Formula Plans in portfolio management Selection

Portfolio Management

1. Sri Ramakrishna College of Arts & Science Coimbatore – 06. Topic : Formula Plans M.VADIVEL Assistant Professor Department of B.Com PA Sri Ramakrishna College of Arts & Science Coimbatore . M.Vadivel

2. Formula Plan M.Vadivel

3. Formula plan Formula plans consist of the basic rules and regulations for purchasing and selling investments. Formula plans enable the investors to estimate the total amount that he has to spend on purchase of securities. M.Vadivel

4. Advantages of the formula plan Formula plans offer the following advantages to the investors: The investor obtains basic rules and regulations for purchase and sale of securities. The rules and regulations laid down by the formula plans are rigid and they enable the investors to overcome emotions and make rational decisions. The investors can earn higher income from their portfolio by adopting formula plans. A course of action is determined in the light of the objectives of the investors. The investor is able to control buying and selling of securities. Formula plans are helpful in making decisions on the timing of investment. M.Vadivel

5. Disadvantages of formula plans The formula plans do not help in the selection of security. The selection of security is based on the fundamental or technical analysis. Formula plans are highly rigid. The formula plans can be applied for long periods, otherwise the transaction cost will be high. Formula plans do not help the investors make forecasts of market movements. Without such forecasts best stocks cannot be identified. M.Vadivel

6. Formula Plan Rules The formula plans lay down the following rules for construction of an optimal portfolio: The formula plans help investors make a decision on the timing of investment. Securities will be selected on the basis of methodology related to the economic, industry and company framework. Basically, the formula plans are highly rigid. The investor, while following the rigid rules of formula plans will experience some problems of adjustment with changing environmental conditions. The formula plans work fruitfully only for long period of holding of securities. The formula plans do not obviate the need for making forecast. Each formula plan has its own methodology of working. M.Vadivel

7. Formula Plans in Portfolio Management The investor uses formula plans to facilitate him in making investment decisions for the future by exploiting the fluctuations in prices. The formula plans have sketched the basic rules and regulations for purchasing and selling of investments. The formula plans make the average investors superior to others. These formula plans in portfolio management  are based on the fact that the investors will not have the problem of forecasting fluctuation in stock prices and will continue to act according to formula. M.Vadivel

8. Rules for Formula Plans These plans work according to a methodology which is related for the working of each plan These plans cannot be used for short periods of time. The longer the period of holding the investments, the easier for formula plans to work. Generally the formula plans are strict and straight forward out they are not flexible. M.Vadivel

9. Types of Formula Plans  in Portfolio Management An aggressive portfolio will determine the volatile nature of the portfolio and will have large number of fluctuations; whereas the conservative portfolio will be planned to complement the aggressive portfolio and will consist of bonds. The conservative portfolio is a mechanism of defensive operations — The two portfolio when combined together will achieve the results as planned by the  formula. M.Vadivel

10. Following are the three important types of formula plans that are found useful in making portfolio investment decisions ; The Constant Rupee Value The Constant Ratio The Variable Ratio Formula Plans M.Vadivel

11.  Constant Rupee Value Plan This plan indicates the rupee value which remain constant in the stock portfolio of the total portfolio. This formula indicates to the investor that whenever the stock value rises his shares should be sold to maintain a constant portfolio. If the price of the stock falls, the investor must buy additional stock to keep the value of aggressive portfolio constant. By specifying that the aggressive portfolio will remain constant in money value, the plan also specifies that remainder of the total fund be invested in the conservative fund. M.Vadivel

12. 2. Constant Ratio Plan Under the constant ratio plan, both the aggressive and defensive portions remain in constant percentage of the portfolio’s total value. This plan method of identifying the ratio of the value in the aggressive portfolio to the value of he conservative portfolio. The aggressive portfolio divided by the market value of the total portfolio should be held constant. The constant ratio plan holder can adjust portfolio balance either at fixed intervals or when the portfolio moves away from the desired ratio by a fixed percentage. M.Vadivel

13. 3. Variable Ratio Plan Under this plan, the ratios are varied whenever (here is a change in the economic or market index. The significant tool of the variable ratio plan is said to be forecasting. The investor is required to make forecasts in the range of fluctuation which more both above and below the median to find out the different ratios at different levels of stock. The investor lowers the aggressive portion of the total portfolio as stock prices rise and steadily increases the aggressive portion as stock prices fall. Whenever there is a growth trend for common stock, then the variations can be accounted for by exploiting the fluctuations around the long term trends. M.Vadivel

14. Thank You…. M.Vadivel