Portfolio Management

If you are a keen follower of the financial markets, have sometimes dabbled in the same and are registered online for stock updates any of the scores of websites offering such services, you may have at one point in time or another come across terms such as 'money manager', 'investment manager' or 'portfolio managers'.

In today's fast-paced world, people need more and more specialized service and one of which is 'Portfolio Management'.

Sameer was talking to one of his friends, Andy, who is a Portfolio Manager. Not knowing what kind of work he did, Sameer asked Andy about his line of work.

Following is an excerpt of their conversation.

Andy: Before we start talking about 'Portfolio Management', we need to understand what a portfolio is. In finance, a portfolio is an appropriate mix or collection of investments held by institutions or a private individual.

You may think why anyone would need to have a portfolio. Holding a portfolio is part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk can be reduced.

The assets in the portfolio could include stocks, bonds, options, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value.

Sameer: What is Portfolio Management?

Andy: The technique of matching the assets of one’s portfolio with predetermined financial goals is called Portfolio Management.

Sameer: How is Portfolio Management done?

Andy: Portfolio management includes selecting the most suitable investment options after assessing their performance in the past and estimating their growth in future. The process of portfolio management involves conducting a Strength, Weakness, Opportunities and Threats (SWOT) analysis to decide the kind of assets to buy and their quantity. It also includes deciding when to make the purchase or which assets to divest (reduce the quantity or number of assets).

Sameer: What are the types of Portfolio Management?

Andy: Although there are not many types of Portfolio Management, in the case of mutual and exchange-traded funds (ETFs), Portfolio management can be broadly divided into:

Active portfolio management: Portfolio managers (either independent advisors or managers tied to financial management firms) are constantly involved in the active management of portfolios. They aim at earning more than the average market return on the chosen investments. Market research is undertaken to formulate investment strategies. Active portfolio management strategy involves purchasing undervalued securities or selling securities that are overvalued. The success of an investment portfolio depends on the skills of a portfolio manager and the accuracy of market research.

Passive portfolio management: This process is limited to selecting securities that track a particular index. It includes formulating an investment plan as part of portfolio building. Decisions regarding asset classes and the proportional allocation of funds to them need to be finalized. This is followed by keeping records and rebalancing the portfolio when needed.

Sameer: What are the factors that influence this process?

Andy: Portfolio management would begin with the setting of investing objectives. While one investor may aim for rapid growth, another may be seeking safe investments.

Accordingly, one can choose between debt instruments (such as bonds) and equities (stocks). In addition, derivatives (such as options and futures contracts) are can also help diversify the portfolio. Other factors that affect the process of portfolio management are:

• Financial circumstances of the portfolio owner
• Investment performance measurement (including expected return and risk associated with it)
• The changing economic conditions
• A preference of the area of investment (domestic or international)

In conclusion, it is important to note that financial institutions conduct their own investment analysis. However, individual investors may hire portfolio management services (from an individual or from an institution) to achieve their financial goals. However, it is good to do your homework before you hire someone to take care of your money!

By BankBazaar.com - an online marketplace for your personal loan and home loan needs.