Portfolio Revision

• The art of changing the mix of securities in a portfolio.
• The process of addition of more assets in an existing portfolio or removing certain assets or changing the ratio of funds invested. 
• The sale and purchase of assets in an existing portfolio to maximize returns and minimize risk.
• The process of adjusting the existing portfolio in accordance with the changes in financial markets and the investor’s position so as to ensure maximum return from the portfolio with the minimum of risk. 

Objective of portfolio revision

1. Maximisation of return
2. Minimisation of risk

Need for portfolio revision

1. Presence of additional money to invest
2. Change in investment goal
3. Market risks and uncertainty
4. Market opportunities

Factors affecting portfolio revision

1. Transaction cost
   1. Buying and selling of securities involve transaction costs such as brokerage and commission
   2. Frequent buying and selling for portfolio revision may push up transaction costs thereby reducing the gains from the portfolio revision.
   3. Transaction costs involved in the portfolio revision may act as a constraint to timely revision of portfolio.
2. Taxes
   1. Tax is payable on the capital gains arising from the sale of securities – usually long term capital gains are taxed at a lower rate than short term capital gains. 
   2. To qualify as long term capital gain, a security must be held by an investor for a period of not less than 12 months before sale. 
   3. Frequent sale of securities in the course of periodic portfolio revision will result in short term capital gains which would be taxed at higher rate compared to long-term capital gains. 
   4. The higher tax rate on short term capital gains may act as a constraint to frequent portfolio revision. 
3. Statutory stipulations
   1. Largest portfolios are managed by investment companies and mutual funds. These institutional investors are normally governed by certain statutory stipulations and strict norms regarding their investment activity. 
   2. These stipulations often act as constraints in timely portfolio revision. 
4. Intrinsic difficulty
   1. Difficult and time consuming exercise
   2. Methodology to be followed for revision also not clearly established – different approaches may be adopted. 
   3. The difficulty for carrying out portfolio revision itself may act as a constraint for portfolio revision. 

Portfolio revision strategies

• The choice of the strategy depend on the investor’s objectives, skills, resources and time. 
• Two different strategies may be adopted:
  1. Active revision strategy
  2. Passive revision strategy