manage a portfolio investment one need to understand the rationale behind the investment. Every time when you review your portfolio or analyze it you need to ask yourself, "Why do you own a specific security?", "What do you expect the returns to be relative to the price you paid?", and "On what terms your are continuing to hold the security?

Basically, the goal behind this step is to examine each security from the portfolio as stand-alone investments. The step eliminates the folly from making unnecessary emotional decisions for your investment. Additionally, this step is significant from a risk management perspective also as it is capable of forecasting the bad phases of the particular stock or security which leads further for timely decision making and avoid losses.

In-depth analysis is carried with various parameters like industry analysis, fundamental analysis, peer analysis, technical analysis etc.

A. Industry Analysis

It is the analysis of the respective industry of the particular stock or security. The industry analysis suggests the potential of the industry in the upcoming period.

B. Fundamental Analysis

Here the financial statements coupled with all other aspects like capex and forecasted earnings have been analyzed.

C. Peer Analysis

It is the analysis of the close competitors on the financial as well as business front to analyze the potential of competitors to understand the position of the company against the competitors.

D. Technical Analysis

This is usually preferred for the investment for the short term. It is the analysis of the graphical movements which are been created by the demand forces with volumes.

4. Concentrated or Diversified

Proper asset allocation is the key to optimized returns. So post analyzing the individual securities of the portfolio the next important aspect is to check the asset allocation. To reduce the risk associated with the particular sector one need to spread the investment among various sectors properly. However over diversification even kills the returns so it needs to be perfect as per the market conditions.

5. Alignment to Investment Objective

The last but not the least step is checking the alignment of investment towards investment objective. Every person in the stock market is investing with different financial goals and it's important to align investment with the same. The investments made should not hamper your investment objectives as well as risk appetite.

From the above discussion, it is clear that portfolio analysis is the process of breaking down and evaluating a stock portfolio in order to determine its appropriateness for the needs, preferences, and probability of meeting the financial goals and objectives on a risk-adjusted basis. Portfolio analysis is one of the key components of the process of portfolio management.

Returns from the long-term investments are directly determined by the types of securities and stock held in the portfolio. So to find out the ideal portfolio mix one needs to assess the portfolio on the various parameters. Depending on these various factors, a portfolio mix of the stocks of various sectors and market caps can be determined to provide the highest possible probability of achieving the desired returns over the period of time while at the same time minimizing short-term financial risks.

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