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All about Portfolio Management

November 18, 2015
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What is a Portfolio?

A portfolio can be defined as different investments tools namely stocks, shares, mutual funds, bonds, cash all combined together depending specifically on the investor’s income, budget, risk appetite and the holding period. It is formed in such a way that it stabilizes the risk of non performance of different pools of investments.

What is Portfolio Management?

Portfolio Management is defined as the art and science of taking decisions about the investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. (Source: Investopedia).

Simply put it, someone has given you their hard earned money and you need to help them increase the capital in the best of diversified ways. This should be in a way in which the risk- return ratio is aptly maintained considering the profits in mind and the holding period of investments.

Portfolio management refers to managing an individual’s investments in the form of bonds, shares, cash, mutual funds etc so that he earns the maximum profits within the stipulated time frame. It is the art of managing money of an individual under the expert guidance of portfolio managers.

It is the detailed SWOT analysis (strengths, weaknesses, opportunities and threats) of an investment avenue, which could be in the form of debt / equity, domestic / international, with the goal of maximizing return at a given appetite for risk.

Types of Portfolio Management

There are majorly four types of portfolio management methods:

  1. Discretionary portfolio management: In this form, the individual authorizes the portfolio manager to take care of his financial needs on his behalf.
  2. Non discretionary portfolio management: Here the portfolio manager can merely advise the client what is good or bad, correct / incorrect for him, but the client reserves the full right to take his own decisions.
  3. Passive portfolio management: It is the form which involves only tracking the index.
  4. Active portfolio management: This includes a team of members who take active decisions based on hard core research before investing the corpus into any investment avenue. (e.g. close ended funds).

Objectives of Portfolio Management

  • It is aptly put as the customization of the investment needs catered by the portfolio managers as per the defined requirements.
  • Portfolio management helps in providing the best options of investments to individuals as per their defined criterions of their income, budget, age, holding period and risk taking capacity.
  • This is mainly done by the Portfolio managers who understand the investors’ financial needs and accordingly suggest the investment policy that would have maximum returns with minimum risks involved. Aptly put, it is risk reduction through diversification.
  • This is the method preferred by those who believe in having liquidity in investments so that one can get the money back when needed.
  • Some of the portfolio management schemes are also done for tax saving purposes.
  • It helps the investors maintain the purchasing power.

Who would opt for Portfolio management?

  • Limited knowledge: It is opted by someone who would like to invest in different investment avenues like stocks, metals, other commodities but does not have the knowledge of doing it.
  • Limitation of time: People who would be from a different work profile may not have the time to set and track their portfolio and hence would hand it over to learnt and experienced hands.

How Portfolio Management takes place practically?

The actual method of Portfolio Management is different from that we do it academically. The investors carry out a market survey in terms of the different schemes and their performances in the past, the fund managers involved their experiences and risk reward ratio and accordingly select the fund in which they would chip in their money.  

  • It is initiated with a contract between the investor and the company that would have different portfolio schemes. These could be purely stock / shares oriented or may have a blend of different investment avenues.
  • Once the contract is in place, verifying the fee structure, time frame, risk exposure and the kind whether discretionary or non discretionary is decided.
  • After all this is in place, the fund manager plays his role. The portfolio is structured on the basis of the agreed terms and then churns the portfolio at regular intervals.
  • The report of the performance of the portfolio is periodically sent to the investors.
  • There are certain computer-software that are used by the managers to keep a track of the developments in the portfolio.
  • The fund manager takes decisions on the basis of the hard core research that is company specific as well as market related done by the team of the portfolio managers.

Example of Portfolio Management

Say the investor has Rs 1,00,000 to start with and the manager has to distribute this across the different investment options. So the portfolio manager according to the risk taking capacity and the kind of returns calculated provides a portfolio structured in tandem to that.

So for example, the portfolio could include real estate, fixed deposits with banks, mutual funds, shares and bonds. There shall be bifurcation across these five units of the total corpus provided.

Thereby, depending on the security and the return from these avenues the bifurcation is done.

On the other hand, the portfolio could be stock specific as well. Thereby, the bifurcation is done across researched stocks in the markets.

Hence, depending on the requirements of the investors, the fund manager takes appropriate decisions and allocates the funds.

Career as a Portfolio Manager

An individual who understands the client’s financial needs and designs a suitable investment plan as per his income and risk taking abilities is called a portfolio manager. A portfolio manager is one who invests on behalf of the client. After understanding the financial goals and objectives of an investor, the portfolio manager provides the appropriate investment solution. The role played by the portfolio manager is indeed a challenging, responsible and answerable one. That is the reason why with the hierarchy across the portfolio management team, the responsibility as well as the remuneration is decently high. The more experienced the fund manager the more is the weightage given to these managers and accordingly place them in a good demanding position in terms of salaries. If to scale it, these run from lakhs to crores as per the market and individual experience. All the pay packages totally depend on the experience and the returns earned for the investors in good or bad times.


In the current scenario where there is quality money in the markets, portfolio management is indeed a preferred method of making investments. With the range of products available across different schemes there is something to offer for every individual as per the different criterions defined. This is one of the highly researched, tracked and appropriate methods of investment giving exposure across different options available.


About the Author

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