MBA (Finance) – IV Semester, Investment and Portfolio Management, Unit 5.4
Define Active Management and The Formula Plans
Active Management is holding securities based on the forecast about the future. The portfolio managers who pursue active strategy with respect to market components are called ‘market timers’. The portfolio managers vary their cash position or beta of the equity portion of the portfolio based on the market forecast. The managers may indulge in ‘group rotation’s. Here, the group rotation means changing the investment in different industries’ stocks depending on the assessed expectations regarding their future performance.
Active Management
Here, the portfolio manager may either remain passive with respect to market and group components but active in the stock selection process or he may be active in the market, group and stock selection process.
The Formula Plans
The formula plans provide the basic rules and regulations for the purchase and sale of securities. The amount to be spent on the different types of securities is fixed. The amount may be fixed either in constant or variable ratio. This depends on the investor’s attitude towards risk and return. The commonly used formula plans are rupee cost averaging, constant rupee value, the constant ratio and the variable ratio plans. The formula plans help to divide the investible fund between the aggressive and conservative portfolios.
The aggressive portfolio consists more of common stocks which yield high return with high risk. The aggressive portfolio’s return is volatile because the share prices generally fluctuate. The conservative portfolio consists of more bonds that have fixed rate of returns. It is called conservative portfolio because the return is certain and the risk is less. The conservative portfolio serves as a cushion for the volatility of the aggressive portfolio. The capital appreciation in the conservative portfolio is rather slow and the fall in price of the bond or debenture is also alike.
