Portfolio Management

By: EconomyWatch   Date: 23 November 2010

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Portfolio management is a technique of matching the components of one’s investment mix with predetermined financial goals. This includes selecting the most suitable investment options after assessing their performance in the past and estimating their growth in future. A portfolio is held as part of an individual’s investment strategy of diversification, whereby varied assets are owned, so as to reduce investment risk.

The process of portfolio management involves conducting a SWOT analysis to decide:

  • which assets to buy

 

  • the quantity of each asset to be purchased

 

  • the timing of their purchase

 

  • which assets to divest

Types of Portfolio Management

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.

Portfolio Management: Factors Influencing the Process

Portfolio management should 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:

  • circumstances of the portfolio owner

  • performance measurement (including expected return and risk associated with it)

  • changing economic conditions

  • preference of the area of investment (domestic or international)

Financial institutions conduct their own investment analysis. Individual investors may hire their services to achieve financial goals.


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