Basics of stock market portfolio management

Investors come to the stock market with the hope of making significant gains. But most of time they succumb to excessive zeal and fury. The issue is that many investors keep adding stocks their portfolios in the belief that the majority will eventually give way to more lucrative investments. However, stocking up on pointless investments is more likely to make you move backward ten steps than ahead two.

Investment is a an art as well as science.. It requires stock market expertise, but more importantly, it needs a plan. The best investors don’t become the best by hoarding, instead, they understand the need of a consistent strategy. Even if it could take some time, one can start with the fundamentals and advance from there. The first step to achieving your financial objective is to methodically put together a portfolio that works best for you.

Meaning of Portfolio Management

The act of managing an individual’s investments to maximise their returns over a certain period of time is referred to as portfolio management. Additionally, these procedures make sure that investors’ capital is not overly exposed to market risk. Making wise selections is the foundation of the entire process. Such a choice usually has to do with generating a successful investment mix, allocating resources in accordance with risk and financial objectives, and diversifying assets to mininise capital erosion.

Asset Allocation, Diversification and Rebalalncing are the key elements of managing investment portfolio. It is most crucial to link elements with results. This calls for a review of the advantages and disadvantages of the several solutions available to investors. Investments benefit from portfolio management because the choices made are tailored to the individual’s financial objectives. It proposes the optimal course of action for an investor and offers a plan and a solution depending on the need.

Need for portfolio management:

● Based on an individual’s income, spending capacity, age, and risk tolerance, portfolio management offers the optimum investment plan.
● Portfolio management reduces the risks associated with investment while simultaneously raising the likelihood of success.
● Portfolio managers are aware of their clients’ financial requirements and offer the best and most risk-effective investment strategy for them.
● Portfolio management gives portfolio managers the ability to provide customers specialised investment solutions based on their wants and needs.

Objectives of Portfolio Management

The main goal of portfolio management is to assist in choosing the best investment options in accordance with one’s income, age, time horizon, and risk tolerance. The following are some of the main goals of portfolio management:

● Increase in value
● Optimum resource allocation
● Risk Reduction
● Ensuring portfolio flexibility
● Improving returns on investments
● Defending profits from market dangers

However, investors should pick a management style that matches their investment style in order to get the most out of portfolio management.

Types of Portfolio Management

In a broader context, portfolio management can be divided into four main categories:

1. Active Portfolio Management : An active portfolio manager aims to outperform the returns of the market. People who make these kinds of investments frequently have contrarian viewpoints. Active managers buy equities when they are undervalued and sell them when they are overvalued. A component of active portfolio management is the quantitative analysis of companies to determine how much a stock costs relative to its potential. In order to achieve this, the active manager disregards the efficient market theory and relies on ratios to support his claims.

2. Passive Portfolio Management: The passive investment strategy is the inverse of active management. Those who support this view hold the efficient market hypothesis. According to this theory, a company’s stock price will always reflect its fundamentals. As a result, the passive manager decides to put money into index funds that have high long-term value but a low turnover rate.

Funds are invested in index funds in accordance with the market capitalization as a percentage. According to this, Rs. 2 would be invested in the company that accounts for 2% of the index for every Rs. 100 invested in the fund. By selecting a lesser return, one can save money on management expenses while still enjoying stability.

3. Discretionary Portfolio Management: In this particular management style, the portfolio managers are given the freedom to make investments at their discretion on behalf of the clients. The manager may select whatever investment strategy they think appropriate based on the objectives of the investors and their level of risk tolerance.

4. Non Discretionary Portfolio Management: Simply put, a non-discretionary manager is a financial advisor. He gives the investor advice on how to proceed best. The investor is free to choose his own course of action despite the advantages and disadvantages being plainly communicated. The advisor won’t take any action unless he has received authorization from the investor to act on their behalf.

It’s important to choose a workable strategy and make sure that it’s presented logically whether you work with a advisor or handle the task yourself. The benefit of keeping a fair portfolio is that it offers assets that are suited to the individual’s goals while eliminating confusion.

Process of Portfolio Management

1. Setting Goals

Finding the investor’s risk-return profile is the key to defining investment goals. A portfolio strategy that can produce the desired returns with a manageable degree of risk depends on an investor’s willingness and ability to take on risk as well as their tolerance for volatility.

2. Choose Assets

The next crucial step in the portfolio management process is to identify alternative assets that might be added to the portfolio to divide risk and reduce loss. At this stage, the connection between the securities must be clearly defined. Portfolios may contain preference shares, equity shares, bonds, and other instruments. The investor’s investment cap and risk tolerance decide the mix’s percentage.

3. Make Strategy

The next step in the portfolio management process comes after choosing an asset mix: developing a workable portfolio plan. An active portfolio strategy and a passive portfolio strategy are the two methods for creating a portfolio strategy. An active portfolio strategy attempts to produce a greater risk-adjusted return by using market timing, sector switching based on market conditions, security selection, or a combination of these.
A passive portfolio technique, in comparison, has a predetermined level of risk exposure. Both the portfolio’s balance and management are excellent. The portofolio can comprise of a mix of both strategies based on the risk appetite of the investor.

4. Security Analysis

Information sources on which a security analysis is based are necessary. All the aspects of a security’s pricing, prospective return, and dangers are taken into account. Security analysis employs both micro and macro analysis. For instance, micro analysis entails looking at a single script. On the other hand, macro analysis is the study of the securities market. Finding assets that can be included in an investor’s portfolio is aided by fundamental analysis and technical analysis.

5. Modify Portfolio

Portfolio adjustment is one of the most important stages in portfolio management. A portfolio manager must continually assess and review scripts in light of market conditions. Examples of portfolio adjustment include adding or removing non performing stocks, , switching from one stock to another, or switching from stocks to bonds and vice versa.

6. Evaluating Returns

During this phase, the performance of the portfolio is evaluated in terms of the quantitative measurement of the return received and the risk associated with the portfolio across the entire investment term.

Effective portfolio management is crucial because it enables investors to create the optimum investment strategy for their income, age, and risk tolerance. Investors can effectively lower their risks and access specialized solutions for their investment-related issues with the help of skilled investment portfolio management. Thus, it is a necessary component of starting any investment venture.

For an investor, it is critical to define their goal and risk management and create a portfolio which is suitable for their respective investment profiles.

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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