Personal Finance Intermediate

What is portfolio management, and why is it important?

What is Portfolio Management?

Key Takeaways

  • Portfolio management is a strategy to make your portfolio better aligned with your goals.
  • You can opt for active or passive portfolio management plans, depending on your risk appetite.
  • Diversification, asset allocation, and rebalancing are some of the important aspects of portfolio management.

In some ways, our investment portfolios resemble a traffic signal which alternates between green and red. Pushing this real-life example a little further, we constantly try to get hold of investment products that would help us meet our short- and long-term financial goals, mindful of the risks involved. That is portfolio management for you, in a nutshell.

However, portfolio management isn’t just about conducting superficial research and stacking your portfolio with debt, equity, and crypto instruments. In fact, it’s all about achieving the right balance, a balance in sync with your objectives. Let’s delve deeper.

To understand portfolio management, we need to understand ‘portfolio’ first. Your portfolio is a bunch of financial projects and instruments that mirror your investment profile. It could include stocks, crypto investments, bonds, PPF, and the like. Yet, each portfolio is different, depending on the risk appetite, near-term goals, and long-term objectives of the investor. Portfolio management helps you customize a portfolio to achieve your goals, considering individual preferences.

What is portfolio management?

It is the resource-intensive process of researching, handpicking, and overseeing investment ideas with a single-minded focus on maximizing returns. The portfolio management strategy you adopt would depend on your time horizon and risk appetite.

Managing a portfolio is a professional skill. While you can always go about it on your own, there are professional portfolio managers who can do the job for you.

Types of portfolio management (portfolio management schemes)

As we have seen, it is a specialized skill and should be closely aligned with your financial goals. Considering this, we can classify portfolio management into the following types:

Active portfolio management (APM)

This mode of management focuses on maximizing returns. In line with this strategy, a sizable portion of capital is allocated to securities trading, stock purchases, crypto exposure, and other high-beta (volatile) asset classes.

Major APM tools are market forecasting and in-depth research and analysis. As the strategy is mandated to be aggressive, the focus is on specific outperforming index stocks and leading crypto assets like Bitcoin and Ether.

Passive portfolio management (PPM)

You might have heard about Index Fund management wherein portfolio managers try and mimic the performance of a specific market index by holding onto the same stocks, allocated in the same proportion as the index weightage. Well, that’s passive management for you.

Most PPM tools focus on structuring portfolios, much like mutual funds or exchange-traded funds. In other words, the idea is to replicate the index and not to be too aggressive with individual, outperforming stocks.

Discretionary portfolio management

This is more of a goal-oriented investment strategy where the focus is on inputs from the investor. Mostly handled by portfolio managers, a discretionary portfolio management plan takes the risk appetite and goals into consideration.

Non-discretionary portfolio management

Non-discretionary portfolio management involves inputs from the managers handling the portfolio. This approach works best when there are highly experienced and well-known managers handling your profile.

While these are the broad categories of portfolio management strategies, each approach can be tweaked further depending on the type of portfolio you wish to put together. Accordingly, some of the portfolio strategies can be customized to suit investor preferences. Some examples are:

  • Income-based portfolio
  • Defensive portfolio
  • Aggressive portfolio
  • Hybrid portfolio
  • Speculative portfolio

Active vs. passive management

Still, you might have doubts about the portfolio management strategy that would work for you. Here’s a ready reckoner which should help you make an informed choice.

ParametersPassive Portfolio ManagementActive Portfolio Management
Time frameLong-term strategy (set-it-and-forget-it plan)Concerns active portfolio handling and short-term bursts
AssetsFocuses more on replicating index performance Focuses on investing in individual (high-performance) stocks
NatureSeeks to mimic the performance of the index, minimizing risksAn aggressive management strategy that aims at maximizing returns 

Objectives of portfolio management

To elaborate, portfolio management is a SWOT (strength, weakness, opportunities, and threats) analysis of diverse investment instruments, completely aligned with the goals of the investor—that is you. Even though the process is meant to maximize profits and protect investments against risks, here are some of the other objectives a portfolio management strategy seeks to achieve:

  1. Maximizing ROI (return on investment);
  2. Rebalancing the portfolio, depending on the market;
  3. Diversification of the investment portfolio;
  4. Reducing exposure to risks;
  5. Ensuring flexibility;
  6. Protecting earnings in volatile market environments;
  7. Optimal allocation of assets.

And while these are some of the key objectives, the ultimate aim of a portfolio management strategy is to secure your financial future.

How to manage your own portfolio

It goes without saying that credible and experienced portfolio managers can do a great job. However, managing your own portfolio is also a viable strategy if you have the requisite skill sets.

However, before you decide to go it alone, you should get a grip on fundamental and technical analysis. This form of research will help you understand the market movements and company-specific developments that might (or might not) impact the value of your investments better. Also, honing your research skills would make you good at picking the right assets such as crypto, equities, debt funds, and bonds.

Once the research is out of the way, you need to get better at the following aspects of managing portfolio as well:

  1. Asset allocation: You need to strike a balance between non-volatile and volatile assets, depending on the risk appetite and financial goals.
  2. Rebalancing: If you wish to manage your own portfolio, make sure you keep rebalancing the ratio between debt and equity or non-volatile and volatile assets depending on the age, market conditions, and current financial goals. Using the equity glide path method to increase the percentage of equity investments in a debt-heavy portfolio is one of the prime examples of rebalancing.
  3. Diversification: Some assets such as crypto are riskier than others. But they generate higher returns. Conversely, some assets like fixed deposits lag in terms of profit generation, but they will hold your portfolio in good stead in a bear market. Therefore, it is important to learn to keep a diversified portfolio— so as to make steady profits without exposing yourself to high-risk scenarios.

What is portfolio management process?

Nothing works without a process. Not even portfolio management. If you wish to handle your own investments, here are some steps you need to follow diligently:

  1. Identify the objectives of your portfolio: Write down the preferred format for returns—stable gains, massive capital appreciation, building a retirement corpus, or anything else.
  2. Estimate the market: Analyse every asset class in the market along with the risk attached and the chances of profit for each.
  3. Take decisions: Pick assets depending on the risk management guidelines. You can even ascertain your long-term goals and pick a ratio that works best.
  4. Formulate strategies: Finetune investments by factoring in the investment horizon and preferred gains.
  5. Focus on profit: At any point in time, pick some assets that are currently in profit. However, take a look at the technicals, liquidity, project/company credibility, and fundamentals before proceeding.
  6. Implement portfolio: It’s finally time to start putting money into the investment instruments selected.
  7. Evaluate and revise: Keep following the set plan for a while and consider revising the ratio as per efficiency, requirements, and current market conditions.
  8. Rebalance: Make specific portfolio tweaks if the evaluation strategy suggests so.

Please note that rebalancing is an important step in managing your portfolio, which needs to be repeated depending on changing priorities.

Conclusion

Clearly, the best portfolio management strategy, either self-managed or manager-led, will help you devise the best investment plan that will suit your needs. The discussion above should serve as a general primer for your investment journey. Yet, some personalized tweaks might be necessary, considering factors such as the investor’s age, risk appetite, income, and lifestyle preferences. As always, DYOR.

FAQs

What is portfolio management in simple words?

Portfolio management is the process of strategically managing a collection of investments, such as stocks and bonds, to achieve specific financial goals while balancing risk and return.

What is IT portfolio management and why is it important?

IT portfolio management involves assessing and prioritizing an organization’s IT projects strategically. It’s crucial for optimizing resources, reducing waste, and aligning IT with business objectives.

What are the types of portfolio management?

Portfolio management includes active and passive strategies. Active involves frequent trading for returns, while passive adopts a long-term approach mirroring market indices.

What is portfolio manager short note?

A portfolio manager is a professional responsible for making investment decisions, implementing strategies, and managing a fund’s assets, aiming to maximize returns within specified guidelines.

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