What is Portfolio Management and how does it work?
There is a popular saying which says “A penny saved is a penny earned”. This is very true. But it is also possible that a penny saved may become two pennies earned. This is possible by investing one’s money properly into assets that will help him earn good return. Portfolio management comes into play here. But before going into what portfolio management is all about, there is need to understand what portfolio is and investment management is.
Portfolio is a group or collection of financial assets such as equity shares, preference shares, bonds, stocks. Mutual funds, debt instruments etc in a certain ratio. The main aim of a portfolio is to stabilize or hedge risk of different investments within it to provide the best possible return. Since it has investment from various pools of risk, it tries minimizing the effect of any non-performing investment. The fact to be noted is that the budget of the portfolio differs from investor to investor.
Investment management is the professional management of assets to meet the investor goal of wealth maximization by earning or meeting specific goals with regard to a particular investment. Investors can be individuals, business houses or companies.
Portfolio management is a guide to manage assets in the form of a portfolio. It helps with the steps of creating a portfolio by providing an understanding of how should selection take place among the best available securities to provide the expected rate of return for the investor in the risk class he is willing to invest in. it also helps in mitigation of risk. It can also be seen as the art of picking out an apt investment policy for the investor where there is minimum risk for maximum return. It manages the investor’s investment in such a way that a portfolio is created from it i.e. has a particular ratio of shares, bonds, cash equivalents, mutual funds etc so that the maximum possible returns in a stipulated time frame.
Requirement for Portfolio Management
- It provides investors with the opportunity to opt for a suitable plan according to their income, savings budget, age, requirement from investment and willingness and ability to take risk.
- It helps in minimizing and hedging risk and increases the probability of making profits.
- One of the most important aspects of the job of a portfolio manager is to understand the investor’s needs and suggest the best investment policy for them which is unique to their requirements with minimum risks involved.
- It helps in providing a customized solution for the investment needs of any investor.
Types of Portfolio Management
- Active Portfolio Management- as the name suggests in this the portfolio managers are actively involved in buying and selling of stocks and securities, so that the investor is ensured the highest possible profit.
- Passive Portfolio Management- in passive portfolio management the portfolio manager has a pre-designed portfolio format which remains fixed. It is designed with regard to the current market scenario.
- Discretionary Portfolio management- In this type of portfolio management, the portfolio manager is given the authority to take care of his financial requirements by the investor. This is done when the investor gives full rights to the portfolio manager to overlook any paper work or documentation on his behalf. The portfolio manager can also take decisions on behalf of the investor.
- Non-Discretionary Portfolio management- In non discretionary portfolio management, the portfolio manager can only advise the investor about which investments are good and which are bad. The investor reserves full right to take his own decisions on the investment disregarding the portfolio manager. The portfolio manager plays the role of a financial advisor in this case.
How does portfolio management work?
Well there are two ways to make it work. The first being one’s own portfolio manager and the second, hiring a professional.
No matter what path an investor chooses, the steps remain the same.
- Identifying investment objectives- it is important to invest with a goal in mind. By doing so, you are establishing the expected return.
- Selection of asset combination- selecting the type of assets to invest on depends on the risk the investor is willing to take.
- Strategy formulation- Here the portfolio mix is strategized with the aim being the expected return.
- Investing in the portfolio- Once the mix is decided, it is time to execute the strategy and invest in the designed portfolio.
- Updating regularly- with the ups and downs of the market, it is important to keep updating the portfolio to avoid any risk and maintain the expected return.
We hope you enjoyed this article. For regular updates from the world of financial markets, subscribe us via Email and we will deliver our next article, right in your mailbox!