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.

2. Formula Plan

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.

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.

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.

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.

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.

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.

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.

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

11. 1. 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.

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.

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.

14. Thank You….