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Portfolio Management - What is Portfolio Management, Objectives, Types & Process

Portfolio Management

India today is home to many successful businessmen and high salaried corporate individuals. With increasing income levels, there is a need for lucrative investment avenues for high net worth individuals to earn good returns on their investment corpus. High-income individuals especially those with limited financial knowledge turn to portfolio managers to manage their investments more profitably.

Now, what is portfolio management?

Portfolio management involves prudently managing one’s investments, ensuring the right mix of investments which are regularly monitored and adjusted to earn a maximum return. Portfolio management services involve the application of investment strategies by expert fund managers to the investment portfolio of its client with the intent of maximizing returns within the acceptable risk level. Portfolio managers earn a commission which can be in the range of 3 to 5% of the portfolio value for undertaking these services. In India, portfolio management services are mostly opted for by HNIs as portfolio managers require a minimum investment commitment of INR 25 lakhs.

The key to portfolio management services is that the entire responsibility of investment portfolio management is handed over to the portfolio manager. The portfolio manager, generally a domain expert undertakes all the required stock research and continuously monitors the investments. The portfolio managers take investment decisions in line with the investor’s goal and keep them updated about the developments in their portfolio.


Objectives of Portfolio Management Services

The major objectives of Portfolio Management can be listed as below.
o Customization of the investment portfolio of the HNI client, which is not possible for other investment options like mutual funds
o The flexibility of choosing your own stocks as compared to mutual funds, which depends on the fund manager's discretion
o Transparency of the costs and the fees along with the charges for the portfolio management services


Need for Portfolio Management Services

After knowing about portfolio management meaning, let us have a look at why portfolio management is important in investments.

o Extensive Research & Expertise
Portfolio management services are provided by professional and expert portfolio managers. Backed with years of expertise and detailed research on the market and specific stocks, they are in a better position to optimize the mix of stocks. This level of expertise is unlikely to be available to an individual and thus it can be more beneficial.

o Continuous monitoring
Portfolio managers are entrusted with the responsibility of the investor’s portfolio and are dedicated to growing the investor’s corpus. They continuously monitor the market trends as well as its impact on the investor’s portfolio and take timely decisions to maximize returns or minimize losses. This type of dedicated monitoring is difficult to achieve at an individual level.

o Provides a customized portfolio for high net worth individuals
Portfolio managers do not have a ‘one size fits all’ approach. They consider the specific investment goals of each investor and tailor make the portfolio mix to suit the investor. Investor’s need not worry about whether their portfolio is aligned with their goals as portfolio management services take care of this aspect.

o Generation of better returns
The cumulative effect of the above factors results in portfolio management services having a greater potential to earn higher returns as compared to what an inexperienced individual investor may be able to achieve on his own.


Understanding Portfolio Management Services

We covered earlier about the portfolio management meaning. Now, the main objective of portfolio management is to design investment strategies that give maximum returns at a nominal risk level. Now, let's look at the portfolio management process.

The portfolio management process is a continuous process and not a one-time act. Let us have a look at the steps involved in the Portfolio Management Process.

o Security Analysis
This is the primary stage of the process. Here, the major task is to identify the risk factors and the returns expected from the securities. These should match up with the investor’s long term financial goals and their risk enduring capability.

o Analysis of the Portfolio
Once the risks and securities are identified, a large number of portfolios can be created. These portfolios are known as feasible portfolios.

o Portfolio Selection
Out of all those feasible portfolios that are created, the portfolio manager will select the ones which are the most suitable for the investors.

o Portfolio Revision
After portfolio selection is done, the portfolio manager and his team will keep a close eye always on the selected portfolio to make sure that no opportunity for obtaining a maximum return for the investor is missed.

o Evaluation of portfolio
Here, in this phase, the portfolio is assessed periodically to find out the return that has been obtained from the portfolio against the risk that is involved. Here, if there is a necessity for making some changes into the portfolio, it is implemented to minimize risk and optimize return.


The Key elements of Portfolio Management

Let us have a look at the key elements of portfolio management.

  • One of the major key elements of investment portfolio management is customization. Those investors who are not very aggressive can add more stable investments into their portfolio. On the contrary, investors having an aggressive profile can add up volatile investments into their portfolio
  • Portfolio management requires fundamental analysis. This analysis helps to identify the selection of stocks that can meet the investment goal. Fundamental analysis involves assessing the financial position of the company
  • Portfolio management also involves undertaking market research and determining risk factors that have an impact on the market and the stocks in the portfolio. Being updated with changes in these risk factors and managing the portfolio to mitigate these on time is key
  • Successful investment portfolio management necessitates continuous monitoring of the market and performance of the portfolio relative to the market. A pro-active approach in this regard can help make timely decisions to maximize profits in a bullish market and minimize losses in a bearish market


While these are some of the standard elements and steps involved in portfolio management process, it may vary from one company to another.


Types of Portfolio Management

Portfolio Management can be further classified into Discretionary Portfolio Management and Non-discretionary portfolio management.

In discretionary portfolio management, the portfolio manager has the complete authority to take all decisions on behalf of the client. The Portfolio Manager is responsible for taking care of the financial objectives of the client, carrying out documentation and filing tasks as well.

Non-discretionary portfolio management is somewhat different from discretionary portfolio management in terms of discretionary powers. Here, the portfolio manager can give suggestions and advice to the investor on investment strategies. However, the final decision is taken by the investor himself.

Portfolio Management brings a lot of benefits to the investors but at the same time has certain pitfalls as well. If you select to opt for portfolio management for your investments, then it is inevitable that you keep your investment goals and level of risk exposure clear with the portfolio managers. This will be the main factor influencing your returns and your investment strategy. Experts at IndiaNivesh will provide the right advice keeping your risk-taking ability and goals in mind and thus, giving you a well-balanced portfolio.




Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.