Last Updated on Sep 28, 2022 by Anjali Chourasiya

Building a healthy portfolio is a step-by-step procedure. It takes time and effort. The key to building a lucrative portfolio is tailoring it according to your goals, risk appetite, and budget. Maintaining a lucrative portfolio involves analysis, strategy formulation, revision, rebalancing, and more. It all comes under portfolio management. In this article, let us understand portfolio management, its objectives, importance, types, process, and more in detail.

Key takeaways

  • Portfolio management involves allocating and diversifying your investments across asset classes, monitoring their performance, and rebalancing the portfolio to reduce risk, maximise returns, and plan taxes.
  • Ultimately, it means managing an investor’s portfolio to ensure their objectives/long-term financial goals are met.
  • Portfolio management comprises four types – active, passive, discretionary, and non-discretionary.
  • With portfolio management, investors can better plan their investments and taxes, minimise risks, save money, and build a customised solution.
  • Financial planning is all about managing and budgeting for future financial needs and goals. In comparison, portfolio management involves investing and managing current capital to grow wealth as per the plan.

What is portfolio management?

The term ‘portfolio management’ is made up of two words. Let’s first understand what these mean individually.

Portfolio – A portfolio is a collection of investments, including stocks, bonds, ETFs, mutual funds, debt instruments, and more.

Management – Management means planning, organising resources, and coordinating activities to achieve a predetermined goal most effectively.

Put together, ‘portfolio management’ is a process of evaluating and managing investments based on an individual’s objectives in order to maximise their earnings within a given time frame. The objectives of an individual can be based on various factors like budget, risk tolerance, etc.

Whether you are a retail investor, high net worth individual or a business, portfolio management is a valuable skill to have. It ensures the capital invested is not exposed to a lot of market risk. You can always take the help of a professional to enjoy optimal returns and achieve your goals.

Objectives of portfolio management

The primary objective of portfolio management is to invest in securities that will help you maximise your returns while minimising the risks to achieve those goals. 

Capital appreciation: The primary objective of portfolio management is to enjoy capital appreciation. The principal invested should grow into a corpus at a higher rate than inflation. It should also minimise risks such as market swings and fund erosion via taxes. If the investor agrees, reinvesting can be considered to generate more income.   

Frequency of income generation: While some investors seek regular income that can be enjoyed through dividends, others may prefer receiving a larger maturity corpus in the form of capital appreciation. A portfolio manager should consider these factors when building one.

Stable return rate: While capital appreciation is the goal, an investment portfolio should provide you with a steady flow of returns while ensuring the safety of the investment. At the least, your current return income should meet the opportunity cost of your funds.

Tax planning: Earning handsome returns but not being able to retain them due to poor tax planning is disappointing. Different assets are taxed differently. Hence, a portfolio manager should consider tax policies during asset allocation to help investors plan their taxes better and not evade them.

Liquidity: Another critical objective of portfolio management is to manage liquidity. It gives an investor immediate access to funds for an emergency, an expense, an exciting venture, rebalancing the portfolio, or even participating in a company’s rights issue. A noteworthy point here is to invest in a well-balanced mix of listed and unlisted shares because the former has more traceability than the latter.

Safety of investments: Above all else, portfolios constructed should match the investor’s risk potential. Funds should be allocated so that the investor doesn’t lose funds they can’t afford. Ultimately, minimising risk is an important aim of portfolio management.

Marketability: If your portfolio consists of poor-performing or inactive stocks or funds, you might face difficulty in marketing them or switching from one investment to another. Hence, investing in companies that are actively traded by other investors and have higher marketability is crucial.

Diversification: There’s nothing called zero risk. That is to say, no risk, no returns. Hence, the only way to enjoy maximum returns is by minimising risk, which can be done through diversification.

Long-term planning: Planning your sunset years in advance can help you carve out a clear path to achieve your retirement goals. Hence, it is considered that the earlier you start, the better. A portfolio manager should consider your retirement and long-term goals while crafting your portfolio.

Portfolio plan

A portfolio plan consists of what the portfolio comprises, expected timescales, major deliverables, and its major dependencies in words and diagrams. It defines how the portfolio will be managed.

Portfolio risks

Portfolio risks typically cover the internal and external events that might impact the portfolio. There are various portfolio risks and numerous approaches to measuring portfolio risk. It should be the responsibility of a portfolio manager to assess and invest in the assets according to an individual’s risk appetite while minimising the risk.

Importance of portfolio management

Better investment planning: With portfolio management, analysis of past investments becomes easier, which helps better frame future investments. It also considers the risk appetite, income, and budget. As a result, an investor can take an informed and sensible investment decision. 

Customisable solution: When managing the portfolio, an investor gets the opportunity to plan for the specific goals that they might have. It allows them to customise the strategies, risks, and expected returns accordingly.

Minimises the risk: With proper planning and timely execution, it becomes possible to reduce the risk of the investment strategy, increasing the chances of making profits. Taking an expert’s opinion and getting a deeper understanding of the risks is always worthwhile.

Reduces cost and saves time: For investors who may not have a sound financial background, they might find it challenging to manage their finances. When not done in the right way, it can be a costly expense and take up a lot of time to rebalance. Hence, portfolio management can go a long way in protecting an individual’s finances.

Tax planning: Taxes can drain an individual’s income. When planning for a portfolio, an investor can design the investment plan in a way that helps them save taxes. Hence, a well-researched and managed investment plan can go a long way.

Who is a portfolio manager?

A professional responsible for an investor’s portfolio management is a portfolio manager. They understand the investor’s financial goals and construct a suitable investment plan in line with their constraints to generate maximum returns.

What does a portfolio manager do?

Portfolio managers’ primary goal is to add value to their clients’ portfolios. Here are six steps that define their work in brief.

  • They start by determining their client’s objective, which includes the returns expectations and risk tolerance levels.
  • Based on the client’s financial goals and situation, portfolio managers decide on the most suitable asset classes available in the market.
  • To get the client’s desired returns with risk tolerance levels, the managers conduct Strategic Asset Allocation (SAA). In this, they set the weights for each asset class. For instance, 45% for bonds and 55% for equities. This stage requires periodic rebalancing.
  • After the SAA, managers perform Tactical Asset Allocation (TAA) and Insured Asset Allocation (IAA). Both of them are different ways of adjusting the weights of assets like SAA during the investment period.
    IAA adjusts asset weights depending on the client’s existing wealth at any specific point in time. TAA makes changes depending on the capital market opportunities. 
  • With the selection of weights for each asset class, portfolio managers have control over the amount of different risks, such as security selection risk, style risk, and TAA risk.
    Security selection risk arises from the manager’s SAA actions. Style risks arise from the manager’s investment decisions/style, while the TAA risks can only be avoided by choosing the same systematic risk – beta – as the benchmark index. 
  • Portfolio managers measure the portfolio’s performance using various ratios and models. It enhances the portfolio to meet the goals of maximising returns and minimising risks.

Who should avail portfolio management services?

  • Individuals with a limited understanding of how the market works.
  • Investors looking to diversify their investments across stocks, bonds, mutual funds, and other asset classes but don’t possess a sound understanding of how the process works.
  • Investors who lack time to monitor and track investments and the market developments that impact them.

Difference between portfolio management and financial planning

Both the terms portfolio management and financial planning are often used interchangeably. However, there are a lot of differences between the two. Here are four major differences that you must be aware of.

ElementFinancial planningPortfolio management 
AimFinancial planning is about understanding an individual’s financial situation and goals and developing long-term financial goals accordingly. It is a more thorough process than portfolio management. Portfolio management is focused on building a portfolio consisting of securities that match an individual’s goals and managing it. It is a regular process.
ScopeIt includes various areas such as building an emergency fund, saving for a new home, accumulating assets for retirement, saving for a child’s college fund, reducing debt, real estate planning, creating tax efficiency, and more.It is concerned with the curation and management of a portfolio according to the risk appetite and the individual’s short, mid, and long-term goals.
AssessmentIt assesses the individual’s overall financial standing to develop a long-term financial plan based on their goals.It involves the assessment of multiple components of a portfolio to make investment decisions, such as to invest or divest.
ManagerA financial planner or advisor assists in financial planning. They are also called wealth advisors who give advice and help enhance their clients’ financial situation.An investment manager is concerned with only the portfolio of the client. They intend to enhance it and make trades on behalf of their clients.

Portfolio management can be considered a subset of financial planning as the current capital is invested and managed in accordance with the future goals of an individual.

Types of portfolio management

As discussed below, there are four types of portfolio management:

1. Active portfolio management

This type of portfolio management calls for a high level of expertise in stock markets. The manager of such a portfolio is actively involved in buying and selling stocks frequently to beat the broader market (indices). The strategy is said to be ‘active’ as it requires consistent evaluation of the market to identify and buy undervalued assets and sell them at the right time. The process involves proactive quantitative analysis, diversification, and understanding of business cycles.

However, active portfolio management comes with extremely high fees as the fund manager implements an aggressive investment strategy that involves constant monitoring and asset turnover. As such, this is best suited for experienced investors that have a higher risk appetite.

2. Passive portfolio management

This type of portfolio management focuses on long-term investing. Passive portfolio managers try to replicate market returns. They believe that the prices of assets always reflect their fundamentals. 

What differentiates passive portfolio management from the active counterpart is that the former type aims at long-term wealth creation and not necessarily to actively beat the markets. This is the reason passive investing is well suited for investors looking to minimise risk and earn consistent returns. 

High Net-Worth Individuals (HNI) looking to earn consistent returns over the long term at low cost also avail such services. Investors who seek to minimise risk often prefer passive strategies. While low cost is a benefit of passive portfolio management, a downside is that it poses a security risk. For instance, indices like the Nifty 100 have only large-cap stocks. Therefore, investing in funds tracking this index would make your portfolio large-cap equity-focused.

3. Discretionary portfolio management

Under discretionary portfolio management, the portfolio manager is fully authorised to take decisions and buy/sell securities on their client’s behalf. This type of portfolio management is suited for individuals that don’t wish to be directly involved in the investment strategy. However, like in the case of active portfolio management, such managers also charge high fees for their premium services.

The primary advantage of discretionary investing is that an expert is taking all your investment decisions. It might make your life a lot simpler.

4. Non-discretionary portfolio management

Non-discretionary portfolio management involves advising clients on whether an investment is good or bad for them. Such a manager acts as a mere financial advisor but doesn’t execute any trades on the investor’s behalf. The clients have full authority over their investments besides expert guidance.

The primary benefit of non-discretionary portfolio management is it allows you to have a financial expert without giving them control of your investment decisions. However, in the case of new market conditions, if you wish to shift your portfolio’s focus quickly, you have to wait for your manager’s approval. It might cost you, and you can end up having lost the opportunity. 

Portfolio management strategies

A portfolio is good for you when it efficiently meets your objectives following your investment stage and budget while minimising the risk. Though everyone’s portfolio is different and in accordance with their goals, here are four key features and strategies to curate and manage your portfolio.

Asset allocation: Effective portfolio management requires a well-thought-of asset allocation that considers an investor’s financial goals and risk tolerance. Asset allocation means spreading funds across asset classes such as stocks, bonds, real estate, and commodities.

Diversification: This refers to investing across different asset classes and investment avenues that have a low correlation with each other. This especially helps cushion portfolios during bear markets. Diversifying your investments in different instruments provides broader exposure and captures returns from various sectors and asset classes over time.

Rebalancing: This involves selling securities that have become expensive and piping that money back into undervalued securities or performing a risk-minimisation move to cap the fall in portfolio value and divert funds to better performers. This allows the investor to earn capital gains and also helps in keeping the initial risk-return profile intact. It involves returning a portfolio to its original target allocation.

Tax reduction: It involves allocating funds to save the individual from paying excessive tax on their investment returns. There are various ways to reduce taxes and improve after-tax returns. Hence, asset allocation should be done wisely.

Portfolio management process

Step 1: Identifying the objectives

The first stage in portfolio management is identifying the objectives and limitations. It is in line with the financial plan. Note that the relative importance of the objectives should also be clearly defined at this stage. 

Step 2: Selection from the asset pool

The next step involves the identification of various assets that can be included in the portfolio. It can be a combination of different assets such as preference shares, bonds, equity shares, etc. The selection is made in accordance with the individual’s risk tolerance and investment limit to spread the risk and minimise loss.

Step 3: Formulation of the strategy

There are various types and strategies to manage a portfolio, like active, passive, rebalancing, and so on. The strategy is formulated depending on your investment horizon, invested capital, and risk appetite.

Step 4: Security analysis 

Security analysis is a method used to calculate the value of various assets and to find the effect of market volatility on their value. It considers the price, possible returns on investment, associated risks, etc. Security analysis helps understand the nature and extent of the risk for any security in the market. There are various ways to perform security analysis, such as fundamental analysis and technical analysis.

Step 5: Execution of the portfolio

It is considered one of the most crucial steps in portfolio management. At this stage, the execution takes place, i.e. the buying and selling of planned securities within the budget and time frame. 

Step 6: Revision of the portfolio

To evaluate the effectiveness of invested securities, a portfolio revision is necessary. It involves constantly monitoring and reviewing the securities according to the market condition. The revision of the portfolio also involves shifting from one stock to another or from one type of security to another. It is also one of the most important steps in portfolio management.

Step 7: Performance evaluation

The evaluation of a portfolio is done over a selected period of time. It is a useful feedback loop that helps in enhancing the quality of the portfolio management process. Performance evaluation involves assessing the risks, return criteria, relative merits and demerits of the portfolio, etc.

Step 8: Rebalancing the portfolio

After the evaluation over a certain period of time, rebalancing of the portfolio is done to maximise returns and minimise losses. It should be performed as often as required while keeping the primary objective in mind.

Tips for healthy portfolio management

  • Goals and strategy: The first step in devising an investment plan is to find out your goals. Make sure your goals are achievable. They can change over time. Hence, make sure to assess how it will impact your overall strategy. Further, keep your risk-tolerance levels always in mind.
  • Asset allocation: The right mix of investment types makes up for an effective asset allocation which is based on various factors like goals, risk appetite, budget, etc. Balance your portfolio in a way that you insulate it against sudden changes in the market.
  • Diversify: You can spread your risks by selecting investments across a broad spectrum of market categories. Diversification helps you reduce the volatility of your portfolio over time. 
  • Long-term investments: One of the key elements of a financial plan is to plan for retirement and other long-term goals. Keep track of how your investments affect your plans to achieve your goals. This way, you can steer clear of past mistakes and build wealth for the future.
  • Have support: You can enhance your financial planning and get a deeper understanding of investments with the help of an expert. Do not hesitate to ask for help from professionals. You might end up saving your money, time, and efforts.

Top 5 portfolio management companies in India 2022

Portfolio management companies are often called Asset Management Companies (AMC).

Sr. No.AMCAverage AMU (Rs. in cr.)(As of the end of last quarter)
1.SBI Mutual Fund6,47,064.29
2. HDFC Mutual Fund4,32,084.97
3.ICICI Prudential Mutual Fund4,68,258.02
4.Nippon India Mutual Fund2,83,260.97
5.Axis Mutual Fund2,60,335.18

In a nutshell

Portfolio management can be tedious, but it saves your money, tax, time, and effort and builds your wealth. It helps you secure your future and manage your finances better. However, thorough research about the market is a crucial element at all stages of portfolio management. Tickertape provides you with all the tools you need to make wise investment decisions. Explore it now!

Frequently asked questions (FAQs)

1. What is the portfolio management process?

Portfolio management involves discussing an investor’s financial goals, risk capacity, return expectations and other personal details to draw a suitable investment strategy. It also involves diversifying funds across asset categories to minimise risk and maximise returns so as to meet the investor’s objectives. 

The portfolio manager also tracks the performance of the investments and can rebalance them to maximise the returns.

2. What are portfolio management services?

Portfolio management services offer to manage an individual or business’ investment on their behalf. They help investors achieve their long-term financial goals by creating wealth. 

Depending on the type of portfolio management, some managers are authorised to execute trades on behalf of an investor, while others merely advise on the feasibility of investment.

3. Why is portfolio management important?

Portfolio management allows you to benefit from a manager’s expertise in markets. It could help you maximise returns and minimise risks and thus effectively achieve your long-term financial goals. Ultimately, it helps keep your finances in check, create wealth, and enjoy financial security.

4. What are the types of portfolio management?

There are four types of portfolio management:
A. Active portfolio management
B. Passive portfolio management
C. Discretionary portfolio management
D. Non-discretionary portfolio management

5. What is the difference between financial planning and portfolio management?

Financial planning is devising an investment plan for an individual according to their goals, risk tolerance, budget, etc. Portfolio management is about investing and managing investments to achieve future goals.

6. What is a portfolio?

A portfolio is a collection of various assets such as bonds, equity, mutual funds, ETFs, etc., owned by an investor.

Anjali Chourasiya
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