What is Portfolio Management?

Portfolio Management refers to the management of your investment portfolios and money. The portfolios are managed by investing them in instruments like stocks, bonds and mutual funds.

In India, portfolio management is offered by several regulated entities like portfolio managers, investment advisors, research analysts and mutual fund distributors. However, only portfolio managers can truly offer end-to-end portfolio management by taking investment decisions on behalf of you.

Portfolio managers offer investment solutions to clients through Portfolio Management Services in India.

Objectives of Portfolio Management

Portfolio management has many objectives. Different objectives can take precedence in different situations. However, the following objectives apply for most situations:

• Generating maximum returns within the constraints of your risk tolerance
• Ensuring that the asset allocation is aligned with your risk level
• Designing an investment portfolio around your financial goals
• Ensuring that the investment portfolio is always sufficiently liquid
• Minimizing the costs of investing associated with transactions and taxation

However, certain portfolio managers are great stock pickers and focus purely on generating high returns. Wealth maximization is more important for such portfolio managers than customizing investment portfolios to serve client-specific needs or objectives like minimizing costs of investing.

Types of Portfolio Management

Broadly, there are two types or styles of portfolio management:

Active Portfolio Management

Active portfolio management involves the portfolio manager picking fundamental securities like stocks and bonds to create investment portfolios. In active management, the portfolio managers back their ability to select stocks and bonds that are likely to perform better than others.

Successful active management is difficult and requires sophisticated processes to be established and followed. The objective of active portfolio management is to beat the market represented by a benchmark index like NIFTY 50 or S&P 500.

Passive Portfolio Management

Passive portfolio management doesn’t involve picking individual stocks and bonds but investing in passive instruments like index funds and ETFs (Exchange Traded Funds). The objective is to generate returns in line with the market or benchmark indices like NIFTY 50 and S&P 500 through index funds and ETFs instead of trying to outperform them.

However, passive management is rarely purely passive. It generally involves dynamic asset allocation, where the portfolio manager tries to increase/decrease allocation to asset classes to generate higher returns.

Portfolio Management Process

A portfolio management approach focused on you (the client) will follow the process below:

Step 1: Define financial goals and risk

You are at the center of the portfolio management process. So, it is logical that understanding your financial goals and risk tolerance levels is the starting point of the portfolio management process.

Defining financial goals and risk helps the portfolio manager lay down a realistic investment plan that he/she can get approved by you.

Step 2: Define optimal asset allocation

Once the portfolio manager understands your goals and risk levels, the next step is to define the optimal asset allocation suited to you. Asset allocation refers to capital distribution among asset classes like equity, bonds, cash, real estate and others.

Research has shown that asset allocation accounts for 90% of the portfolio returns. 

Step 3: Manage the portfolio using a strategy

After the optimal asset allocation is defined, the portfolio manager will invest in securities for each asset class included depending on the investment strategy. 

For example - An active portfolio manager will pick individual stocks and bonds for you. In contrast, a passive portfolio manager will invest in a portfolio of index funds that track equity and debt indices like NIFTY 50 and CRISIL 10 year gilt index.

Step 4: Actively monitor the portfolio

Actively monitoring the portfolio is a crucial step since it allows the portfolio manager to correct things when things are not going as planned. 

Simply rebalancing the client portfolio to keep it in line with the investment strategy/your goals/risk is an example of active monitoring.

Step 5: Make changes when necessary

Changes in regulations and your needs are not unusual. But they can make the existing portfolio suboptimal/inefficient. 

It is important to keep track of your needs and regulations so that necessary changes can be made to keep the portfolio optimized. You should be quick to convey changes in your needs (financial situation/goals) to the portfolio manager while the portfolio manager should follow regulatory changes closely to recommend changes if necessary.

Who is a Portfolio Manager?

A portfolio manager is someone who constructs and manages client investment portfolios. In India, portfolio managers operate Portfolio Management Services or PMS that cater to clients with an investible surplus of Rs. 50 lakh and above.

Portfolio managers are investment experts who generally have qualifications like the CFA or an MBA in Finance and years of experience in the investment industry. Most portfolio managers are supported by a team of research analysts who help the portfolio managers make the right investment decisions.

Portfolio Management: Frequently Asked Questions

What is the scope of portfolio management?

Portfolio management, although vast, has a scope limited to investing in the right assets and instruments and creating the right investment portfolio. Other aspects of personal finance, like budgeting, insurance, credit cards etc., are outside the scope of portfolio management.

What is the need of portfolio management?

Portfolio management is needed broadly for two reasons. First, to personalize the investing process to the client’s needs and risk profile. Second, to give a structure to the investment process and focus on important aspects like asset allocation, costs and liquidity. 

What is the difference between security analysis and portfolio management?

Security analysis involves researching and analysing securities like stocks, bonds, mutual funds etc., to determine the most promising ones. Portfolio management has a wider scope than security analysis since it also involves creating and managing investment portfolios suited to client goals and risk.

What are the advantages of portfolio management?

The most significant advantage of portfolio management is it gives structure to the investment process and gives clients a portfolio customized to their needs.

What is the Markowitz Model of portfolio management?

Markowitz Model of portfolio management, AKA the Modern Portfolio Theory (MPT), is a Nobel prize-winning concept that gives portfolio managers a framework to optimize investment portfolios for a given level of risk through diversification and asset allocation.

Should I invest in an active portfolio or a passive portfolio?

At Dezerv, the answer to this question is that a mix of active and passive investing is optimal. Passive investing should be used in where beating the market is difficult, whereas active investing works in pockets where beating the market is relatively easy.