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Portfolio Management - An Overview


Portfolio-Management is used to select a portfolio products that help in maximize the profitability or value of the portfolio and to provide balance. Before we go in detail about portfolio management we first need to understand what exactly portfolio means. Portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual exchange-traded and closed-ended fund counterparts. Investors should construct an investment portfolio in accordance with risk tolerance and return requirements. Imagine a pie that is divided into pieces of varying sizes, investment portfolios are just the same representing a variety of asset classes or types of investments to accomplish an appropriate risk-return portfolio allocation.

Portfolio Management

Now that we know about Portfolio, it can be said that portfolio management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals as well as institutions, and balancing risk against performance. There are two forms of portfolio management :
• Passive management
• Active management
Passive management simply tracks a market index, commonly referred to as indexing also known as index investing. Active management involves a single manager, co-managers, or a team of managers, based on research and decisions on individual holdings attempt to beat the market return by actively managing a fund's portfolio through investment decisions.

Portfolio manager

The person or persons who are responsible for investing a mutual, exchange-traded or closed-end fund's assets, implementing its investment strategy and managing the day-to-day portfolio trading are called portfolio managers.

Steps to be determined while deciding on the Portfolio Management

• Determining the Appropriate Asset Allocation
• Attaining the Portfolio Designed in Step 1
• Re-evaluate Portfolio Weightings
• Stabilize Strategically

Determining the Appropriate Asset Allocation

The basis of constructing a portfolio lies in ascertaining the individual financial situation and investment goals. The factors to be considered are age, how much time you have to grow your investments, as well as amount of capital to invest and future capital needs. The Investment strategy of a single college graduate just beginning his or her career would differ from that of a 55-year-old married person expecting to help pay for a child's college education and plans to retire.

Another factor to be considered is the risk tolerance level of the individual. Analyzing the current situation and future needs for capital, as well as the risk tolerance level will determine how investments should be allocated among different asset classes. There are two types of Investors; one is conservative and the other aggressive. Conservative Investors are risk averse and they would invest more in Fixed Income securities and less in equities and cash equivalent, where as Aggressive Investors are risk lovers and they either equally distribute their investments in fixed income securities and equities or more in equities and considerably less in fixed income securities.

Attaining the Portfolio Designed in Step 1

Once the right asset allocation is determined, we simply need to divide the capital between the appropriate asset classes. There are several ways to go about choosing the assets and securities to fulfill the asset allocation strategy, not to forget to analyze the quality and potential of each investment to buy because not all bonds and stocks are the same.

Stock Picking - The stocks that has to be chosen should satisfy the level of risk we want to carry in the equity portion of our portfolio - sector, market cap and stock type are factors that has to be consider. The companies have to be analyzed using stock screeners to shortlist potential picks and then a more in-depth analysis should be carried on each potential purchase to determine its opportunities and risks.

Bond Picking – The factors to be considered while choosing bonds are the coupon, maturity, the bond type and rating, as well as the general interest rate environment.

Mutual Funds - Mutual funds is an investment alternative chosen by people who pool their money to buy stocks, bonds and other securities selected by professional managers employed by an investment company. Since mutual funds invest in a number of different securities, an occasional loss in one security is often offset by gains in other securities.

Exchange-Traded Funds (ETFs) - ETFs as mutual funds that are traded like stocks. ETFs are similar to mutual funds, its just that they represent a large basket of stocks - usually grouped by sector, capitalization, country and the like - except that they are not actively managed, but instead track a chosen index or other basket of stocks. Since they are passively managed, ETFs offer cost savings over mutual funds while providing diversification.

Re-evaluate Portfolio Weightings

The portfolio established should be analyzed periodically as the market movements would keep fluctuating which probably might change the initial weightings we would have made. The current financial situation, future needs and the risk tolerance level would also change. Accordingly the portfolios should also be adjusted.

Stabilize Strategically

In case if we have adjusted our portfolio due to the various factors mentioned above, we have to choose our securities according to step-2. Once it is determined as to which securities we need to reduce and by how much, decide which underweighted securities we will buy with the proceeds from selling the overweighed securities. To choose the securities, use the approaches discussed in Step 2. The tax implications need to be considered when selling assets to rebalance the portfolio. Investment in growth stocks might have appreciated strongly over the past year, but if we were to sell all of our equity positions to rebalance the portfolio, we may incur significant capital gains taxes. In such case, it might be more beneficial not to contribute any new funds to that asset class in the future while continuing to contribute to other asset classes so that it will reduce the growth stocks' weighting in the portfolio over time without incurring capital gains taxes.

Basic Guidelines for Investment

• 1. Confer top priority for a residential house
• 2. Integrate life insurance with your investment plan
• 3. Choose a risk posture consistent with the stage in investor life cycle
• 4. Sneak through the world of precious objects
• 5. Avail tax shelters
• 6. Adopt a suitable formula plan
• 7. Judiciously select the fixed income instruments
• 8. Focus on fundamentals keeping an eye on technical.
• 9. Moderately diversify
• 10. Periodically review and modify the portfolio

Financial Planning
Tax Planning
Investment Planning