January 18, 2016
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 nonperformance of different pools of investments.
Portfolio Management is defined as the art and science of making 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 the 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.
There are majorly four types of portfolio management methods:
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.
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 with 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.
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 weight 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.