Portfolio management

119 terms · each links to a full explanation with a worked example and the exam traps

Absolute return objectiveA return goal stated on its own, such as 15% a year, with no comparison to a benchmark — the opposite of a relative return objective.
Advisory servicesThe PMS service type in which the portfolio manager only suggests ideas or gives non-binding advice; the investor both takes the decisions and executes the transactions.
Allocation effectIn performance attribution, the part of a portfolio's return over its benchmark from over- or under-weighting a sector versus the benchmark, separate from the return earned by picking securities.
Alpha-beta separationSplitting a portfolio's market exposure (beta) from its skill-based excess return (alpha) into two separately managed pieces, using long-short and passive positions.
Average daily AUMThe average of a client's portfolio value taken daily over a period, used by SEBI to cap a portfolio manager's operating expenses at 0.50% a year, over and above the management fee.
Badla financingA traditional Indian carry-forward financing arrangement that a portfolio manager is expressly barred from deploying client PMS funds into, grouped with bill discounting and third-party lending.
BB&K modelA psychographic framework that sorts investors into five personality types — Adventurer, Celebrity, Individualist, Guardian and Straight Arrow — using confidence and carefulness as its two axes.
Benchmark portfolioA reference portfolio, typically an index, matched in composition to a client's own portfolio so the client's actual returns can be fairly compared against it, comparing 'apple with apple'.
Best-in-class screeningAn ESG stock-selection method that picks the highest-rated companies within each sector, rather than the highest-rated companies overall — so the portfolio stays diversified across industries.
Beta returnUnder the CAPM, the part of a portfolio's return that comes purely from taking on market (systematic) risk, calculated as beta multiplied by the market's excess return over the risk-free rate.
Boutique PMSAn independent portfolio management firm that is not part of a larger asset management company or brokerage house, one of three provider types the workbook uses to classify PMS.
Buy and Hold strategyA passive strategy of buying securities, or setting an asset mix, and then holding without trading — in equities for the long run, in bonds to maturity, and in rebalancing as "do nothing".
Capital Market LineThe straight line from the risk-free rate tangent to the efficient frontier at the market portfolio — with a risk-free asset available, it is the efficient frontier, priced in standard deviation.
Capital Market TheoryThe extension of Modern Portfolio Theory that adds a risk-free asset and builds a model for pricing all risky assets, giving the Capital Market Line, the market portfolio and CAPM.
Cash dragThe understatement of a portfolio's true return that happens when a manager reports return only on the invested portion, ignoring the lower-yielding uninvested cash sitting alongside it.
Cash drag adjusted returnA portfolio return recalculated to include cash the manager has not yet deployed, correcting for the fact that idle cash earns less than the main investment and drags overall performance down.
Catch-up and no catch-upTwo ways a PMS profit-sharing fee is calculated once returns cross the hurdle rate: 'no catch-up' charges only the gains above the hurdle; 'catch-up' charges the entire gain from the first rupee.
Catch up clauseThe waterfall step that pays the manager a set share — often 100% — of the profit left after investors receive their capital and hurdle, until the manager reaches its agreed share of total profit.
Co-investment Portfolio ManagerA category of portfolio manager that the SEBI PM Regulations exempt from several rules — the ₹50 lakh minimum per client, net worth at all times, and appointing a custodian.
Collective investment vehicleA structure that pools money from many investors and invests it together — in India, mutual funds, REITs, InvITs and AIFs, each following a trust-based model governed by SEBI.
Composite (hybrid) indexAn index that blends an equity index and a bond index in fixed proportions — reset periodically — to benchmark portfolios that hold both asset classes.
Consolidation phaseThe mid-to-late-career life-cycle stage, when income exceeds expenses and a still-long 15-to-20-year horizon lets the portfolio balance capital-gain investments with some capital preservation.
Constant mix strategyA "do something" rebalancing strategy: trade periodically to restore the portfolio's asset mix to its target weights, keeping market-risk exposure steady.
Constant Proportion Portfolio InsuranceA rebalancing strategy that keeps a multiple of the cushion — portfolio value minus a protected floor — in risky assets, and the rest in risk-free assets.
Core and satelliteA portfolio built from a large, low-cost, usually passive core — about 70% to 80% — plus smaller satellite portions managed actively to capture shorter-term opportunities.
CorrelationA measure of the strength and direction of the relationship between two variables, running from -1 to +1, and the single factor that determines how much risk diversification actually removes.
CorridorThe permitted range around a portfolio's target asset-class weight in threshold-based rebalancing — set wider for costlier-to-trade assets and narrower for more volatile ones — that triggers a trade only when breached.
Customised benchmarkA benchmark built from a portfolio manager's own investment universe, used when no market index fits the manager's strategy or style. Valid, but costly to build and maintain.
Deal-by-deal distribution waterfallThe order in which a close-ended Category I or II AIF pays out the proceeds of each individual exit — expenses first, investors next, the manager last and only what is left.
Direct access facilityA facility requiring portfolio managers to let investors come to them directly, without a distributor, so that the investor avoids distribution costs — the PMS counterpart of a mutual fund direct plan.
Direct onboardingThe option portfolio managers must give clients to join a PMS directly, without a distributor. It must be prominently disclosed, and only statutory charges may be levied at direct onboarding.
Distributions to Paid-in CapitalCumulative cash actually distributed to investors divided by the capital they have paid in — the realisation multiple, and the one return measure a fund cannot flatter with its own valuations.
DriftThe gradual deviation of a portfolio's actual asset-class weights from its strategic target, caused by unequal price movements across assets, which is exactly what rebalancing corrects.
Due diligenceA client's own investigation of a portfolio manager before appointing them — checking process, people and past performance against a benchmark, not just the headline return.
Dynamic asset allocationA pre-defined, rules-based reallocation model triggered by valuation or performance levels — this workbook treats it as distinct from tactical allocation, which is a discretionary market call.
Efficient asset allocationAn asset mix built from asset classes with low or negative correlation, so gains in one offset losses in another and the portfolio's combined return does not rise and fall as one.
Efficient frontierThe umbrella-shaped curve of portfolios offering the highest expected return for each level of risk, or the lowest risk for each level of return — any portfolio below it is dominated.
Emotional biasOne of two investing bias categories in behavioural finance — spontaneous decisions driven by deep-rooted feeling, as opposed to cognitive errors, which come from faulty reasoning.
Empanelled valuation agencyA valuation agency approved by APMI from whose panel every portfolio manager must mandatorily source debt and money market security prices, though the manager still bears ultimate responsibility for fair valuation.
Error of commissionRegret over an action actually taken, as opposed to regret over an action that could have been taken but was not — the workbook says the first stings more, which is why investors default to doing nothing.
Ethical investingChoosing investments based on an investor's own moral principles — typically avoiding sectors like gambling, alcohol, tobacco or firearms — a personalised filter on top of the usual return and risk criteria.
Factor-based investingBuilding a portfolio by selecting and weighting securities on a measurable characteristic such as value, momentum or quality, instead of market size — one route to the asset allocation decision, alongside SAA and TAA.
Factor modelA model that explains a security's or portfolio's return through its sensitivity to chosen factors — macroeconomic, fundamental or statistical — rather than through a single market beta alone.
Fixed costIn a Portfolio Management Service, the charge the investor pays regardless of performance — usually a set percentage of assets managed, plus brokerage — as against the separate performance-linked fee.
Full replicationAn indexing technique that holds every security in the benchmark at the same, or nearly the same, weights as the index itself — practical for indices with few, liquid constituents like the Nifty 50 or Sensex.
Fundamental Law of Active ManagementGrinold and Kahn's 1989 rule that a manager's Information Ratio equals skill (IC) times the square root of breadth — the number of independent bets made.
Fusion investingA strategy that combines fundamental analysis with behavioural finance: screen for value, filter for financial strength, then pick the stocks showing strong price momentum.
Gifting phaseThe final stage of an investor's life cycle, reached once assets clearly exceed everything that will ever be needed for spending, when the portfolio's purpose shifts to leaving a legacy or funding a charitable cause.
GIPSGlobal Investment Performance Standards — voluntary ethical standards, owned by CFA Institute, for calculating and presenting investment performance on the principles of fair representation and full disclosure.
Growth investment styleAn active equity style that buys companies expected to grow faster than their peers, accepts a premium valuation for them, and aims at capital gain rather than income.
High-Water MarkThe highest year-end NAV the fund has ever reached, net of operating, transaction and management costs — the manager earns no incentive fee until the NAV climbs back above it.
Home biasInvestors' tendency to hold far more of their own country's securities than its share of world markets justifies, because the familiar feels less risky.
Homogeneous expectationsThe Capital Market Theory assumption that all investors estimate identical probability distributions for future returns — one the workbook says can be relaxed with minor effects if differences are small.
Index futures and options horizonsThe workbook comparison of how long an index derivative can be held against how long an index fund can be held: a few days to a maximum of 3 months, against a lifetime.
Index inclusion effectThe portfolio and price impact when an index rebalance adds or drops a constituent: full-replication funds must buy the entrant and exit the leaver in full, on the same date, whatever the price.
IndexingBuilding a portfolio that mirrors an index constituent by constituent — the most common form of passive management, carried out either by full replication or by sampling.
Infinite divisibilityThe Capital Market Theory assumption that any asset or portfolio can be bought or sold in fractions — which is what lets the theory draw its frontiers and lines as continuous curves.
Information CoefficientThe correlation between a manager's forecasts and what actually happened — a measure of forecasting skill from −1 (always wrong) through 0 (coin toss) to +1 (always right).
Information RatioActive return over the benchmark divided by tracking error — how much outperformance a manager delivers for each unit of risk taken by deviating from the index.
Interaction effectIn attribution analysis, the combined impact of asset allocation and security selection: Σ (Wp − Wb) × (Rp − Rb). It captures overweighting a sector and also picking better stocks in it.
InvestabilityA criterion for judging a market index: how easily investors can actually build a passive position matching it, given the liquidity of its constituent securities and how much weight each one carries.
Investment approachA broad outlay of the securities and permissible instruments a portfolio manager will invest in for a client, set out in the PMS agreement and tagged to exactly one strategy.
Investment flexibilityThe third liquidity need in portfolio construction: cash held not for emergencies or near-term goals, but so that the investor can act when an asset class becomes cheap.
Investment Policy StatementThe written roadmap, drafted with the investor, that sets out objectives, goals, constraints, preferences and risk tolerance. Developing it is the first step of portfolio management.
Investment styleThe consistent approach a fund manager takes to picking securities inside a given mandate — such as a credit quality or interest-rate sensitivity in debt, or a market-cap segment in equity.
Large value accredited investorAn accredited investor category whose portfolio manager may put up to 100% of assets under management into unlisted securities, against a 25% cap that applies to ordinary non-discretionary clients.
Lock-inA minimum holding period before withdrawal, expressly barred in PMS: a portfolio manager cannot force a client to keep funds invested, though a graded exit load may still apply.
M² measureA portfolio's return re-scaled to the market's level of risk, so it can be compared with the market return directly, in percentage points.
Managed portfolioAn investment made through a professionally managed vehicle that pools investors money — a mutual fund, AIF, portfolio manager or collective investment scheme — rather than bought directly.
Managers universe analysisEvaluating a portfolio manager's performance by ranking it against the median portfolio of other managers running a similar investment approach, rather than only against a market index.
Market PortfolioThe tangency portfolio M of all risky assets worldwide in market proportions — the one risky portfolio every rational investor holds once a risk-free asset exists; indices serve as its proxy.
Minimum investment amountThe floor SEBI places on what a portfolio manager may accept from a client — fifty lakh rupees of funds or securities, with exemptions for accredited investors and co-investment portfolio managers.
MITCThe standard-format Most Important Terms and Conditions document a portfolio manager must give every client alongside the portfolio management agreement, so the critical terms are not buried in the full contract.
Modern Portfolio TheoryMarkowitz's framework for building portfolios on expected return and risk together, in which the co-movement between holdings — not their individual riskiness — decides the risk of the whole.
Momentum investingAn active strategy that rides an ongoing price trend — long in a rising trend, short in a falling one — worked from price and volume data rather than a company's fundamentals.
Money Weighted Rate of ReturnThe internal rate of return on an investor's actual cash flows into and out of a portfolio — so it rewards or punishes the timing of those flows, not just the manager's skill.
Net selectivityFama's absolute performance measure: the fund's return above the risk-free rate, less the market premium the portfolio's own total risk would have earned on its own.
Non-discretionary serviceA portfolio management service in which the client decides every buy and sell and the portfolio manager only executes — the manager must consult the client for every transaction.
Optimum portfolioThe combination of investments, chosen from the feasible portfolios, that has desirable risk-return characteristics within the investor's constraints and meets that investor's objectives.
Passive breachA portfolio manager's investment limit being crossed by market movement rather than by a fresh purchase — the client's earlier consent does not cover it, and it still has to be recorded, disclosed and rectified.
Perfect Negative CorrelationA correlation coefficient of −1: two assets' returns move in opposite directions, delivering the complete benefit of diversification and making a zero-risk combination possible.
Perfect Positive CorrelationA correlation coefficient of +1: two assets' returns move together in a completely linear way, so combining them gives no diversification benefit at all.
Performance attributionSplitting a portfolio's return over its benchmark into the part earned by allocation (different weights), by selection (better picks) and by the interaction of the two.
Performance feeThe variable fee a portfolio manager charges as a share of profit above a hurdle rate, on top of a fixed management fee: 20% of gains over the hurdle, without catch-up, in the workbook's own illustration.
Periodic investingBuilding a holding in a volatile asset through small regular instalments rather than one lump sum, so more units are bought when prices are low and the average cost falls.
Phased redemptionSelling a volatile holding in instalments rather than all at once, so the retiree is not forced to realise the whole corpus at one day's price — the workbook's phased case realised 7.5 percent more.
PortfolioUnder the SEBI PM Regulations, the total holdings of securities and goods belonging to any person — the basket whose return is a weighted average but whose risk also depends on correlation.
Portfolio management processThe repeating sequence of planning, execution and evaluation through which an adviser creates an optimum portfolio for a client and then keeps it optimum as things change.
Portfolio Management ServicesA tailored investment service where the client owns the securities directly in their own name, regulated under the SEBI (Portfolio Managers) Regulations, with a minimum investment of Rs 50 lakh.
Portfolio managerA body corporate registered with SEBI that, under a contract with a client, advises on or manages that client's securities or funds — discretionary, non-discretionary or advisory.
Profit booking in the bucketsA maintenance rule inside the bucket strategy: set a target return on the riskier buckets, and whenever it is beaten, move the excess down into a safer bucket rather than letting it ride.
RebalancingRestoring a portfolio to its target asset allocation after markets have pushed it away — which mechanically sells what has risen and buys what has fallen, with no view on market direction.
Rebalancing costsThe transaction cost and the tax cost a portfolio incurs when it is brought back to its target weights — weighed, in the workbook's framing, against the cost of not rebalancing at all.
Rebalancing policyThe part of the Investment Policy Statement that sets out in advance how a portfolio will be brought back to its target weights — and weighs the cost of doing so against the benefit.
Reference Hurdle NAVThe rupee NAV a close-ended AIF must reach before any incentive fee is earned — called-up capital compounded forward at the hurdle rate, year after year.
Relative return objectiveA return objective stated against a benchmark rather than as a standalone number — for example, to earn 5% a year more than the Nifty 50 for the next several years.
ReplicabilityA criterion for judging a market index: it should be possible to passively replicate the benchmark by holding its actual constituent securities in their index weights, rather than merely tracking it on paper.
SamplingAn indexing technique that tracks an index without holding all of it: some constituents are replaced by similar stocks, so the portfolio matches the index's risk and return rather than its exact list.
Scheduled Commercial BankThe type of bank where a portfolio manager must keep a separate account holding all clients' funds, segregated from the manager's own money, a general responsibility under the PMS Regulations.
Sector rotationAn active, top-down equity strategy of shifting portfolio weight into sectors expected to benefit from the current phase of the economic cycle, and out of sectors expected to lag.
Security selection effectIn performance attribution, the part of excess return earned by choosing better securities within a sector, measured at the benchmark's own sector weights, separate from allocation and interaction effects.
Segregation of holdingsThe portfolio manager's duty to hold each client's securities in a separate account, and all clients' funds in a separate bank account with a Scheduled Commercial Bank.
SelectivityThe fund manager's ability to select securities that generate extra returns — the stock-picking half of performance attribution, as against timing the market or weighting a sector.
Smart betaIndex-based investing that deviates from traditional market-cap weighting to emphasise factor exposure such as value, momentum, quality or low volatility. Sits between active and passive.
Sortino RatioExcess return over the risk-free rate divided by semi-standard deviation — a Sharpe-style ratio that counts only downside volatility as risk.
Strategic asset allocationThe long-term target split of a portfolio across asset categories, fixed from the investor's goals, time horizon and risk profile rather than from any view on markets.
StrategyA SEBI-mandated broad theme, equity, debt, hybrid or multi-asset, that every Investment Approach must be tagged to, each strategy carrying its own prescribed benchmarks.
Sub-asset classA division within an asset class whose members share distinct features — within equity, by industry or market capitalisation; within debt, by credit risk or tenor.
Sustainable investingSelecting investments against environmental, social and governance criteria, with the aim of earning financial returns while also having a positive impact on society.
Tactical asset allocationDeliberately shifting a portfolio away from its strategic target to exploit conditions in particular markets, with the stated aim of improving risk-adjusted return rather than simply chasing return.
Threshold-based rebalancingA rebalancing policy that trades only when an asset class's weight breaches a set tolerance band around its target, giving tighter control of the mix than calendar rebalancing at the cost of constant monitoring.
Time-based (calendar) rebalancingThe simplest rebalancing policy — resetting a portfolio to its target weights on a fixed schedule such as monthly or quarterly, regardless of how far it has actually drifted.
Time Weighted Rate of ReturnA compounded return that neutralises client deposits and withdrawals by linking sub-period returns, so it measures the manager’s decisions. Mandatory for PMS investment approach performance.
Upfront feeA fee charged at the time of investing. Portfolio managers may not charge upfront fees to clients, directly or indirectly — so the full amount invested starts working from day one.
Value investment styleAn investment management style of buying stocks priced below their intrinsic value, on the belief that the market has mispriced them and will correct that mispricing over time.
Value trapA stock that looks cheap on value screens like low P/E and high dividend yield, but never re-rates because its business is genuinely weaker than the screens suggest, not merely overlooked by the market.
Variance-covariance matrixThe grid of every asset's variance and every pair's covariance that is needed to compute the risk of a portfolio holding more than two securities.
Wealth relativeThe ending value of one unit of money over a period — 1 plus the period's return in decimals. Multiplying wealth relatives chain-links sub-period returns into TWRR or geometric return.
XIRRExtended Internal Rate of Return: the annualised return on an investment with irregular cash flows, found by assigning a date to each flow. PMS reports it for each investor’s own experience.