Developinga healthy portfolio is an art. It requires a good amount of knowledge andskill. A good portfolio can be built only after understanding the goals andconstraints of an investor. His risk tolerance will determine what kind ofstocks would form part of the portfolio. Therefore building a lucrative portfoliois a difficult task. This is where the role of portfolio management isimportant. In this article, you will learn the meaning of portfolio managementand the steps involved.
Portfolio Management
Portfoliomanagement is the process of selecting shares or securities that can give theinvesting agency the highest returns after considering the given level of risk.The fund managers attempt to increase the expected return from the portfolio consistently.They aim to build an efficient portfolio that has minimum risk and maximumreturns.
Whatare the Steps of Portfolio Management?
·IdentifyingObjectives and Constraints
Thefirst step of the portfolio management process is to identify the investmentobjectives and constraints of the investor. In this planning stage, the desiredoutcomes of the client are evaluated against the risk he can afford to take andthe returns he expects out of the investment. It is one of the crucial steps ofbuilding a Portfolio Management Service (PMS) as it lays down the foundationsand defines the entire process.
·InvestmentPolicy Statement
Thesecond step of the portfolio management process is drafting the InvestmentPolicy Statement (IPS). This statement is drafted after the objectives andconstraints are known. This document consists of the investment plan andlimitations within which it will perform its operations.
·Expectationsfrom Capital Market
Inthis step of portfolio management, expectations regarding the capital marketsare formed. The risk and return from various asset classes are forecasted overthe long term. The selection of asset class must be optimal as it must eithergive maximum returns for the given level of risk or minimize the risk for the desiredlevel of returns.
·Strategyfor Asset Allocation
Thefourth step of the portfolio management process involves the important task ofasset allocation. Asset allocation is done based on tactical or strategic or a mixof both plans. Generally while determining the asset allocation the IPS andexpectations from the capital market are combined to find the weight of the targetasset class. This can be termed as allocation based on the strategic plan.Whereas, a tactical plan involves a short-term change in the portfolioallocation based on the change in the circ*mstances of an investor or themarket expectations.
·Execution:Portfolio Selection
Thisstage involves putting the plans into action. In this stage, the plans areexecuted by selecting the portfolio. Here the specific assets are selectedafter considering the expectation of the capital market along with the investmentallocation strategy.
·Execution:Portfolio Implementation
Atthis stage of the portfolio management process, the execution part is completedby portfolio implementation. Here the investment is done in mutual funds or directlyinto equities. The main focus in this stage is to focus on the efficiency ofexecution by looking at factors like timing of execution, transaction costs,tax effectiveness, etc.
·MonitoringAnd Rebalancing
Portfoliomanagement is not a one-time task. It involves constant engagement with theclient. The portfolio manager must monitor the risk exposures of the portfolioand compare them with the strategic allocation plan. If required, the managermust rebalance the portfolio for the better of the client. Transaction costsand taxes form part of portfolio rebalancing.
·PerformanceEvaluation
Thelast part of the portfolio management process is the evaluation of performance.Sometimes a portfolio might be doing well but it might be underperforming incomparison to peers. Performance evaluation helps in finding areas whereimprovement can be done. Performance evaluation is also important to measurethe performance of the portfolio with its objectives and how the portfoliomanager is handling the investments. The portfolio manager’s performance isevaluated by looking at the absolute returns and relative returns.
Theabove mentioned are the steps involved in the portfolio management system. Thewhole process of portfolio management requires an understanding of thefinancial markets and knowledge to implement the plans correctly. If you are new to the financial market or seekany assistance regarding investment, you may get in touch with IndiraSecurities.
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