Portfolio Management

To put simply portfolio management is the art and science of choosing and monitoring investments over a particular period of time in order to meet the financial goals of an investor. It involves balancing risk and return of an investment.

Portfolio management could be management of combination of stocks, gold, REIT, InvIT, fixed deposits etc. For a portfolio manager monitoring an investment continuously is of prime importance especially when the world around him is going through various cyclical changes.

The most important part of portfolio management is the optimal allocation of assets. Here the portfolio manager has to weigh pros and cons of several investments in order to achieve the desired financial objectives.

E.g. – A portfolio manager who if managing a medium risk portfolio has to analyze ETFs, Equity, Debt Instruments, Gold Investment in order to allocate particular share of portfolio in order to balance risk and reward.

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Types of Portfolio Management

1. Active Portfolio Management – In active portfolio management, the manager is continuously involved in buying and selling of securities. The manager has to buy and sell securities from time to time for maximizing gain. In this type of investment, the strategy is to buy undervalued stocks and sell them at a higher price.
2. Passive Portfolio Management – In passive portfolio management, the manager buys index fund, ETFs with respect to current market scenario. The goal here is to generate consistent returns typically over long period of time. The risk associated with this type of portfolio management is low.
3. Discretionary Portfolio Management – In this type of portfolio management, an investor appoints a manager to take care of financial needs of the investor. Here the portfolio manager has been entrusted with full authority to take decisions on behalf of the investor. In addition to investment, the manager also has to look after the paper work, documentation, other filings etc.
4. Non – Discretionary Portfolio Management – In this type of portfolio management, the manager can only advise the client as to where the client should make an investment. However, client reserves full right to make his decisions.

Portfolio Management Process

1. Defining investment objectives(if client is not clear about the objectives.)
2. Finding prospective investments that are aligning with the objectives.
3. Calculating corresponding risks and returns of shortlisted investments.
4. Allocation of assets through optimal investment mix.
5. Analyzing, monitoring, evaluating, rebalancing the portfolio.

Portfolio Management Principles