Definition

Portfolio Management

 

What is Portfolio Management?

Portfolio management refers to process of deciding and managing a group of investments with the motive of getting maximum return by minimising the risk. Portfolio management can be defined as managing an individual’s portfolio, which may include shares, mutual funds, bonds, and other securities. 

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Understanding Portfolio Management

Portfolio management is the art and science of managing and deciding a portfolio to invest for achieving long-term objectives and earn maximum profits by minimising the risk of a client, which can be a company or an individual. The portfolio may include shares, bonds mutual fund and other security. A portfolio manager helps an individual or a company to identify apt schemes or shares and invest in portfolio according to their income, budget, and risk appetite. A portfolio manager helps an investor in investing their money by doing detailed SWOT analysis of an investment.

Portfolio management helps an investor to invest in a group of securities which maximize an investor’s earning and reduce risk. A portfolio manager prepares and manages a portfolio according to its client’s income, budget, and financial needs which would give maximum return with minimum risk. Investors put their money in a portfolio to meet the long-term financial objectives. A portfolio manager understands client’s financial needs, goals and objectives and offers a best possible investment plan (portfolio) that meet the needs of a client. 

Frequently Asked Questions (FAQs)

What are the types Portfolio Management?

Types of Portfolio Management include:

  1. Discretionary portfolio management: In discretionary portfolio management, the portfolio manager invests on the behalf of its client based on their financial needs.
  2. Non-discretionary portfolio management: In non-discretionary portfolio management, the portfolio manager only advices the investor on investment choices like what is good or bad, investor will take the final decision whether to accept or reject the recommendation of the portfolio manager. Investor has full right to take his own decision.
  3. Passive portfolio management: In this, the portfolio manager invests by tracking the current market trends. For instance, the portfolio manager invests in index funds which would guarantee low but fixed returns in long term.
  4. Active portfolio management: In active portfolio management, the portfolio manager take cares of its client’s financial needs, and focused on generating maximum profit. In this form a portfolio manager engaged in buying undervalued securities and sells them when it will increase. 

What are the objectives of Portfolio management?

The basic and fundamental objective of portfolio management is to offer best investment portfolio as per the need of the clients. Here are some other objectives of portfolio management:

  • Capital appreciation: A portfolio manager helps an investor to increase its capital by offering best investment options. 
  • Maximising returns on investment: Portfolio management helps an individual, company, or an institute to maximise its return on their investment by advising them a good portfolio. 
  • Risk reduction: Portfolio managers help the investor in reducing the risk by diversifying their investments. 
  • Allocating resources optimally: Portfolio managers allocate the investors’ money efficiently in volatile and non-volatile assets. 
  • Ensuring flexibility of portfolio: Portfolio manager offers the investment plans or portfolio to its clients based on their income, budget, financial needs, and risk appetite. 
  • Protecting earnings against market risks: Portfolio manager protects an investor earning through diversifying its investment. 

What are the key elements of Portfolio management?

Key elements of portfolio management may include asset allocation, diversification, and rebalancing.

  1. Asset allocation

Asset allocation refers to the process of allocating the money in the investment of different assets including volatile and non-volatile assets. Portfolio manager advices the investor based of their goals, income and risk appetite. Asset allocation is a strategy that helps in balancing the risk and profit by investing in asset portfolio, asset classes may include equities, fixed income, and cash and equivalents.

  1. Diversification

Diversification adopted by portfolio managers to reduce the risk of investment, it is also known as risk management strategy. It includes a wide range of investment assets, securities such as shares, bond, mutual fund etc. of different sectors. Diversification helps in balancing the risk and profit of different investments.

  1. Rebalancing

Rebalancing is mandatory for investment portfolio in order to improve profit generating aspects. It is helpful in rebalancing the ratio of components of a portfolio to higher yield returns at minimum loss. A portfolio manager advices to rebalance the portfolio of investment to line up with market trends and requirements.

What is the significance of Portfolio management?

Portfolio management is needed for the following reasons:

  • Best investment plan: Portfolio management recommend the best investment plan to the investors, companies, institutes and an individual. Portfolio managers suggest an investment plan as per the financial need, income, budget, and the risk appetite.
  • Minimizes the risks: Portfolio management helps in minimizing the risk of an investment and maximizing the profit through asset allocation and diversification.
  • Provide customized investment solutions: Portfolio managers suggest the investment solutions as per the needs and the requirement of client. A portfolio manager advices the unique and customised investment plan/policy to its clients as per their needs.

What is the process of Portfolio Management?

Process of Portfolio Management includes the following given steps:

  1. Identification of objectives: Investors has to decide its objective whether he/she wants stable returns or capital appreciation.
  2. Decisions about asset allocation: After determining the objective, managers take decision related to asset allocation with suitable asset classes.
  3. Formulating suitable portfolio strategies: Managers formulate different strategies as per investor’s income and ability to undertake the risk.
  4. Selection of an investment: The portfolio manager selects a group of securities to invest that gives maximum profit to its client with minimum risk depending on credibility, liquidity, etc.
  5. Implementing portfolio: After selecting a portfolio, investing in the planned assets and securities should be take care by an investor or manager.
  6. Evaluating and revising the portfolio: Evaluating and revising a portfolio is essential to evaluate the efficiency of a portfolio.
  7. Rebalancing the composition of the portfolio: Rebalancing of a portfolio is essential to maximise the earnings.