What are the constraints of a portfolio?

What are the constraints of a portfolio?

Every investor would like to dig out the objectives of investment before investing. So the concept of portfolio management involves decision making as to what to purchase and what to sell from the available security. It requires detailed risk and return analysis.

So in the investment way portfolio management is a dynamic concept and requires systematic analysis, judgement and operations. It is a process involving many activities of investment in the shares market. An appropriate portfolio is constructed based on the investor’s objectives, constraints and preference for risk and return etc. After analysing the objectives, then investors must analyse the constraints which they have to face on the way of investment. What are the constraints of a portfolio?

INVESTMENT CONSTRAINTS

An investment requires a plan for investment objectives as well as the investment constraints. These investment constraints are following as

Liquidity
Time Horizon
Tax Concerns
Legal and Regulatory factors
Unique Factors
Loss Consideration
Transaction costs
Intrinsic difficulty

(1). Liquidity:- Liquidity always increases the value of investment. Because investors are always interested in investing in that security which provides optimum liquidity. Liquidity refers to the need for cash in excess of any savings available in the future. It can be planned or unplanned. But both require converting investments into cash. As if any investors will purchase shares then he/she can sell easily in the available market when he/she requires cash in the future. What are the constraints of a portfolio?

But some assets, such as real estate, may take considerable time to sell. So before the investment, liquidity needs must be estimated especially carefully. If liquidity is a major concern for the investors, he/she must invest in Treasury bills, commercial papers, and certificates of deposits. Which have highly security as compared to real estate.

(2). Time Horizon:- Time horizon refers to timing for holding securities. As some investors are interested to hold securities long term whereas some investors would like to invest in short term securities. Time horizon influences the ability to accept risk and could modify allocation of assets strategy. Investors must have to plan for several time horizons. Which becomes the constraints allocation decision. What are the constraints of a portfolio?

Because the time horizon also influences the risk and return. Example:- As Some times shares of renowned companies increase their value in the long term and such investment is able to provide maximum return. Whereas unrenowned company’s shares can decline in the future. So the time horizon also plays an important role in the management.

(3). Tax Concerns:- Tax is also the biggest constraint on the way of investment. Because tax policy includes differences between the tax rates for different types of investment returns as in the form of interest vs. Capital gains or dividends. Sometimes tax legislation might be changed. Thus, taxes are an important modifier of portfolio selections. Every investor would like to decline their tax liability. So they are interested in constructing their portfolio in such a way which will decrease their tax liability.

(4). Legal and Regulatory:- There are some legal factors which can affect the investment returns. Because every industry has a different influence on the returns of investment. As per the SEBI guidelines all investors have to accept investment rules. However, every business has to follow the legal regulations determined by the government. Which acts as a constraint in the portfolio revision. What are the constraints of a portfolio?

Any business is bound to earn under such limited legal policy. Because it cannot go beyond such regulations to earn more. If we talk about the sebi legal policy it is not easy to understand by the layman. Rather it can be understood by the commercial background person. Such legal regulations are a constraint on the investment method. What are the constraints of a portfolio?

(5). Unique Factor:- Unique factors are concerned with the individual needs. Which are as health needs, dependent needs, previous experience and social needs of investors like securities of old age and securities of his children. All Investors are unable to select a unique portfolio which can fulfil his social needs. Because there are many alternatives for the investors to invest in. But it is very difficult to choose a unique factor of investment.

These individual investment factors may not be beneficial to socialism. Every investment is unique by itself. However, it is considered as the unique factor of investment constraints. So investors are unable to make investment in the unique portfolio.

(6). Loss Consideration:- Every investor would like to earn more money. Because every investment includes the risk of loss in the investment. But investment contains loss upto a certain point. This is difficult to predict how much loss is available in the investment. Because higher return leads to higher risk. So loss is an obstacle in the way of investment.

But anybody would like to minimise their loss on their investment. But such loss is uncertain and not appropriately expected by any investor. Thus, loss consideration is an essential part of the best investment plan. Which asks proper attention before the investment. Which is also a loss constraint in the investment. What are the constraints of a portfolio?

(7). Transaction Costs:- Trading in securities involves huge transaction costs in the form of brokerage and commission. By continuing buying and selling of the securities may increase the costs which reduces the profits of the investors on their portfolio. Because sometimes revision is necessary to make the best portfolio plans. Which process also involved the cost. Thus transaction costs are a constraint on the way of investment. Whose affects directly the profits of the investors. However, such constraints can be controlled by giving proper attention during the construction of a portfolio plan. What are the constraints of a portfolio?

(8). Intrinsic Difficulty:- If there is a need to revise the portfolio. But it is considered as a difficult and time consuming activity. Because no proper methods are established on which such revision can be made. However, there are some approaches which may be used to revise the portfolio. Which itself is a constraint on the way of revision of investment. What are the constraints of a portfolio?

Conclusion:- Every investment contains the above constraints. Which are required to analyse before the investment by all investors. These constraints may create obstacles on the way of investment. What are the constraints of a portfolio?

Note:- Important question of investment besides What are the constraints of a portfolio?

What are the basic tools of economic analysis for investment?

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