What Is Portfolio Management?: Meaning, Types & Steps to Follow | 5paisa (2024)

Content

  • Introduction
  • What is Portfolio Management?
  • Who is a Portfolio Manager?
  • Key Elements of Portfolio Management
  • Who should opt for?
  • Types of Portfolio Management
  • Steps of Portfolio Management
  • Conclusion

Introduction

Maximising returns on investment is an ideal way of accumulating wealth. Portfolio management largely assists in balancing gains and protecting against risk. It is the compilation of investment tools like stocks, mutual funds, cash, bonds, insurance policies, etc. Portfolio management acts as a cushion against market risks. This article explains the portfolio management meaning.

What is Portfolio Management?

Portfolio management includes prioritising, choosing the right investments, and strategising to achieve good returns. It simply refers to overseeing a person's financial investments. The portfolio may consist of cash, bonds, mutual funds, or any other investment. This process needs a strong understanding of the stock market and the ability to direct investments.

Who is a Portfolio Manager?

A portfolio manager is a professional responsible for investments and efficiently handling a portfolio of assets. Solid portfolio management requires developing the best investment plan to match your income, age, and risk-taking capacity. Furthermore, to reduce the risk effectively, the portfolio manager needs to develop a customised solution for buying and selling assets.

Key Elements of Portfolio Management

To achieve the desired outcome, investors need to account for certain concepts when building a strong portfolio. These are some crucial components of portfolio management.

● Asset Allocation

Dividing the assets minimises the risk from a vulnerable market environment. It is predicated on the knowledge that a balanced portfolio with low risk requires a variety of assets. According to the investor's risk tolerance and financial objectives, experts advise using systematic asset allocation.

● Diversification

Diversification is the process of distributing risk in a portfolio. It aims to reduce volatility while capturing the long-term returns of all sectors since it is impossible to predict which sector of a market or asset class will perform better at any given time. Diversifying portfolios can significantly revamp the collection. It brings a perfect blend of risk and reward. Investing in multiple assets helps in dealing with market fluctuations in a better way.

● Rebalancing

Rebalancing is the method of returning a portfolio to its original target allocation at regular intervals. It is an important aspect of portfolio management as it helps investors to capture gains and expand the opportunity for growth. The process involves selling high-priced stocks and investing that amount in lower-priced stocks.

● Active Portfolio Management

In active portfolio management, the investor buys undervalued stocks and sells them when their value rises. Portfolio managers pay close attention to market trends and trade in securities. Investors have received higher returns through this strategy.

● Passive Portfolio Management

This is stated as index fund management. It aligns with the current and steady market trend. Investors invest with the objective of low and steady returns that seem profitable in the long run.

Who should opt for?

People who want to increase their wealth but have little experience with the stock market or the time to keep track of their investments should consider portfolio management. Furthermore, if someone wants to invest in bonds, stocks, or commodities but doesn't know enough about the process, they should go for portfolio management. Investors can reduce risk while achieving long-term financial goals with portfolio management.

Types of Portfolio Management

1. Active Portfolio Management

Active portfolio management entails constant selling and purchasing of securities. The primary objective of substantial buying and selling of assets or securities is to outperform the markets collectively. Active investment management aims to make the most of the market conditions, especially while the markets are rising.

2. Passive Portfolio Management

It follows the efficient market hypothesis. In most cases, the passive manager sticks with index funds with low turnover but promises good long-term value. Opting for the lower yield is to gain profitability through stability.

3. Discretionary Portfolio management services

Your investments are managed by a qualified portfolio manager through the discretionary portfolio management service. The portfolio manager has total discretion over the investments he makes on the client's behalf.

4. Non-Discretionary Portfolio management

In Non-Discretionary Portfolio management, the client receives periodic advice from the portfolio manager. However, the client is ultimately in charge of the investment and is responsible for it. The role of the portfolio manager is restricted to providing guidance and market information. The client makes decisions based on their risk appetite, market study, and manager's advice.

Steps of Portfolio Management

This approach goes beyond managing your investments. Since it is an iterative process, comprehension of it is crucial. Formulating a portfolio strategy requires maintaining a manageable portfolio with a customized investment plan.

Step 1: Identifying the objective

An investor needs to identify the objective. The outcome achieved can be either capital appreciation or stable returns.

Step 2: Estimating capital markets

Research and analysis should be carried out to estimate expected returns with associated risks.

Step 3: Asset Allocation

A sound decision should be made on allocating assets. Asset allocation is identified depending on investors' risk tolerance and investment limit.

Step 4: Formulation of a Portfolio Strategy

An appropriate portfolio strategy must be developed considering investment capacity and risk susceptibility.

Step 5: Implementing portfolio

The profitability of assets is analysed thoroughly. The planned portfolio is then implemented by investing in various avenues. Portfolio execution is one of the important phases as it directly impacts investment performance.

Step 6: Evaluating portfolio

The portfolio is regularly evaluated and revised for efficient work. Evaluating a portfolio is a quantitative measurement of the portfolio's actual returns and risks. It gives a direction to continuously improve the quality of the portfolio.

Conclusion

Implementing an investment strategy and managing day-to-day portfolio trading is an important component of portfolio management. Following some guidelines for portfolio management not only provides cushioning against risk but also maximises returns successfully.

What Is Portfolio Management?: Meaning, Types & Steps to Follow | 5paisa (2024)

FAQs

What Is Portfolio Management?: Meaning, Types & Steps to Follow | 5paisa? ›

Portfolio management largely assists in balancing gains and protecting against risk. It is the compilation of investment tools like stocks, mutual funds, cash, bonds, insurance policies, etc. Portfolio management acts as a cushion against market risks. This article explains the portfolio management meaning.

What are the 4 types of portfolio management? ›

There are four main portfolio management types: active, passive, discretionary, and non-discretionary. A successful portfolio management process involves careful planning, execution, and feedback. Investment strategies can assist investors in making an educated choice about an investment.

What is the portfolio management process and its steps? ›

Understanding Portfolio Management

It usually entails setting financial goals, picking the correct investments, allocating assets, assessing risks, and diversifying resources to avoid losses. Investors can make significant profits by aligning their income and financial objectives with their risk tolerance.

What is portfolio management meaning? ›

Portfolio management is the selection, prioritisation and control of an organisation's programmes and projects, in line with its strategic objectives and capacity to deliver. The goal is to balance the implementation of change initiatives and the maintenance of business-as-usual, while optimising return on investment.

What are the 7 steps of the portfolio process? ›

Processes of Portfolio Management
  • Step 1 – Identification of objectives. ...
  • Step 2 – Estimating the capital market. ...
  • Step 3 – Decisions about asset allocation. ...
  • Step 4 – Formulating suitable portfolio strategies. ...
  • Step 5 – Selecting of profitable investment and securities. ...
  • Step 6 – Implementing portfolio. ...
  • Step 7 – ...
  • Step 8 –

What are the 5 phases of portfolio management? ›

Steps of Portfolio Management
  • Step 1: Identifying the objective. An investor needs to identify the objective. ...
  • Step 2: Estimating capital markets. ...
  • Step 3: Asset Allocation. ...
  • Step 4: Formulation of a Portfolio Strategy. ...
  • Step 5: Implementing portfolio. ...
  • Step 6: Evaluating portfolio.
Oct 12, 2023

What are the 5 techniques for portfolio management? ›

They'll help keep your investing portfolio well-balanced and in tip-top shape.
  • Know your goals and strategy. It sounds almost too simple to be true, but your goals are the No. ...
  • Divvy up your assets. ...
  • Rebalance your portfolio. ...
  • Diversify your investments. ...
  • Understand how to manage your own investments.

What are the 4 Ps of portfolio management? ›

These are People, Philosophy, Process, and Performance. When evaluating a wealth manager, these are the key areas to think about. The 4P's can be dissected further, but for the purpose of this introduction, we'll focus on these high-level categories.

What are the stages of a portfolio? ›

There are three major stages: planning, execution, and feedback.

What do portfolio managers do? ›

What Is a Portfolio Manager? Portfolio managers are investment decision-makers. They devise and implement investment strategies and processes to meet client goals and constraints, construct and manage portfolios, make decisions on what and when to buy and sell investments.

What is an example of portfolio management? ›

If this hypothetical investment corpus amounts to $1,000, a portfolio manager will distribute it across different units like real estate, mutual funds, and shares, for example, to enhance profitability.

What is the main objective of portfolio management? ›

Achieving Asset Allocation: The primary objective of Portfolio Management is to allocate assets across different investment classes, such as equities, fixed income, and alternative investments in such a way that the asset allocation goes with the investor's risk profile and investment goals.

What is the first step in portfolio management? ›

The first step of the portfolio management process is to identify the investment objectives and constraints of the investor. In this planning stage, the desired outcomes of the client are evaluated against the risk he can afford to take and the returns he expects out of the investment.

What are the 5 types of portfolio? ›

Types of Portfolios
  • Aggressive Portfolio: An aggressive portfolio aims to maximise returns while taking a relatively high degree of risk. ...
  • Conservative Portfolio: This portfolio is designed for low-risk tolerance investors, such as those with short-term goals. ...
  • Income Portfolio: ...
  • Speculative Portfolio: ...
  • Hybrid Portfolio:

What are the major four 4 assets of an investors portfolio? ›

There are four main asset classes – cash, fixed income, equities, and property – and it's likely your portfolio covers all four areas even if you're not familiar with the term. Your pension, for instance, may hold a mix of these four types of assets.

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