Portfolio Management

PORTFOLIO MANAGEMENT

First let us understand what a portfolio actually means :

A portfolio is a collection of investments, including stocks, bonds mutual funds, debt instruments etc.

WHAT IS PORTFOLIO MANAGEMENT?

According to the definition given in Investopedia, it is the art as well as science of selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of a client, company or an institution. Under portfolio management there are licensed investors that work on behalf of clients and there are individuals who may choose to build and manage their own portfolio.

so basically, portfolio management involves allocating and diversifying the investment among different asset classes and stocks to reduce the risks and gain more returns on investments.

This leads us to understand the objectives behind portfolio management, the fundamental and significant objective of portfolio management is to assist an investor to select best investment options based on the range of income, time, and the amount of risk he is willing to take.

There are few core objectives of portfolio management like:

1.Capital appreciation

2.Risk optimisation

3.Diversifciation in the investments.

4.Protecting earnings against market risks.

5.Good amount of return on investments.

Portfolio management can be further divided into:

i) Active portfolio management: This is a type of management where the portfolio manager is concerned with only generating maximum returns. for e.g. this is done by purchasing stocks from the market when their price is low and sell them when the price increases in the market.

ii)Passive Portfolio management: In this type of management the individual is not concerned with high returns instead money is invested in index funds which has low but steady returns. This may be profitable in the long run.

iii) Discretionary Portfolio Management: Under this type of management, the investment is done based on investors direction and authority, so based on the investor's goal and willingness to take risk, the manager will choose on what to invest whichever seems suitable.

iv)Non-discretionary investments: Under this type of management the managers offer advice to the investors and it is up to the decision of the investors on whether to go by the suggestions of the portfolio manager or go according to what investor wants. Generally, it is preferrable to acknowledge the suggestions and analyse them rather to disregard them completely.

So, we briefly went through what is portfolio management and what are the types under it, so this leads me to explain what makes a good or a bad portfolio. There is nothing like a good or bad portfolio but there are some aspects of a portfolio where it can be improved.

Signs of a good portfolio:

1.Consistent returns: even during market downturns we have to earn some returns.

2.Risk Management: The portfolio should be able to manage the risk and uncertainty that might arise.

3.Economic: All the objectives should be achievable through incurring low costs.

4.Diversification:The investment is diversified but not too diversified which decreases the returns and doesn’t help much in risk assessment.

Signs where the portfolio needs improvement:

1. Poor allocation of funds: For e.g.: if the goal was to invest with a conservative strategy but ended up investing in an aggressive fund because of its high performance over the past few years, then there might be no returns or could end up losing money due to dynamic market conditions.

2. Too diversified or not diversified enough: it is a risk if all the money is invested on one type of an asset and it is also a risk if the money is invested in various or numerous types of assets because investing on too many different types of assets, decreases the rate of return and the managing of risks becomes difficult.

3. Too many risky investments: if an investor has invested in a lot of risky investments, then the portfolio will be affected by the volatility of such investments. There might be random fluctuations without any prior notice and no apparent reason.

A portfolio is a foundation of investing in the market; Portfolio management is an important financial skill that is used for active investing. All the components of portfolio should coordinate to meet the financial goal, and increase the risk tolerance. Regardless of the strategy, diversification up to a certain extent is beneficial in reducing the risks without hampering the portfolio's expected return.

Authored By

Ananya Bhat

(Finance graduate from Dayananda Sagar Institutions)