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Portfolio investment refers to the collection of assets such as stocks, bonds, mutual funds, and other financial instruments that an individual or institution holds. Unlike direct investment in a single asset, portfolio investment involves spreading funds across multiple securities to achieve financial goals while managing risk.
Investment portfolio management involves building and overseeing this collection of assets in a way that considers returns with risk according to the investor’s preferences and market conditions. This guide explains portfolio investment and systematic approach to managing an investment portfolio.
Active portfolio management
Passive portfolio management
Discretionary portfolio management
Non-discretionary management
Effective portfolio management revolves around clear objectives. These include:
Increasing the invested capital over time by selecting assets that exhibit price appreciation.
Earning regular income through dividends, interest payments, or rental yields from portfolio holdings.
Reducing the impact of adverse market movements by spreading investments across different assets and sectors.
Ensuring availability of funds when required by investing in assets with varying liquidity profiles.
Tailoring the portfolio to meet specific goals such as retirement planning, education funding, or wealth transfer, considering the time available to invest.
Managing an investment portfolio involves a series of deliberate steps that help align investments with the investor’s profile and market realities.
The foundation of portfolio management is understanding financial objectives and willingness to accept risk. Are you investing for long-term growth, income, or capital preservation? Your age, income stability, and future needs influence this assessment.
Asset allocation involves deciding how much of your portfolio to invest in various asset classes such as stocks, bonds, and cash. Diversification within and across these asset classes helps mitigate risks related to specific securities or sectors.
After allocating assets, the next step is to choose specific securities or funds. This may involve researching company fundamentals, bond ratings, or fund management quality.
Implementing the investment plan through purchase or sale of assets, and continuously monitoring performance relative to goals and benchmarks.
Market movements may skew your original asset allocation. Rebalancing involves adjusting the portfolio back to its target allocation by selling over-weighted assets and buying under-weighted ones, maintaining risk levels consistent with your goals.
Portfolio management involves considering various elements that can influence investment outcomes and strategy. These are discussed below-
Global and domestic economic factors such as interest rates, inflation, GDP growth, and geopolitical events influence portfolio performance and decisions.
Younger investors may tolerate higher risks for growth, while those nearing retirement may prefer stable income and capital preservation.
Understanding tax implications of investment returns and adherence to regulations is a key consideration for portfolio management.
Emotions like fear and greed can impact decisions. Discipline and adherence to a plan help avoid common pitfalls.
Investors often consider two primary approaches for managing their investments: engaging professional portfolio managers or independently overseeing their own portfolios. Let’s distinguish between the two-
Financial experts or firms offer portfolio management services, utilising research capabilities and technology. This approach can be considered by investors seeking hands-off management and personalised strategies.
Some investors prefer managing their own portfolios. This requires knowledge, time, and discipline but allows control over investment choices and costs.
Investors employ various approaches to structure and oversee their investment portfolios, each with distinct characteristics and objectives. Some of them are given below-
Passive management involves replicating a market index, focusing on long-term performance and managed costs. Active management aims to achieve different returns than the overall market through strategic buying and selling.
Growth investors seek capital appreciation by investing in companies with high potential. Income investors prioritise steady cash flow from dividends or interest.
Value investing focuses on undervalued assets with potential for price correction. Other strategies include momentum, sector rotation, and dividend investing.
Investment portfolio management is a disciplined process designed to manage returns while considering risks according to individual preferences. Understanding portfolio investment, setting clear objectives, and following a systematic management process are important for investing. Whether managed personally or through professionals, a portfolio aligned with financial goals contributes to wealth management.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Sources
Securities and Exchange Board of India (SEBI) – sebi.gov.in
Reserve Bank of India (RBI) – rbi.org.in
Investopedia – investopedia.com
Chartered Financial Analyst Institute – cfainstitute.org
Portfolio investment involves diversified securities without control, whereas direct investment typically involves ownership and management control.
Diversification reduces risk by spreading investments across assets, influencing the impact of any single investment’s performance.
Risk tolerance, investment horizon, financial goals, and market conditions primarily influence asset allocation.
Yes, with knowledge, discipline, and use of resources, beginners can manage portfolios. Professional advice is available if further guidance is sought.
A periodic review, typically annually or semi-annually, helps in alignment with goals and risk tolerance.
Market risk, liquidity risk, interest rate risk, and specific asset risks are among the common challenges.
No, investment outcomes depend on market conditions and cannot be guaranteed.
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Posted on 18 Aug
Geetanjali Lachke
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