Portfolio Management

Article byPrakhar Gajendrakar
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Portfolio Management Meaning

Portfolio management involves overseeing a set of investments, including securities, bonds, exchange-traded funds, mutual funds, cryptocurrencies, etc., on a personal or professional level. Its purpose is to help investors achieve their long-term financial goals and manage their liquidity needs and risk tolerance.

The approach intends to maximize investors’ earnings based on their income, savings, budget, and timeline while minimizing the market riskMarket RiskMarket risk is the risk that an investor faces due to the decrease in the market value of a financial product that affects the whole market and is not limited to a particular economic commodity. It is often called systematic risk.read more. This strategy emphasizes choosing the optimum investment policy or a collection of investments called a portfolio. It comprises various processes, including asset allocationAsset AllocationAsset Allocation is the process of investing your money in various asset classes such as debt, equity, mutual funds, and real estate, depending on your return expectations and risk tolerance. This makes it easier to achieve your long-term financial goals.read more, rebalancing, diversification, and tax reduction. Portfolio managersPortfolio ManagersA portfolio manager is a financial market expert who strategically designs investment portfolios.read more are those who monitor and manage investments on behalf of their clients.

Key Takeaways

  • Portfolio management refers to building and supervising a group of investments, such as securities, bonds, exchange-traded funds, mutual funds, cryptocurrencies, etc., either personally or professionally.
  • It is a three-step process that includes planning, implementation, and feedback, with asset allocation, diversification, rebalancing, and tax reduction being the four most common tactics.
  • The four different styles of investment portfolio management include active, passive, discretionary, and non-discretionary.
  • Portfolio managers help investors accomplish their long-term financial goals, maximize returns based on their income, budget, and timeline, and minimize risk tolerance by monitoring and managing investments on their behalf.

Understanding Portfolio Management

Portfolio management protects the assets of investors against market risks while also allowing them to profit handsomely. It usually entails setting financial goals, picking the correct investments, allocating assets, assessing risks, and diversifying resources to avoid losses. Investors can make significant profits by aligning their income and financial objectives with their risk toleranceRisk ToleranceRisk tolerance is the investors' potential and willingness to bear the uncertainties associated with their investment portfolios. It is influenced by multiple individual constraints like the investor's age, income, investment objective, responsibilities and financial condition.read more. They can develop a strategy to invest in assets, such as stocks, bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more, ETFs, mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more, private equityPrivate EquityPrivate equity (PE) refers to a financing approach where companies acquire funds from firms or accredited investors instead of stock marketsread more, digital currenciesDigital CurrenciesDigital currency is a currency found only in an electronic form as it is used for trading over the internet. They are famous for allowing transparent and secured digital payments. Although their popularity is constantly growing, their adoption as a reliable alternative to physical money is nowhere close. Some of the popular digital currencies are Ethereum, Bitcoin, and Litecoin.read more, real estate, and precious metals.

What is Portfolio Management

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Individuals and businesses build and manage their income and assets through the portfolio management process, which involves considering various short- and long-term financial plans. They can do so by themselves or by contacting a portfolio manager for better understanding and outlook. The latter recommends the best and most tailored investment policies. Portfolio management services also guide investors about unforeseen risks, market stability, opportunity, and the right time to invest. In both circumstances, the method could lead to higher profits and lower risks in a set period.

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Objectives Of Portfolio Management

The strategy focuses on picking the optimal pool of investments based on the investor’s income, aim, time horizon, and risk tolerance. Let us look at some of the portfolio management objectives:

Portfolio Management Objectives

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Types Of Portfolio Management

The portfolio management process comes in various forms, each with its own set of characteristics:

Portfolio Management Types

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#1 – Active

Here, portfolio managers actively sell and purchase stocks, bonds, and other assets using quantitative or qualitative methods to maximize profits for their clients. They strategize to outperform the stock market indexStock Market IndexA market index tracks the performance of a diverse selection of securities that make up a significant part of the financial market. It serves as an indicator of the overall financial market condition by listing the historical and real-time trends in different market segments. read more by buying undervalued securities and selling them at higher prices.

#2 – Passive

In this type, portfolio management services build and manage a fixed portfolio of index fundsIndex FundsIndex Funds are passive funds that pool investments into selected securities.read more, such as ETFs corresponding to current market conditions. Even though these funds offer lower returns, they are more consistent and profitable over time.

#3 – Discretionary

Investors appoint portfolio managers to make financial decisions on their behalf based on their goals and risk appetite to maximize earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more. It may also include paperwork and filing in addition to investment management.

#4 – Non-Discretionary

In this case, portfolio managers can only advise on the best investment plans, while the decision-making authority rests solely with investors.

Process Of Portfolio Management

The following are some of the steps involved in managing an investment portfolioInvestment PortfolioPortfolio investments are investments made in a group of assets (equity, debt, mutual funds, derivatives or even bitcoins) instead of a single asset with the objective of earning returns that are proportional to the investor's risk profile.read more:

#1 – Planning

Understanding the investor’s needs is the initial step in the process, which entails several stages, such as:

#2 – Execution

After having developed an effective investment plan, the portfolio manager proceeds with the following steps:

#3 – Feedback

Once investments have been made in a group of assets, it is crucial to keep track of their performances at regular intervals:

Portfolio Management Strategies

Various strategies can be employed to accomplish the goal of investment portfolio management, i.e., to outperform the market, generate returns, and lower risks. Although predicting the future of financial marketsFinancial MarketsThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more is almost impossible, there are a few proven ways to improve profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more:

Portfolio Management Strategies

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#1 – Asset Allocation

This strategy involves investing in different types of assetsTypes Of AssetsAssets are the resources owned by individuals, companies, or governments expected to generate future cash flows over a long period. There are broadly three types of asset distribution: 1. Based on convertibility (current and non-current assets), 2. Physical existence (tangible and intangible assets), 3. Usage (operating and non-operating assets)read more (volatile and non-volatile) based on the investor’s investment goals and risk tolerance. Eventually, it can result in significant returns with little risk.

#2 – Diversification

Investors or portfolio managers must diversify the investment portfolio to spread the risk and generate profits. Financial markets are volatile and subject to risks. Hence, having a diverse portfolio of assets with little or no correlation means profit made by one can easily offset the loss incurred by another.

#3 – Rebalancing

Market volatility may cause an investment plan to diverge from its target allocation. Therefore, rebalancing the portfolio based on market conditions might result in higher returns with little risk. The common ways to do this include buying and selling assets as required or increasing portfolio investment.

#4 – Tax Reduction

It is nothing more than figuring out a strategy to avoid paying excessive taxes on investment returns.

Frequently Asked Questions (FAQs)

What is portfolio management process?

Portfolio management helps investors match their financial goals with their risk tolerance while making considerable profits. They can develop an investment strategy for various assets, including equities, bonds, ETFs, mutual funds, private equity, digital currencies, real estate, and precious metals. Setting financial goals, choosing the correct investments, allocating assets, identifying risks, and diversifying resources to avoid losses are all part of it.

What are portfolio management services?

Portfolio managers or portfolio management services monitor and manage investments on behalf of investors. They, thus, assist their clients in achieving their long-term financial goals, maximizing returns depending on their income, budget, and time horizon, and reducing risk tolerance. Besides, they offer advice on unforeseen risks, market stability, opportunities, and the optimum time for investment.

Why is portfolio management important?

Portfolio management could result in higher returns on investment with fewer risks by considering multiple short- and long-term financing options over a set period. Investing in a variety of assets ensures the growth and stability of managed investments. Other benefits include capital appreciation, effective resource allocation, and a financially secure future.

This has been a guide to portfolio management and its meaning. Here we discuss how portfolio management works along with its process, strategies, types, and objectives. You can learn more from the following articles –

Reader Interactions


  1. Saikrishna Peddi says

    The Above content regarding the Portfolio and portfolio management is very helpful . this article provided the easily understandable information on portfolio management.

    Thanks Sir.

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