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When you intend to invest, you don't buy just a few stocks or mutual funds. It is a mix of assets, and when you lack the time and expertise to manage them, that's where Portfolio Management comes into the picture.
Ever wondered how portfolio managers cut through 7,000+ stocks and still deliver focused results? This blog reveals the process behind it.
Stay tuned as we explore the different phases of portfolio management, the benefits of taking this service, and its related risks.
If you think you haven't heard anything such, keep reading and take note of everything, including common mistakes beginners make in portfolio management.
Portfolio management is a process of managing one's assets, securities, or investments systematically. Here, a licensed portfolio manager selects, oversees, and balances a collection of investments to meet an investor's financial goals, balancing risk and optimizing returns. They primarily deal in equities, debt, ETFs, and other eligible instruments.
Think of it as building and maintaining a garden. You don't just plant seeds and forget about them. You plan what to grow, provide each plant with the right space, check their growth regularly, and make adjustments as needed.
Based on this principle, there are five phases of portfolio management that help a portfolio manager manage the portfolio effectively.
Portfolio management is not a one-time activity; it’s a continuous process. Most professional portfolio managers follow five key phases that ensure investments are aligned with investor objectives, risk tolerance, and market conditions.
The first phase in portfolio management is “Security Analysis.” Here, the portfolio manager will analyze the securities (Equities, bonds, ETFs, or other instruments) and determine their future potential for growth and value.
It's like peeling the first layer of investments and assessing whether the securities purchased are financially sound at the value at which they were acquired.
Importantly, the primary reason for analyzing them is to identify any overvalued securities and purchase undervalued securities in return. And it happens via fundamental and technical analysis.
Key Methods of Security Analysis:
With security analysis, the next stage is to "Analyze the Portfolio" from a macro perspective. It involves reviewing the portfolio in terms of asset allocation and diversification needs. For example, suppose the asset's distribution is more inclined towards equity for a conservative investor. In that case, the portfolio needs to be realigned. And that's what the portfolio analysis report tells us.
Here are a few factors that can impact your portfolio:
The next step is "Portfolio Selection," which aims to identify an investment policy or theme that aligns with the investor's risk levels and expected returns.
The goal is to find an optimal portfolio mix that matches the investor's requirements. By calculating the risk-return ratio of each security, a portfolio (mix of assets) can be constructed. However, each will follow the same pattern – investor's goals, risk appetite, and investment period.
With the help of Portfolio Revision, one can “Revisit, Review, and Adjust” their portfolio more effectively. It helps maintain the market's pace and keep up with the changes that occur. Think of it as a shuffling program until the fund manager finds the right payoff (maximum returns, minimum risk).
In short, it is akin to "Portfolio Rebalancing," which happens in three ways.
While reviewing and adjusting occur simultaneously, the portfolio manager opts for "Portfolio Evaluation" as the final step. In this phase, you can view whether the returns have matched your expectations.
Through this evaluation, you can also identify areas for improvement and make the necessary adjustments. It will allow some space for growth and the elimination of overvalued securities.
To better understand the phases of portfolio management, let's take a simple example of Riya, a 28-year-old professional whose investments are scattered.
At present, she holds a fixed deposit, a couple of mutual fundSIPs, and some idle funds in her savings account.
Now, let's see what her 5 phases of portfolio management would look like.
With professional guidance, Riya turns her scattered savings into a disciplined, goal-driven portfolio that grows steadily while managing risk.
Portfolio Management is incomplete without its phases. It is a funnel that streamlines scattered portfolio investments into a disciplined strategy. From security and portfolio analysis, portfolio construction, rebalancing, to evaluation, each stage helps in wealth growth.
For beginners, this process may sound technical at first, but in reality, it is designed to align investments with personal financial goals. However, consulting a professional or using reliable tools can make the journey smoother.
By following these five portfolio management phases, investors can get the following benefits. For instance,
While deploying portfolio management, investors often make mistakes like over-diversification or under-diversification due to a wrong strategy selection.
There are two types of rebalancing often practiced in portfolio management - Fixed and Flexible Rebalancing. While fixed rebalancing is more specific to annual, quarterly, or at a fixed time (regardless of market conditions), the flexible method adjusts according to market conditions.
Disclaimer: The information provided in this article is for educational and informational purposes only. Any financial figures, calculations, or projections shared are solely intended to illustrate concepts and should not be construed as investment advice. All scenarios mentioned are hypothetical and are used only for explanatory purposes. The content is based on information obtained from credible and publicly available sources. We do not guarantee the completeness, accuracy, or reliability of the data presented. Any references to the performance of indices, stocks, or financial products are purely illustrative and do not represent actual or future results. Actual investor experience may vary. Investors are advised to carefully read the scheme/product offering information document before making any decisions. Readers are advised to consult with a certified financial advisor before making any investment decisions. Neither the author nor the publishing entity shall be held responsible for any loss or liability arising from the use of this information.”
