Before understanding the meaning of Portfolio Management, it is essential to acquaint yourself with the concept of ‘Investment Management.’ It refers to the art and science of managing the securities and other assets of a client, in order to meet his/her investment goals.
The client can be an institution (insurance company, charitable organization etc.) or an individual, which will also include those operating via mutual funds. Broadly speaking, when the assets of ‘an individual’ are managed in order to offer economic returns, it is referred to as ‘Portfolio Management’. It is significant as far as its role and career scope is concerned. Let us see how.
Portfolio Management – Meaning & Types
Let us say someone has given you his money to take care and you are also in charge of multiplying it. What will you do? The role that you’ll play for him is of a ‘Portfolio Manager’. He is a professional responsible for taking advice from analysts and market researchers and thereby, strategically suggesting his clients the optimum quantity and kind of investments to be made. It is defined as:
“The art and science of analyzing various assets in the market, taking strategic decisions about investment mix and balancing risk with return.”
Portfolio Management can be done in various ways:
- Passive Portfolio Management – It involves tracking of the index and taking decisions without any forecasting. The easiest way to do so is by imitating the performance of a given index in the market.
- Active Portfolio Management – It is the opposite of Passive Investment. It involves chalking out of investment strategies by portfolio managers to arrive at buying or selling decisions regarding securities.
- Discretionary Portfolio Management – It allows the portfolio manager to take investment decisions on behalf of his client. The client authorizes the manager to invest in any security keeping in view his financial needs.
- Non – Discretionary Portfolio Management – It is the opposite of discretionary portfolio management. It doesn’t allow the portfolio manager to take action; instead he plays only an advisory role. He offers advice to his client, who may or may not accept the same for decision making.
Concept of Portfolio Management
Before getting to know how portfolio management takes place, it is important to know the parties responsible in taking investment decisions. The portfolio manager is not the only person concerned with decision making. He is a ‘manager’. His tasks involve understanding client’s needs, allocating work to his team and sending periodic reports back to the client. His team consists of market researchers and analysts from buying and selling side. The buying side analysts carry out a research on ‘what and when to buy’ and selling side analysts report on ‘what and when to sell’. Accordingly, the portfolio manager takes the decision to invest in certain securities over others.
Initially, a contract is signed between the client and the portfolio management company (or the portfolio manager). The contract lays down all terms and conditions along with necessary guidelines from both ends. It clearly specifies the following so that there is no confusion between both parties:
- Type of contract – discretionary/non-discretionary
- Duration of contract
- Risk bearing capacity
- Preference of securities (if any)
- Commission/fee details
The portfolio manager then gets the required documents signed by the client and the contract becomes binding. As per the laid down terms, the portfolio manager directs his team of analysts to study the market and list out favourable securities. Then he takes the decision to invest in securities, the reports of which are sent to the client at specified time intervals.
Importance of Portfolio Management
Today’s market is experiencing a lot of change, especially when its dynamic nature comes into picture. In such a situation, portfolio management plays a crucial role. Some points to back the same are as follows:
- Diversified investment solutions – Different people have different financial requirements at different times. In such a scenario, portfolio management comes to their rescue. It offers a diverse bundle of investments returning plentiful benefits. The portfolio manager aims to serve his client’s needs in the best possible way.
- Benefit of liquidity – The investments made via portfolio management are highly liquid. The client can anytime demand his investments to be converted into cash, thereby providing a convenient option.
- Serves different criteria – The clients may have any budget and risk taking capacity, portfolio management makes sure to deliver the best return according to the given criteria. Thus, it is universally beneficial. The access is to all who are willing to invest their sum in profitable returns.
- Reduction of risk – Since the process is carried out by portfolio manager and his team, who are expert at their work, the chances of failed returns are dimmest possible. The risk is reduced significantly due to diversification. Also, the investment is made after thorough analysis and consideration.
- Saves tax – Many of the investments made are exempt from tax (depending upon state laws on taxation in different countries). Portfolio management helps in not only earning a little more but saves quite a significant amount of hard-earned money by offering tax deduction.
- Saves time – Not everyone has the time and energy to study the market and then reach a certain conclusion of investment mix. Moreover, the probability of incurring a loss is way higher in any individual’s case in comparison to a portfolio manager’s case. It saves time, which is a precious commodity.
Career Scope of Portfolio Management
After realizing the importance of work carried out by a portfolio manager, one can easily conclude that his role is extremely significant in market of investments. He is a sought after person, whose expertise is highly valued. That is the sole reason why the job of a portfolio manager is so well paid. When the accountability to perform is so large, the corresponding consideration has to be high. The skill set required to pursue this career is unique. One must be confident in his approach, analytical, dexterous, a good decision maker. These qualities come handy only when coupled with the ability to interact and convince others. A portfolio manager has to stay in touch with variety of stakeholders. Thus, he must be more than just an analyst.
Considering the fact there are multiple investment options available in the market, people who enjoy abundance are looking for perfect fit for their money. In such circumstances, there is an urgent need of portfolio managers, who can understand complex and varying requirements of clients and yield the financial results they desire. Portfolio management is the best solution for reducing risk and increasing returns. It not only assures the fulfillment of financial goals, but also saves a considerable amount of time and efforts, which otherwise would have been required. It is modern answer to the traditional question of where to invest money.
– Shweta Arora, Intern, Vskills
Shweta Arora is a student of Kirori Mal College, Delhi University, pursuing a Bachelors degree in Commerce. Curiosity to find a logic drives her writing.