Tips For Effective Portfolio Management

Last Updated July 29th 2021
8 Min Read

It is a no brainer - investing is essential for building wealth. You are not only saving a corpus for bad times and emergencies but also allocating money in the hope of making your future better. 

As an investor, you might have invested in a varied collection of assets or investment tools such as shares, forex, bonds, stocks, mutual funds, real estate, cryptocurrency, etc. 

However, just investing your hard-earned money in anything is not going to help. You need a structured process and a portfolio to invest wisely. It is important to manage your portfolio well or you could even end up with lower returns.

This is where an effective portfolio management (and manager) will be able to maximise your returns successfully.

What is Portfolio Management?

Portfolio management is all about making decisions by evaluating a varied assortment of investments and matching them as per your income, budget and time horizon. In a portfolio approach, the investments are matched to your objectives, selecting the right investment mix and policies, and allocating assets as per risk and financial goals. Portfolio management also refers to determining the best plans and policies to invest in in an attempt to maximise returns. Ultimately, the goal is to achieve a profitable investment mix with minimum risk.

To successfully manage your portfolio you need the expert guidance of a portfolio manager.

Responsibilities of a Portfolio Manager

A portfolio manager is someone who understands the client’s financial needs, crafts a suitable investment package as per the client’s financial goals and appropriate level of risks, invests on behalf of the client and manages investment allocations.

To be a successful portfolio manager, he/she should keep abreast with the current investment and trade news in the financial market. It is a good idea to follow investment analysts and researchers on social platforms to gain a better understanding of market conditions and domestic and global developments that may impact investments.

A portfolio manager needs to make quick decisions and finalise the best financial plan for his clients and invest on their behalf.

Processes of Portfolio Management

So, what are the steps in the portfolio management process?  

Identification of objectives: The very first process a portfolio manager needs to do is to understand the client’s objectives and limitations and design an investment policy statement that would work to their advantage. The balance of equity, fixed income, cash and other securities will differ from client to client.

Estimating the capital market: Based on the objectives and limitations of each investor, the expected returns and associated risks are analysed.

Asset allocation - diversification: Another important step is to decide a perfect blend of suitable asset classes, asset combinations and proportions. For example, a client asset allocation could comprise of 70% fixed income securities, 15% cash and equivalents, and 15% equities. Another way to diversify is to put money in both volatile and non-volatile assets in such a way that helps generate substantial returns at minimum risk.

Develop portfolio strategies: An investment strategy must be developed to generate maximum value to a portfolio after factoring in the time frame and risk exposure.

Understanding the profitability of investments: The next step is to analyse the profitability of assets by factoring in their fundamentals, credibility, liquidity, etc.

Implementing the portfolio: Once you have your portfolio planned out, you can put it to action by investing in the right investments.

Monitoring, evaluating and rebalancing the portfolio: Did you know that the right portfolio choice for you today could not work even in a years' time? 

A portfolio needs to be monitored, evaluated and rebalanced regularly to keep up with its efficiency and maximise earnings. Rebalancing also helps to understand whether the portfolio performed over time, were the objectives met, the ratio of portfolio components to yield higher returns at minimal loss. etc.

Check Out: Strategies For Diversifying Your Portfolio

Types of Portfolio Management

Portfolio management is an umbrella term for a specialised way of effectively managing the investments of an individual or a group. But, in practice, it can be classified into distinct types, based on the approach taken. 

Active portfolio management: In this approach, the focus is purely on ensuring the highest possible returns. The portfolio manager gives more emphasis on actual trading with an aim of maximising profits. He is always on the hunt for stocks that are undervalued that hold the potential to appreciate and provide a good upside. 

Passive portfolio management: Contrary to the active style, passive portfolio management is oriented to a more sedate and conservative approach. Here, the manager aligns the investor profile to the market conditions. The strategy is to maintain a steady appreciation even if the growth curve is less ambitious. To this extent, he is more likely to invest in low risk, low growth alternatives like index funds over stocks.  

Discretionary portfolio management: Here, a portfolio manager takes note of his client’s profile, appetite for risk and his investing goals to construct an investment strategy. The manager takes all investment decisions based on these inputs and the mandate his client has given him. 

Non-discretionary portfolio management: This approach is ideal for more advanced investors who have a fair understanding of investments but are still dependent on the advice of professionals. The portfolio manager continues to feed his client with advice and recommendations that may or may not be followed.  

Objectives of Portfolio Management

Portfolio management is an important financial management tool that is practised widely. But what would a list of its top objectives look like? 

Here is a look at the many reasons how and why it can be so fundamental to investment goals. 

Capital appreciation and a higher rate of returns: First and foremost, it is about the basic tenet of investment – seeing your capital appreciate. When you make an investment, it is with a clear objective to increase the value of your portfolio. At an individual level, there is usually a limit to which an investor can draw on his skills, knowledge and experience to scale up operations and make the right decisions consistently. 

But with portfolio management, there is a level of expertise, order and professionalism to the way a portfolio is managed. 

Optimise resource allocation: With portfolio management, a client has the benefit of his portfolio handled such that there is optimum use of the resources he brings in. A portfolio manager can better understand the investor profile and the investment goals and align them such that the portfolio is built with the right stocks and managed optimally. 

Reduce chances of risk: Besides the skill of building a portfolio to maximise returns, a good portfolio manager also knows how to mitigate risk and avoiding the potential for losses. He is equipped with the right knowledge levels, access to updated information and the right infrastructure like software and analytical tools to manage risk.  

Ability to customise: Portfolio management also offers the advantage of bringing an element of flexibility to investing. A good manager would always be monitoring the portfolio and be ready with timely and appropriate changes to keep it on track. Also, it is possible for him to introduce the level of customisation where needed. 

Read Also: How To Invest Money: Smart Ways To Make Your Money Grow

The Ideal Customer for Portfolio Management

So who is portfolio management ideal for? 

While the concept is a tried and tested one, it may not suit everyone. It is a specific facility with a clear target market that could benefit from it. Here is a look at the ideal customer for portfolio management. To more effectively make use of portfolio management, it is important to know if it is right for you. 

Investors not knowledgeable enough about market offerings

There are investors who are either starting off with investment products or are too early into their investing. A wrong decision here or a bad call there can potentially cause a big loss. Deciding on the right investment options and choosing the best mix would require an understanding of the broad concepts of investing and the specifics at the stock level. It is best for this type of investor to entrust their funds to a portfolio management company. 

Investors who are not knowledgeable enough about market influencers

Another aspect of the lack of adequate knowledge in investing goes beyond the products offered. It is not possible for everyone to have a sound understanding and awareness of market conditions and dynamics and their effects on investments. From minor aberrations to major economic developments, there are many variables that can impact the stock prices. All this may be too technical for the average investor and they would find portfolio management as an ideal solution here. 

Investors who are too busy to give time 

When you are too tied down by work or are travelling most of the time or just not able to devote enough time to managing your investments, it is a good idea to opt for portfolio management. Investing can demand a lot of time and attention and neglecting it can give you a few shocks. That is why it is best to leave it to a professional like a portfolio manager who can cover up for your lack of time. 

Investors looking for diverse investment products

Even an investor who is familiar with the workings of the stock market, in general, can feel out of their depths with more complex investment products. A portfolio management approach can greatly help if you need to go over and beyond the regular options. For example, if you want to get into commodities, you may need a specialised knowledge. Similarly, investments in stocks in sunrise sectors or those that are under the radar will need more expert help.  

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