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What is Portfolio Management? Research Team | Posted On Monday, October 01,2018, 11:22 AM

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What is Portfolio Management?



A portfolio is a collection of investments where you and other investors have put your money. Portfolio management is selecting and managing investments, at minimum risk with an objective of getting the maximum returns. A portfolio tells how investments are doing, without having to check each investment individually. Investing money in the right places means a healthy portfolio. This also gives an excellent opportunity to book profits. Portfolio management means you must regularly monitor the portfolio and sell off the non-performing investments to cut losses. You are able to identify well-performing investments and this gives an idea on where to invest.

In simple words, portfolio management is the art of making investment decisions, matching investments with financial goals, asset allocation (where to put how much), and also balancing risk in investment.

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What is Portfolio Management?

Take a look at the process of portfolio management.

1. Make a policy statement:

The first step in portfolio management is you need to make a policy statement. This is like a blue print. You need to understand investment goals and set them in right measure. (Set investment goals which can be achieved).

A mere policy statement is no guarantee of success. It’s just a path which guides you to achieve investment goals. You can set realistic investment goals after understanding the risk involved and studying the financial markets.

2. Get an investment strategy:

You need to come up with an investment strategy. (This is how you plan your investments). You will need to get an idea on the market conditions and also take a look at future trends. You will have to keep monitoring the portfolio and understand how the market conditions, political landscape and any major event can affect your portfolio.

3. Execute the plan

This is the most important part of portfolio management. Based on market conditions and future trends (you try to forecast the markets), you can set the investment strategy and easily allocate money across asset classes (debt or equity or a mix of both), markets and securities. You must construct a portfolio at minimum risk (This is based on your risk profile) to achieve intended investment objectives.  

4. Monitor the portfolio

You have to keep monitoring the portfolio to check if it’s on track. Based on how the portfolio is performing, you might have to modify the investment strategy. You evaluate the portfolio performance, see if it’s on track and if not, implement corrective measures to bring it back on track.

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Objectives of portfolio management:

Asset allocation:

Asset allocation is at the heart of portfolio management. Good asset allocation helps achieve investment objectives at minimum risk with maximum return. This is done by selecting investments which have low correlation to each other.

If you are an aggressive investor, you may have a high allocation towards equity. The portfolio would be weighted more towards equity.

If you are a conservative investor, you may have a high allocation towards debt. The portfolio would be weighted more towards debt.


Diversification is the spreading of risk across asset classes. When it comes to investments, it’s difficult to predict winners and losers. Diversification seeks to get the maximum returns with minimum volatility.


You have to select and maintain that asset mix which gives maximum returns with minimum risk. If by some event out of your control, or for whatever reason the portfolio has changed and no longer reflects the intended risk/return profile, you need to rebalance it.  If you don’t, the portfolio gets exposed to high risk and adverse economic and market conditions which can cause heavy losses.

Importance of portfolio management

  • Helps in decision making vis-a-vis investments.
  • Efficient risk management.
  • Your Principal amounts invested are safe.
  • You enjoy liquidity in investments.
  • You have stable returns and peace of mind.
  • Efficient tax planning means no excess amounts paid in tax.

Types of portfolio management:

Discretionary portfolio management:

In this type of portfolio management, the manager makes the decisions. He adopts the strategy he thinks is the best. He does so in line with your investment and financial goals. You sit back and enjoy the profits.

Non Discretionary portfolio management:

In this type of portfolio management, the manager is just a financial counselor. You are the decision maker. Once the manager receives the signal (go-ahead) from you, he makes the investment. This move is good if you know what you are doing and it cuts down the confusion.

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