What is Portfolio Management?
Developing
a healthy portfolio is an art. It requires a good amount of knowledge and
skill. A good portfolio can be built only after understanding the goals and
constraints of an investor. His risk tolerance will determine what kind of
stocks would form part of the portfolio. Therefore building a lucrative portfolio
is a difficult task. This is where the role of portfolio management is
important. In this article, you will learn the meaning of portfolio management
and the steps involved.
Portfolio Management
Portfolio
management is the process of selecting shares or securities that can give the
investing agency the highest returns after considering the given level of risk.
The fund managers attempt to increase the expected return from the portfolio consistently.
They aim to build an efficient portfolio that has minimum risk and maximum
returns.
What
are the Steps of Portfolio Management?
· Identifying
Objectives and Constraints
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. It is one of the crucial steps of
building a Portfolio Management Service (PMS) as it lays down the foundations
and defines the entire process.
· Investment
Policy Statement
The
second step of the portfolio management process is drafting the Investment
Policy Statement (IPS). This statement is drafted after the objectives and
constraints are known. This document consists of the investment plan and
limitations within which it will perform its operations.
· Expectations
from Capital Market
In
this step of portfolio management, expectations regarding the capital markets
are formed. The risk and return from various asset classes are forecasted over
the long term. The selection of asset class must be optimal as it must either
give maximum returns for the given level of risk or minimize the risk for the desired
level of returns.
· Strategy
for Asset Allocation
The
fourth step of the portfolio management process involves the important task of
asset allocation. Asset allocation is done based on tactical or strategic or a mix
of both plans. Generally while determining the asset allocation the IPS and
expectations from the capital market are combined to find the weight of the target
asset class. This can be termed as allocation based on the strategic plan.
Whereas, a tactical plan involves a short-term change in the portfolio
allocation based on the change in the circumstances of an investor or the
market expectations.
· Execution:
Portfolio Selection
This
stage involves putting the plans into action. In this stage, the plans are
executed by selecting the portfolio. Here the specific assets are selected
after considering the expectation of the capital market along with the investment
allocation strategy.
· Execution:
Portfolio Implementation
At
this stage of the portfolio management process, the execution part is completed
by portfolio implementation. Here the investment is done in mutual funds or directly
into equities. The main focus in this stage is to focus on the efficiency of
execution by looking at factors like timing of execution, transaction costs,
tax effectiveness, etc.
· Monitoring
And Rebalancing
Portfolio
management is not a one-time task. It involves constant engagement with the
client. The portfolio manager must monitor the risk exposures of the portfolio
and compare them with the strategic allocation plan. If required, the manager
must rebalance the portfolio for the better of the client. Transaction costs
and taxes form part of portfolio rebalancing.
· Performance
Evaluation
The
last part of the portfolio management process is the evaluation of performance.
Sometimes a portfolio might be doing well but it might be underperforming in
comparison to peers. Performance evaluation helps in finding areas where
improvement can be done. Performance evaluation is also important to measure
the performance of the portfolio with its objectives and how the portfolio
manager is handling the investments. The portfolio manager’s performance is
evaluated by looking at the absolute returns and relative returns.
The
above mentioned are the steps involved in the portfolio management system. The
whole process of portfolio management requires an understanding of the
financial markets and knowledge to implement the plans correctly. If you are new to the financial market or seek
any assistance regarding investment, you may get in touch with Indira
Securities.
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