Portfolio management is managing a set of investment assets with the objective of maximizing the overall returns for the given risk. The important point to focus on is overall risk and return. Building a portfolio mix of stocks and bonds is a way to diversify the investment risk that arises as a result of concentrating the investment in one type of assets or few assets. Portfolio management is a reasonably simple process. Unfortunately making something simple is not how the world operates. Portfolio management or even investment is made difficult by us because of our greed of earning extra ordinary returns without our homework and missing good investment opportunity because of fear of losing the money. Hence portfolio management is important.

Portfolio management fulfils two important requirements of investors: one, the need to preserve money and second, the need to achieve good returns on the investment.

Factors affecting portfolio management

Portfolio management is a process affected by many parameters. We will take a look at the parameters which impact the returns of the portfolio.

Investment objective:

Investment objective is the most important parameter that defines the performance of the portfolio. However, people seldom realise the importance of setting objective of invest5ment. One of my friends told me very humbly that he doesn’t wish to achieve more than 25% returns every year. What humility? Just 25% returns per year. You must be joking Mr Bharti. Now this is bad objective as no asset has given returns of 25% in long term. You can get lucky and get even 100% returns in 6-12 months but this is sheer luck. You can identify a fundamentally strong company which is underpriced but expecting returns of 25% or 100% is not right.

The investors have to define the objective of his or her portfolio. Is it for income (or dividend), for capital appreciation (growth stocks), or safety of principal (bonds etc.). The investment objective should drive the portfolio decision and not the other way.

Asset allocation

The investor should also decide what the portfolio mix should be. Usually the mix can include equities and bonds. The mix depends on risk profile of individual investors and time horizon.

Asset allocation prevents you from putting all your eggs in one basket. The advantage of asset allocation is the absence of correlation between the various assets. This prevents investors from losing money if one of the assets goes down. We all know that market is very fluctuating. If you invest all the money in stocks and if market crashes, you lose all the money. If you allocate some part in equity and some in bonds, you will still be able to preserve the capital or lose marginal amount of sum compared to the first case.

Portfolio strategy:

You can have portfolio strategy as active or passive investors. Active strategy involves rotating stocks and sectors based on market movements, market timing, and stock selection at opportune time to earn superior returns. Passive strategy is to hold a diversified portfolio and sit tight by maintaining a pre-defined portfolio mix.

Active strategy is good for investors who have time to analyse their stocks, portfolio mix, and market and decide accordingly on rejigging their portfolio. A passive investor will do himself or herself very good if he just finds out few good blue chip companies in diversified areas and invest for long ter.

Equity selection

Fundamental analysis and technical analysis are two major ways to use for selecting stocks. For bonds, use YTM, credit rating, term to maturity, price etc.

Most of the investors prefer technical analysis and go by volume and price chart. While this could be an accepted form of stock selection, it doesn’t take care of fundamentals of the company.

Fundamental analysis looks at company performance, revenue and profit growth, cash flows, important ratios and many more ratios. This comprehensive look at a company and its stock gives you an insight into the company’s operations and help you decide the investment worthiness of the company.

Portfolio execution and revision

This is actually implementing the plan for following your guidelines on portfolio selection, asset allocation etc. You also change the mix based on value and mix of the portfolio after changed scenario.

The portfolio execution is the most important step in portfolio management. Unless the investors execute the plan, they cannot make use of stock market returns. As Warren Buffet says “"You can't keep money around forever. It’s like saving sex for your old age." Take your money out. Learn investing and Invest in the market.

Portfolio management is a very dynamic concept and hence you should revise the portfolio from time to time to make sure you are incorporating investment horizon and risk profile at every stage of your life.

Performance evaluation

Every quarter or year, the investors should do performance evaluation of their portfolio. They should make appropriate changes based on the performance.

Performance evaluation is key to successful investing. The major fault with any investor is that they keep talking about their wins and conceal their losses. That is where you hear all the “money out of thin air” stories. It is important to look at win and loss as part of the portfolio. This will give a better idea about your investing successes and misses. There are many tools available on internet which can help you evaluate the performance of the portfolio. You also can build the tracker for the performance of your portfolio by suing excel sheet.


Portfolio management has grown into a big business. This is one of the best ways for investors to achieve good returns in the market. Many companies have come up in past few years in the area of portfolio management services. While it is good sometimes to employ a portfolio management company if you do not time and have enough money, we will discuss the steps to manage portfolio for people who can invest some time in understanding the portfolio management and apply some of the principals to manage their investment.

A portfolio is nothing but a mix of different investment assets which are bought to diversify risk and achieve the best return for the risk associated.



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