When Aditya started working he was very excited about his salary and would dream of how to spend it, what he would buy, who he would treat, where he would travel. He was however a responsible son and also gave his parents money for monthly expenses. Saving however, was the farthest from his mind. Whatever deductions his company made towards his tax liabilities and the mandatory saving schemes such as PF, PPF, insurance policies, Aditya was ok with it. Once his salary package grew, he even made some small investments in SIPs. Whenever he got a bonus, he also invested in Fixed Deposits. At the behest of his friend who raved about the profitability in the stock market, he even bought a few shares.
But that was years ago. Since then, he has got himself raises and promotions, switched jobs and earned hefty pay packages. With advice from his CA and his friends he has been investing in various instruments and his investments have been growing steadily. Pressures of the job however, prevent him from looking at all his investments closely. That’s when his CA suggested he hire a portfolio manager. “I am not a millionaire”, he said. Only very rich people have portfolio managers!”
“Not necessarily”, said his CA. “The job of a portfolio manager is to get your money to make more money, not just manage it. And anyone can have a portfolio manager for a small fee. Most banks provide this service.”
What exactly is a portfolio?
A portfolio is essentially a record of all your investments with special focus on gains and losses that form a compilation of Aditya’s worth. By that logic, he already has one – all his investments that can ultimately gain profit; such as real estate, stocks or other investments, is a part of this. However, Aditya’s portfolio has been built over time, in a random, organic manner, without much deliberation.
By hiring a private portfolio manager or utilizing one from his existing bank, Aditya can build a healthy investment collection in a step by step process. This includes a lot of planning with some essential financial goals in mind – a new house, marriage, children’s education, regular holidays, vacation home, family emergencies, etc. The portfolio manager will ask you all these questions and allocate percentage of investments towards each. The manager will also understand your appetite for risk – as in, are you going to be okay to invest in stocks that might be regularly affected by the market or would you prefer to spread your risk with safer instruments like SIPs, FDs etc.
The art of creating a profitable portfolio lays in tailor-making it to fit the goals and limitations of the investor.
Managing a portfolio
The portfolio management services are provided by the financial companies, banks, hedge funds and money managers.
Aditya was very impressed meeting his portfolio manager appointed by his bank. He explained that Portfolio Management is concerned with allocating assets while downsizing risk. This requires an analysis of the potentials and pitfalls related with the various options available.
The manager explained to Aditya that Portfolio management can by either passive or active, in the case of mutual and exchange-traded funds (ETFs).
Passive management tracks a market index to ensure a regular update on the investments made and monitor where are headed. There are enough indexing and tracking tools available for the same and the bank can send regular updates. A passive portfolio manager focuses on investing in long term gains by evaluating companies that are on a slow but steady growth path.
Active management involves a single manager and co-managers who actively manage a portfolio through investment decisions based on research and decisions on individual holdings with an aim to make better returns than what the market dictates. Active managers buy stocks when they are undervalued and start selling when the value of the stock rises. To downsize risk, the active manager prefers to diversify investments amongst the various sectors. Closed-end funds are generally actively managed.
The manager further explained that portfolio management can be discretionary and non-discretionary. “What ever does that mean?”, asked Aditya.
Discretionary Portfolio Management
You will have to give full control of your money to a discretionary manager when it comes to deciding what to buy, sell, hold. While Aditya’s financial goals and time-frame are taken into account, the manager adopts whichever strategy he thinks best.
Non-Discretionary Portfolio Management
The non-discretionary manager is simply a financial counsellor. He will advise Aditya on the pros and cons that he would have choose. The manager will keep Aditya updated and make a move only when has been given the go ahead, on Aditya’s behalf.
Key activities in Portfolio Management
• Profiling the investor’s (Aditya’s) capacity to invest, his financial goals (long term and short term), his appetite for risk and specific preferences if any.
• Selection of instruments and securities in which the amount is to be invested.
• Creation of appropriate portfolio (number of investments, percentage allocation of each investment, etc.), with the securities chosen for investment.
Process of Portfolio Management
1. Security Analysis:
2. It involves complete assessment of the risk and return factors of individual investments and securities, along with their correlation.
3. Portfolio Analysis: After analysing the best pick of investment securities and studying the risk involved, a number of feasible portfolios can be created out of them.
4. Portfolio Selection: Out of all the feasible portfolios, the optimal portfolio that matches Aditya’s needs and his risk appetite would be selected.
5. Portfolio Revision: This optimal portfolio is then managed by the portfolio manager, who will monitor it closely to ensure optimal performance and earn good returns.
6. Portfolio Evaluation: Aditya’s portfolio would be periodically evaluated for quantitative measurement pertaining to risks, performance and returns.