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Portfolio Management

Steps To Follow: Portfolio Management

Whether you are managing your own portfolio or you are opting for a professional portfolio manager, here are some steps that need to be followed for efficient portfolio management. 


1. Determine the investment objective

Every person is different. Be it a large portfolio or small, every investment is made with a specific objective or goal – children’s higher education, planning for retirement, family holiday, emergency fund, to name a few. Hence, the first step is to determine the investment objective. This will also help in ascertaining other aspects such as the time horizon, risk appetite, desired return, etc. 


2. Choosing the asset classes

The next step involves choosing the asset classes. This depends largely on the investor’s risk appetite as well as the time horizon. As we have already seen in this module, distributing the investible fund into a variety of asset classes helps in the diversification of the portfolio.


3. Strategic asset allocation

Strategic asset allocation is the process of setting allocation into assigning a targeted allocation for each asset class in a portfolio – such as 60% into equity, 40% into bonds, and so on. Again, the percentage of allocation depends on the investor’s risk appetite, time horizon, and return expectation. Based on these weights, the portfolio is rebalanced at regular intervals. 


4. Tactical asset allocation

This is a portfolio strategy wherein the weights associated with each asset class is changed to adapt to changing market conditions. For example, suppose there is a portfolio with a strategic asset allocation of 60% into equity, 20% into bond, and 20% into gold. In 2020, when global stock markets crashed due to the Covid-19 pandemic and gold showed an upward trend, the portfolio manager may have changed the allocation to 40% equity, 20% bond, and 40% gold. 


This kind of change is known as tactical asset allocation. Through this kind of asset allocation, the fund manager tries to identify opportunities in the market as well as make tactical decisions to protect a portfolio from unforeseen market scenarios. 


5. Measure performance

The main purpose of doing all the above steps is to generate returns. Naturally, we would want to see what we have achieved. This is the final stage where the performance of the portfolio in question is measured. A range of measures is available to determine how a portfolio is doing. This has been discussed in detail in the next section of this module. 

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Units 13/16