Portfolio Management

TWR (Time-Weighted Return) eliminates the effect of cash flows — used to evaluate fund manager performance. Calculated by chaining sub-period returns between cash flows. MWR/XIRR (Money-Weighted Return) accounts for timing of cash flows — used to measure actual investor experience. Example: fund manager returned 15% TWR, but investor who invested more before a drawdown might have 8% XIRR. Use TWR for manager comparison, XIRR for investor statements.

Brinson-Hood-Beebower decomposes active return (portfolio vs benchmark) into: 1) Allocation Effect — did we over/underweight the right sectors? = (wp - wb) × (rb - R), 2) Selection Effect — did we pick better stocks within each sector? = wb × (rp - rb), 3) Interaction Effect — combined over/underweighting and selection. Sum of all three = active return. Used to understand if outperformance came from asset allocation or security selection skill.

Corporate actions (dividends, splits, rights, mergers) must be applied accurately to maintain correct positions and cost basis. Process: 1) Receive corporate action notification (from exchange, data vendor), 2) Validate against holdings, 3) Apply: Stock split → multiply shares, divide price; Cash dividend → cash position increase, income posting; Bonus → add shares; Rights → offer subscription to investor. Need to handle ex-date vs record date. Must update cost basis, historical NAV for performance. Missing corporate actions = wrong performance calculations.

VaR (Value at Risk) is the maximum expected loss over a time period at a confidence level. Example: 1-day 95% VaR of ₹10L means 95% of days the loss won't exceed ₹10L. Methods: Historical simulation (actual past returns), Parametric (assume normal distribution), Monte Carlo. Limitations: 1) Doesn't tell you the loss beyond the threshold (tail risk), 2) Assumes normal distribution — underestimates fat tails, 3) Based on historical data — doesn't capture regime changes, 4) Not additive across desks simply. CVaR/Expected Shortfall addresses the tail risk gap.

India's T+1 settlement means trades must settle (money and securities exchanged) by next business day. Portfolio system impacts: 1) Position updates must be real-time — can't wait for overnight batch, 2) Cash availability checks must consider T+1 payables, 3) Corporate action processing tighter timelines, 4) Custodian reconciliation must happen same day, 5) NAV calculation for MFs must account for T+1 settled positions. Systems need STP (Straight-Through Processing) with no manual intervention.