Glossary · 70 terms
Portfolio Management
All portfolio management terms in the EquitiesIndia.com glossary — plain-English definitions written for Indian retail investors.
Active Share(Degree of Active Management)
Active Share is a quantitative measure of the degree to which a portfolio's holdings differ from its benchmark index, ranging from 0% (complete replication) to 100% (no overlap), and is used to assess how genuinely active a fund manager is relative to the index.
Alternative Data in Investing(Alt Data)
Alternative data refers to non-traditional information sources — satellite imagery, credit card transaction flows, job posting volumes, app usage metrics, web traffic — used by quantitative and fundamental investors to derive insights not available in public financial statements.
Behavioural Finance Overview(Behavioural Economics (Finance))
Behavioural Finance is the field of study that combined insights from psychology and economics to explain how cognitive biases, emotional responses, and social influences caused investors to make systematic, predictable errors that deviated from the rational-actor model assumed by classical finance theory.
Behavioural Portfolio Theory(BPT)
Behavioural Portfolio Theory (BPT), proposed by Shefrin and Statman, describes how investors construct portfolios not as a single optimised mean-variance portfolio but as a mental accounting structure of distinct layers — a safety layer designed to prevent financial ruin and an aspirational layer designed to achieve outsized gains.
Black-Litterman Model(BL model)
The Black-Litterman model is a portfolio construction framework that combines equilibrium market returns (derived from global market capitalisation weights) with an investor's subjective views using Bayesian updating to produce a blended, stable expected return vector.
Capital Asset Pricing Model (CAPM)(CAPM)
The Capital Asset Pricing Model (CAPM) is a financial framework that describes the relationship between an asset's expected return and its systematic risk (beta), asserting that investors demand higher returns only for bearing market risk that cannot be eliminated through diversification.
Circular Economy Investing(circular economy stocks)
Circular economy investing is a thematic investment approach that allocates capital to companies whose business models extend product and material lifecycles through reuse, recycling, remanufacturing, and closed-loop supply chains, reducing resource waste and environmental impact while potentially benefiting from regulatory tailwinds and ESG-aligned institutional capital flows.
Closet Indexing(Benchmark Hugging)
Closet Indexing refers to the practice of an actively managed fund constructing a portfolio that closely mimics a benchmark index while charging active management fees, resulting in investors paying a significant premium over index fund costs for performance that closely tracks the index.
Coffee Can Portfolio(coffee can investing)
The Coffee Can Portfolio is a long-term buy-and-hold investment strategy that involves selecting a concentrated set of high-quality companies — meeting strict criteria on revenue growth, return on capital, and market position — and holding them without selling for a decade or longer, popularised in India by Saurabh Mukherjea and Rakshit Ranjan of Marcellus Investment Managers.
Concentrated vs Diversified Portfolio(Focused Portfolio)
The concentrated versus diversified portfolio debate centres on whether holding a small number of high-conviction positions (10-20 stocks) generates better risk-adjusted returns than a broadly diversified portfolio (50-100+ stocks), with evidence and practitioners firmly split on both sides.
Conditional VaR (CVaR/Expected Shortfall)(CVaR)
Conditional Value at Risk (CVaR), also called Expected Shortfall (ES), measures the average portfolio loss in the worst (1−α)% of scenarios beyond the VaR threshold, providing a complete picture of tail loss severity rather than just the threshold level.
Constant Proportion Portfolio Insurance (CPPI)(CPPI)
Constant Proportion Portfolio Insurance (CPPI) is a dynamic portfolio strategy that maintains a minimum portfolio floor value by allocating between a risky asset and a safe asset using a fixed multiplier applied to the cushion above the floor.
Contrarian Investing(contrarian strategy)
Contrarian investing is a strategy that deliberately takes positions opposite to prevailing market sentiment — buying assets that are widely disliked, depressed in price, and under-owned, while avoiding or underweighting assets that are universally loved and highly valued — based on the premise that consensus optimism and pessimism are systematically overdone, creating mispricing opportunities.
Core-Satellite Portfolio (Indian Implementation)(Core-Satellite Strategy)
The Core-Satellite portfolio framework structures an investment portfolio into a stable, low-cost index-tracking core and a smaller, actively managed satellite allocation, and in the Indian context is typically implemented using Nifty 50 or Nifty Next 50 index funds as the core and active mid-cap, small-cap, or sectoral funds as the satellite.
Correlation(Pearson Correlation)
Correlation is a statistical measure ranging from -1 to +1 that quantifies the degree to which two assets' returns move together, with +1 indicating perfect co-movement, -1 indicating perfect opposite movement, and 0 indicating no linear relationship.
Correlation Breakdown in Crisis(Diversification Failure)
Correlation breakdown describes the empirical phenomenon where asset classes that normally exhibit low or negative correlations — providing diversification benefits — converge toward a correlation of +1.0 during financial crises, precisely when diversification is most needed.
Country Risk Premium(CRP)
Country Risk Premium (CRP) is the additional return that investors require to hold assets in a specific country relative to a risk-free benchmark such as US Treasury securities, reflecting political instability, regulatory uncertainty, currency volatility, and sovereign default risk, and is a key input in the Capital Asset Pricing Model when estimating cost of equity for Indian companies.
Covariance
Covariance is a statistical measure of the joint variability of two assets' returns, indicating whether and to what degree the returns of two assets move together, with positive covariance signalling co-directional movement and negative covariance indicating inverse movement.
Dogs of the Nifty(Dogs of the Dow India)
Dogs of the Nifty is a dividend yield-based contrarian equity strategy adapted from the classic Dogs of the Dow, applied to the Nifty 50 or Nifty 100 index in India, which involves annually selecting the ten highest dividend-yielding blue-chip stocks and holding them for one year before rebalancing.
Dollar-Cost Averaging vs Value Averaging(DCA vs VA)
Dollar-Cost Averaging (DCA) invests a fixed sum at regular intervals regardless of price, while Value Averaging (VA) adjusts the periodic investment amount to ensure the portfolio reaches a predetermined value target at each interval — investing more when prices fall and less (or selling) when prices rise sharply.
Drawdown Management(max drawdown)
Drawdown management refers to the systematic strategies and risk controls used to limit, monitor, and recover from peak-to-trough portfolio value declines, including maximum drawdown limits, drawdown duration analysis, and trailing stop mechanisms.
Efficient Frontier(Markowitz Frontier)
The efficient frontier is the set of optimal investment portfolios that offer the highest expected return for each level of risk (standard deviation), or equivalently the lowest risk for each level of expected return, forming a curved boundary in risk-return space above which no portfolio can lie.
Efficient Market Hypothesis (India)(EMH)
The Efficient Market Hypothesis (EMH) posits that asset prices fully reflect all available information at any given time, making it impossible to consistently achieve returns above the market average on a risk-adjusted basis through analysis or timing; academic research on Indian equity markets has found evidence consistent with weak-form efficiency while semi-strong and strong efficiency have been more contested.
Endowment Model(Yale Model)
The endowment model is an institutional portfolio management approach — pioneered by Yale and Harvard — that allocates heavily to illiquid alternative assets (private equity, real assets, hedge funds) in exchange for an illiquidity premium, a framework India's AIF ecosystem is beginning to parallel.
Equal Risk Contribution (ERC)(ERC)
Equal risk contribution (ERC) is a portfolio construction approach that allocates weights such that each asset contributes an identical share of the total portfolio risk, irrespective of its expected return — also known as the risk parity approach applied at the asset level.
ESG Investing(ESG)
ESG investing integrates Environmental, Social, and Governance criteria into the investment process alongside traditional financial analysis, aiming to identify companies that manage non-financial risks effectively and align with sustainability principles.
Factor Investing(Smart Beta)
Factor investing is an investment approach that targets specific, academically documented characteristics — known as factors — that have historically explained a significant portion of asset return differences, including style factors such as value, momentum, quality, size, and low volatility.
Goal-Based Portfolio Construction(Goals-Based Investing)
Goal-based portfolio construction organises an investor's capital into distinct sub-portfolios, each matched to a specific financial goal with its own time horizon, required return, and risk tolerance, rather than managing a single blended portfolio against a benchmark.
Herding Behaviour (Indian Markets)
Herding behaviour in investing described the tendency of investors to mimic the actions of a larger group — buying what others were buying and selling what others were selling — irrespective of their own independent information or analysis, a pattern documented in FII flow clustering, retail momentum chasing, and sectoral allocation waves in Indian mutual fund data.
Home Bias(domestic bias)
Home bias is the tendency of investors to overweight domestic assets in their portfolios relative to what global diversification principles would prescribe, observed prominently in India where retail investors overwhelmingly concentrate equity and debt holdings in domestic instruments despite the Liberalised Remittance Scheme (LRS) enabling up to USD 250,000 per year in overseas investments.
Kelly Criterion(Kelly Formula)
The Kelly Criterion is a mathematical formula for determining the optimal fraction of capital to allocate to a bet or investment to maximise the long-term geometric growth rate of a portfolio, taking into account both the probability of success and the payoff ratio.
Liability-Driven Investment (LDI)(LDI Strategy)
Liability-driven investment (LDI) is a portfolio management approach where the structure of assets is explicitly designed to match the duration, size, and timing of future obligations, minimising the risk that assets fall short of liabilities when payment is due.
Low Volatility Factor(low-vol factor)
The low volatility factor is an investment approach that systematically favours stocks with lower historical price variability, based on the empirical finding that low-volatility stocks have often produced competitive or superior risk-adjusted returns relative to high-volatility stocks over long periods.
Magic Formula (Joel Greenblatt)(Greenblatt magic formula)
The Magic Formula is a systematic value investing screen developed by Joel Greenblatt that ranks stocks by combining earnings yield (EBIT to enterprise value) and return on invested capital (EBIT to net working capital plus net fixed assets), with high-ranking stocks representing companies that are simultaneously cheap and high-quality.
Maximum Sharpe Ratio Portfolio(tangency portfolio)
The maximum Sharpe ratio portfolio, also called the tangency portfolio, is the risky portfolio that maximises the Sharpe ratio — the ratio of excess return over the risk-free rate to portfolio standard deviation — representing the most efficient combination of risky assets.
Mean-Variance Optimization(MVO)
Mean-variance optimization is the mathematical framework introduced by Harry Markowitz that identifies the portfolio with the highest expected return for a given level of risk (variance), or equivalently, the lowest risk for a target expected return.
Minimum Variance Portfolio(MVP)
The minimum variance portfolio (MVP) is the portfolio on the efficient frontier with the lowest possible variance (risk), irrespective of expected return, achieved by selecting asset weights that minimise overall portfolio volatility through diversification.
Modern Portfolio Theory(MPT)
Modern Portfolio Theory (MPT) is a mathematical framework for constructing investment portfolios that maximises expected return for a given level of risk, or equivalently minimises risk for a given expected return, by exploiting the diversification benefits that arise from combining assets with less-than-perfect return correlations.
Momentum Investing(price momentum)
Momentum investing is an investment strategy that involves purchasing securities that have outperformed their peers over a recent lookback period on the premise that stocks with strong recent price trends tend to continue outperforming in the near term.
Momentum Strategy (Practical Application)(momentum factor India)
A momentum strategy in equity investing systematically allocates to stocks that have generated the strongest relative returns over a defined lookback period — typically six to twelve months — on the premise that recent outperformers continue to outperform over the short to medium term, with the Nifty 200 Momentum 30 Index providing a live Indian benchmark for this factor.
Monte Carlo Simulation(MCS)
Monte Carlo Simulation is a computational technique that generates thousands of random scenarios for portfolio outcomes or asset prices based on assumed statistical distributions, providing a probability distribution of potential results rather than a single deterministic projection.
Overconfidence Bias (Investing)
Overconfidence bias in investing referred to the tendency of investors — particularly active traders — to overestimate the accuracy of their own predictions, the quality of their information, and their ability to time markets, leading to excessive trading frequency, under-diversification, and disproportionate participation in high-risk derivatives products.
Portable Alpha(Alpha Portability)
Portable Alpha is an investment strategy that separates the alpha-generating component of a portfolio from its beta exposure, allowing investors to earn excess returns from a skill-based alpha source while maintaining their desired market exposure through derivatives or index instruments.
Portfolio Insurance (Concept)(CPPI Strategy)
Portfolio insurance is a family of strategies — including protective puts, dynamic delta hedging, and Constant Proportion Portfolio Insurance (CPPI) — designed to limit the downside loss of a portfolio to a predefined floor while maintaining participation in upward moves.
Private Market vs Public Market Valuation(Public vs Private Valuation)
Private market assets — unlisted equity, private credit, infrastructure — are valued using periodic appraisals based on comparable multiples or DCF models rather than continuous market prices, creating persistent valuation gaps versus their public market counterparts that can be positive or negative depending on the market cycle.
Prospect Theory
Prospect Theory, developed by Daniel Kahneman and Amos Tversky and published in 1979, described how individuals evaluated probabilistic outcomes relative to a reference point rather than in absolute terms, placing approximately 2.5 times greater weight on losses than equivalent gains — a framework that explained numerous observed investor behaviours including the disposition effect and reluctance to stop SIPs during drawdowns.
Quality Factor(quality investing)
The quality factor in investing refers to a systematic preference for companies that demonstrate high profitability, strong balance sheets, stable earnings growth, and efficient capital allocation, on the basis that such firms tend to deliver superior risk-adjusted returns over time.
Quality Score (Multi-Factor)(quality factor score)
A Quality Score in equity analysis is a composite multi-factor metric that combines measures of financial returns, earnings stability, and balance sheet strength — typically including return on equity, earnings consistency, low leverage, and high cash conversion — to rank companies by the sustainability and reliability of their business performance.
Quantamental Investing(Systematic Fundamental Investing)
Quantamental investing combines systematic quantitative screening — factor models, statistical pattern recognition, alternative data analysis — with traditional fundamental research, using each approach where it has the greatest comparative advantage.
Random Walk Theory (Indian Context)
Random Walk Theory held that stock price changes were statistically independent from one past change to the next — implying that future price movements could not be predicted from historical patterns and that price series resembled the path of a random walker — with Indian market research examining both the empirical support for and deviations from this theory.
Rebalancing Triggers(Rebalancing Rules)
Rebalancing Triggers are the pre-defined rules or conditions that prompt an investor to restore a portfolio to its target asset allocation, with the three primary approaches being calendar-based rebalancing (fixed time intervals), threshold-based rebalancing (deviation bands), and hybrid rebalancing combining both.
Recency Bias(Availability Heuristic)
Recency bias in investing described the cognitive tendency to overweight recent events and extrapolate recent market performance into the future — causing investors to allocate heavily into equities near market peaks after strong recent returns and to flee equities near troughs after recent losses, systematically buying high and selling low.
Risk Budgeting(Risk Parity (related))
Risk Budgeting is a portfolio construction methodology that allocates a defined amount of total portfolio risk — measured by volatility, Value at Risk, or another risk metric — to each constituent asset or strategy, ensuring that no single position or asset class consumes a disproportionate share of total portfolio risk.
Risk Parity(Risk-Balanced Portfolio)
Risk Parity is a portfolio construction approach that allocates capital such that each asset class or component contributes an equal amount of risk (measured by volatility or marginal risk contribution) to the total portfolio, rather than allocating equal capital weights.
Risk-Off vs Risk-On Environment(RORO Framework)
Risk-on and risk-off describe the periodic shifts in global investor sentiment between embracing higher-risk assets (equities, emerging market currencies, commodities) and retreating to safer alternatives (US Treasuries, gold, yen), with India's markets experiencing these shifts primarily through FII flow reversals.
Sector Rotation Strategy (Detailed)(Sector Rotation India)
Sector rotation is the active portfolio management practice of systematically shifting capital between equity sectors as economic conditions evolve through the business cycle, exploiting the predictable sequence in which different sectors lead and lag market performance.
Smart Beta(factor investing)
Smart beta refers to index construction strategies that depart from traditional market-cap weighting by selecting or weighting securities based on one or more systematic factors such as value, momentum, quality, low volatility, or equal weight, with the aim of improving risk-adjusted returns.
Strategic Asset Allocation(SAA)
Strategic asset allocation sets long-term target weights across asset classes — equity, fixed income, gold, real estate, and cash — based on an investor's return objectives, risk tolerance, and investment horizon.
Style Drift(Fund Style Drift)
Style Drift refers to the phenomenon where an investment fund gradually deviates from its stated investment mandate, style, or category over time — for instance, a small-cap fund accumulating mid-cap or large-cap stocks — often occurring in response to market conditions or asset growth, and regulated in India under SEBI's fund categorisation framework.
Systematic Risk(Market Risk)
Systematic risk is the portion of an investment's total risk that is attributable to broad market or macroeconomic factors — such as interest rate changes, inflation, recessions, or geopolitical events — and that cannot be eliminated through diversification.
Tactical Asset Allocation(TAA)
Tactical asset allocation involves making deliberate, short-term deviations from the strategic asset allocation target weights to exploit market mispricings, macro themes, or valuation anomalies.
Tail Risk(tail event)
Tail risk refers to the probability of extreme, low-frequency losses in a portfolio arising from fat-tailed return distributions — events far beyond what normal distribution assumptions predict — often associated with financial crises, black swan events, or structural market breaks.
Tax Alpha(After-Tax Alpha)
Tax Alpha refers to the incremental after-tax return achieved through deliberate tax-efficient portfolio management strategies — including tax-loss harvesting, holding period optimisation to qualify for lower long-term capital gains rates, and timing of realisation — over and above the pre-tax return of the portfolio.
Tax-Aware Portfolio Management(Tax-Efficient Investing India)
Tax-aware portfolio management integrates the timing of realised gains and losses, lot selection for partial sales, and portfolio turnover minimisation into investment decision-making to maximise after-tax returns, which can meaningfully exceed pre-tax returns over long compounding periods.
Thematic Investing(theme-based investing)
Thematic investing is a portfolio construction approach that organises equity allocations around structural, multi-sector trends — such as digitalisation, clean energy, or India's manufacturing renaissance — rather than traditional sector or geographic classifications, with smallcase baskets on NSE and thematic mutual funds on AMFI platforms serving as the primary access mechanisms in the Indian retail market.
Tracking Error Budget(active risk budget)
A tracking error budget is the deliberate allocation of active risk (tracking error — the standard deviation of portfolio returns relative to a benchmark) across different sources of active bets, ensuring the total active risk stays within mandated limits while maximising the information ratio.
Transition Management(Portfolio Transition)
Transition management is the process of restructuring a large investment portfolio — typically when changing fund managers, rebalancing asset allocation, or liquidating an inherited portfolio — in a manner that minimises transaction costs, tax leakage, and market impact while managing the investment risk during the transition period.
Unsystematic Risk(Specific Risk)
Unsystematic risk is the portion of an investment's total risk that is specific to an individual company or sector — arising from factors such as management failures, competitive threats, regulatory actions, or operational accidents — and that can be substantially reduced through diversification.
Value at Risk (VaR)(VaR)
Value at Risk (VaR) is a statistical measure that estimates the maximum expected portfolio loss over a specified time horizon at a given confidence level — for example, a one-day 95% VaR of Rs 10 lakh means there is only a 5% probability of losing more than Rs 10 lakh in a single day.
Window Dressing(Quarter-End Window Dressing)
Window Dressing is the practice by fund managers of buying recent high-performing stocks and selling underperforming holdings near the end of a reporting period — such as a quarter or financial year — to make the portfolio appear more attractive in the fund's published holdings disclosure.