Portfolio Revision Constraints

Portfolio Revision Constraints

Portfolio revision constraints refer to the rules and limitations that portfolio managers must adhere to when modifying a portfolio. These constraints are put in place to ensure that the portfolio remains aligned with the investor’s goals and objectives, as well as any legal or regulatory requirements. Some common portfolio revision constraints include transaction costs, liquidity, diversification, and regulatory compliance.

Transaction costs are a common constraint in portfolio revision, as every trade or transaction incurs a cost that can eat into the portfolio’s returns. Liquidity constraints are another important consideration, as investors need to be able to access their funds when they need them. Portfolio managers must also take into account diversification constraints, as holding too many or too few assets can lead to undesirable levels of risk.

Finally, regulatory compliance is another critical constraint that portfolio managers must consider when revising a portfolio. These regulations are designed to protect investors and ensure that portfolio managers operate within legal and ethical boundaries. Portfolio managers must be familiar with these regulations and ensure that their portfolios comply with them at all times. Overall, portfolio revision constraints are an essential aspect of portfolio management, as they help portfolio managers optimize portfolio performance while minimizing risk and ensuring compliance with applicable regulations.

Portfolio revision involving purchase and sale of securities gives rise to certain problem which become constraints in the process.

• Statutory Stipulations: Investment companies and mutual funds manage most the portfolios in every economy. The institutional investors are normally governed by certain statutory stipulations regarding their investment activity; for instance, the Securities and Exchange Board of India (SEBI). These conditions often act as constraints in effective portfolio revision.
• Transaction cost: Buying and selling of securities involve transaction costs such as commission and brokerage. The recurring buying and selling of securities for portfolio revision tends to push up transaction cost thereby reducing the gains from portfolio revision. Hence, the transaction costs involved in portfolio revision acts as a limitation toward proper revision.
• Intrinsic difficulty: Portfolio revision is a difficult and time-consuming exercise. The methodology to be followed for portfolio revision is also not clearly established and different approaches may be adopted for the purpose. Carrying out portfolio revision itself may act as a restriction to portfolio revision.
• Taxes: When there are capital gains arising from sale of securities, tax is applicable. Long term capital gains are taxed at a lower rate than short-term capital gains. A security must be held by an investor for a period not less than 12 months before sale to qualify as long-term capital gain. Frequently selling securities in the course of periodic portfolio revision of adjustment will result in short-term capital gains. This would be taxed at a higher rate compared to long-term capital gains. The higher tax on short-term capital gains may act as a constraint to frequent portfolios.

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