Types Of Portfolio Management
Portfolio management can be of various types. Here are some of the major ones:
Active portfolio management
As you can understand from the name, in this kind of portfolio management, the portfolio manager actively buys and sells securities and assets to make use of opportunities in the market. Usually, the portfolio manager tracks a specific index such as the BSE Sensex or Nifty 50 and tries to outperform the benchmark index.
Since this portfolio management technique involves taking quick, yet informed decisions, usually the portfolio manager is guided by a team of co-managers as well as analysts. Extensive analysis, market forecasting, and the expertise of the portfolio management team are crucial to the success of active portfolio management. The team has to keep a keen eye on the market trends, economic changes, political landscape, corporate news, and other aspects that can affect the financial market.
Passive portfolio management
In passive portfolio management, the portfolio manager primarily designs a fixed portfolio and reviews it from time to time. In most cases, the portfolio tries to duplicate a particular market index and buys the same stocks that are listed on the index, giving them the same weightage in the portfolio as in the index.
A passively managed portfolio can look like an exchange-traded fund or ETF. Compared to actively managed portfolios, these portfolios require less oversight, a smaller team to manage and incur lower charges.
Discretionary portfolio management
In this kind of portfolio management, an individual authorizes the portfolio manager to make financial decisions on his behalf. The money is assigned to the portfolio manager. In turn, the portfolio manager takes all the investment decisions. Before commencing, a thorough analysis is done of the individual’s investment goals, time horizons, needs etc. so that an informed decision can be arrived at.
The negative aspect of discretionary portfolio management is that the portfolio manager remains in the driver’s seat, while the investor remains merely a rider. The portfolio manager controls the entire portfolio and if he is not an expert, this may be detrimental to the investment portfolio.
Non-discretionary portfolio management
In non-discretionary portfolio management, the portfolio manager acts as an advisor. He advises the client, but the client reserves the right to make the final decision.