Portfolio Management

Definition: Portfolio Management, implies tactfully managing an investment portfolio, by selecting the best investment mix in the right proportion and continuously shifting them in the portfolio, to increase the return on investment and maximize the wealth of the investor. Here, portfolio refers to a range of financial products, i.e. stocks, bonds, mutual funds, and so forth, that are held by the investors.

Portfolio management involves deciding about the optimal portfolio, matching investment with the objectives, allocation of assets and balancing risk.

Types of Portfolio Management

  1. Active Portfolio Management: When the portfolio managers actively participate in the trading of securities with a view to earning a maximum return to the investor, it is called active portfolio management.
  2. Passive Portfolio Management: When the portfolio managers are concerned with a fixed portfolio, which is created in alignment with the present market trends, is called passive portfolio management.
  3. Discretionary Portfolio Management: The Portfolio Management in which the investor places the fund with the manager, and authorizes him to invest them as per his discretion, on the investor’s behalf. The portfolio manager looks after all the investment needs, documentation, etc.
  4. Non-Discretionary Portfolio Management: Non-discretionary portfolio management is one in which the portfolio managers gives advice to the investor or client, who can accept or reject it.

The outcome, i.e. profit received or loss sustained belongs to the investor himself, whereas the service provider receives an adequate consideration in the form of fee for rendering services.

Activities Involved in Portfolio Management

  • Selection of securities in which the amount is to be invested.
  • Creation of appropriate portfolio, with the securities chosen for investment.
  • Making decision regarding the proportion of various securities in the portfolio, to make it an ideal portfolio for the concerned investor.

These activities aim at constructing an optimal portfolio of investment, that is compatible with the risk involved in it.

Process of Portfolio Management

  1. Security Analysis: It is the first stage of portfolio creation process, which involves assessing the risk and return factors of individual securities, along with their correlation.
  2. Portfolio Analysis: After determining the securities for investment and the risk involved, a number of portfolios can be created out of them, which are called as feasible portfolios.
  3. Portfolio Selection: Out of all the feasible portfolios, the optimal portfolio, that matches the risk appetite, is selected.
  4. Portfolio Revision: Once the optimal portfolio is selected, the portfolio manager, keeps a close watch on the portfolio, to make sure that it remains optimal in the coming time, in order to earn good returns.
  5. Portfolio Evaluation: In this phase, the performance of the portfolio is assessed over the stipulated period, concerning the quantitative measurement of the return obtained and risk involved in the portfolio, for the whole term of the investment.

The portfolio management services are provided by the financial companies, banks, hedge funds and money managers.

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