Friday, October 4, 2019

Overview of portfolio management


OVERVIEW OF PORTFOLIO MANAGEMENT
Introduction
A portfolio can be defined as basket of diversified investment instruments such as stocks, shares, mutual funds, bonds, and cash in a certain ratio depending upon the investor’s income level, budget, risk appetite and the holding period. In other words, a portfolio is a group of assets. The portfolio gives an opportunity to diversify risk.  Diversification of risk does not mean that risk is completely eliminated. With every asset, there are two types of risk; unsystematic risk (inherent to a specific company or industry) and market/ systematic risk. Even an optimum portfolio cannot eliminate systematic risk, but can only reduce or eliminate the element of unsystematic risk.
Meaning of Portfolio Management
Portfolio Management is the art of making decisions about the investment mix for investors  ensuring maximum returns and minimum risk within a given timeframe. In common terms, it refers to the selection of assets and securities and their continuous churning in the portfolio to optimize the overall returns. The riskiness of portfolios depends on the attributes of individual assets, as well as the interrelationships among assets. Therefore, it is primarily for this reason that portfolio management is desirable.

The theory of portfolio management describes the resulting risk and return of a combination of individual assets and securities. One of the major objectives of the theory is to identify combinations of assets and securities that are efficient. Here, efficiency means the highest expected rate of return on an investment for a given level of risk. The starting point for portfolio theory requires an assumption that investors are risk averse. This means that for a given level of return, investors prefer less risk to more risk.
Modern portfolio theory has been largely defined by the work of Harry Markowitz in a series of articles published in the late 1950s. In 1952, Harry Markowitz's article on "Portfolio selection" was published in which he analyzed the implications of the fact that investors seeking high expected returns generally wish to avoid risk. This is the basis of all scientific portfolio management. Portfolio theory explains that some sources of risk associated with individual assets can be eliminated, or diversified away, by holding a proper combination of assets.
Objectives of Portfolio Management
  • Security/safety of principal: Security in this context implies keeping the principal amount   secured. Safety means protection of investment against loss and uncertainty. In order to ensure safety of investment, a careful review of the underlying economic and industry trends is necessary before selecting the investment avenue.
  • Stability of income: To ensure a steady flow of income to take care of financial needs of the family.
  • Growth of capital: Investors seek appreciation in capital and want their money to grow quickly.
  • Liquidity: This is one of the major objective of investors so that they can get the money back when needed. It also helps them to maintain the purchasing power.
  • Diversification: The basic objective of building a portfolio is to reduce risk of loss of capital and / or income by investing in various types of securities and over a wide range of industries.
Types of Portfolio Management                                               
There are primarily two types of portfolio management strategies:
·         Passive portfolio management: A passive strategy requires the investor to buy and hold some replica of the market portfolio and accept an expected return equal to the market.
·         Active portfolio management: In this strategy, specific investments are made focusing on outperforming an investment benchmark index or market return by actively buying and selling securities.  
Conclusion
To summarize, portfolio management is a process to manage investment in assets and securities as per the income, budget and risk appetite of the investors. It is a dynamic concept and involves regular and systematic analysis, judgment and action. Further, it is quite relevant as it helps investors in effective and efficient management of their investments to achieve their overall financial goals over a period of time.


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