By: Rupesh Oli
What is Portfolio Management?
In layman’s terms, portfolio management can be comprehended as managing one’s portfolio that may comprise stocks, mutual funds, bonds, or cash based on his/her budget, income, risk appetite, and the holding period formed in such a way that, ultimately, a portfolio formed hedges the not-so-great performing assets. In addition, it refers to the selection of the best possible investment tools which possess the capability of delivering the optimum returns through the minimization of risk to the investors. Portfolio management can be performed on your own—on an individual level wherein you have the portfolio that comes in handy to manage, or under the supervision of expert portfolio managers—basically for an organizational level.
Monitoring the investment you picked upon can be a tedious task. Nevertheless, you can always start on your own from a minor amount at the forefront. Ultimately, once you gather the required experience managing the portfolio, you can, obviously, play big. You need to take into consideration the factors such as time horizon, market risk, profitable investment mix, your level of risk exposure, financial goal, and so forth.
When it comes to portfolio management, one is basically performing the SWOT analysis—one of the heavily used terms in the field of management—as one weighs the strengths, weaknesses, opportunities, and threats on the pool of investment that s/he has chosen.
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Types of Portfolio Management
Active Portfolio Management
Portfolio manager focuses on garnering maximum returns—aiming to beat the indices such as S&P 500 or say, NEPSE in the context of Nepal. As we very well know that returns are directly proportional to the risk, as one target higher returns, the risk will be higher in turn in the case of active portfolio management. Basically, one opts for undervalued stocks and once the stocks reach their true potential—the value surges—s/he sells. Nevertheless, diversification is done for the hedging purpose to mitigate the risk, if occurs. The research team chooses the securities based on their extensive research and hence, actively manages the portfolio.
Passive Portfolio Management
Unlike active portfolio management wherein the portfolio managers aim at battering the indices/market, they rather align with the current market trends in case of passive portfolio management—mimic the performance of indices so that the return, at least, can be generated in line with what the indices depict. The focus is on the index funds that yield low and steady returns. Furthermore, passive portfolio management comprises low transaction costs as portfolios are not churned on a frequent basis—which occurs in active portfolio management.
Discretionary Portfolio Management
Both discretionary and non-discretionary portfolio management is all based upon the discretion of the individuals wherein the individuals and portfolio managers align for the investment decisions. In the case of discretionary portfolio management, an individual hires portfolio managers to control his/her portfolio. The hired portfolio manager has total control over the individuals’ portfolios and can adopt any investment strategies preferred to accomplish the investment objectives and the returns.
Non-discretionary Portfolio Management
Conversely, in the case of non-discretionary portfolio management, the portfolio manager before taking any sort of investment decision consults with the individual and executes only when the individual agrees upon the taken decision. So, the suggestion of investment strategy is put forth to the individual, and the portfolio managers act accordingly.
Objectives of Portfolio Management
- To invest in a manner that delivers maximum return on one hand and on the other hand, achieve such through minimizing risks to the extent possible.
- To leverage the consistent benefits—returns—from the investments and protection upon the capital amount.
- To surge the after-tax returns of one’s investment by gauging the tax efficiency of the possible investment strategies providing efficient tax planning for an individual’s investment—comes in handy for the tax saving purpose.
- To develop a customized portfolio to cater to clients’ liquidity needs so that one can convert their pool of investment into cash in a prompt manner when required.
Key Elements in Portfolio Management
When one lacks enough knowledge of asset allocation, s/he might adopt either growth investing or value investing strategy wherein, investors possess an aggressive portfolio with growth stocks when adopting the growth investing strategy; conversely, investors possess value stocks or the blue-chip stocks in case of value investing strategy. Hence, one ought to know the fundamentals of asset allocation wherein a mix of assets—both the volatile and the less volatile ones—provide balance and hedging against the risk alongside minimal compromise in returns. A mix of assets could comprise stocks, bonds, real estate, commodities, etc. If shuffled with proper allocation of such assets, the offset of one asset class has a minor impact on the overall portfolio.
Asset allocation takes into consideration what percentage of stocks, bonds, or cash your portfolio comprises; diversification focuses on spreading your asset across various asset classes. Diversification, simply, refers to the allocation of capital across a variety of investments, be it across various classes of securities or sectors of the economy and the geographical regions. As it is one of the challenging tasks to predict what asset class is likely to outperform the others, diversification focuses on garnering returns from a wide variety of sectors diminishing the volatility at a given point in time.
Rebalancing of a portfolio is done to align with investors’ financial goals and risk tolerance. Suppose, one’s portfolio started with 65% stocks and 35% FD and over the haul, the portfolio shifts out to 75% stocks and 25% wherein the investor booked optimum profit. However, the portfolio now has more risk compared to the commencement. In such a scenario, rebalancing is done so that the portfolio, once again, becomes aligned with the original risk and reward potential.
For whom does Portfolio Management Suit?
- Investors who want to spread out their investment in a wide array of asset classes such as stocks, index funds, bonds, and commodities, however, do not possess enough knowledge and expertise to do so.
- Those who are unknown regarding how the market forces and unprecedented events impact ROI.
- Individuals who lack knowledge about the nitty-gritty of the investment jargon.
- Investors facing a limitation of time to track their investment and struggling to rebalance their portfolio to align with the risk/reward ratio so that they could hand it over to the professional and experienced portfolio managers.
Who is a Portfolio Manager?
As per the CFA institute, “Portfolio Managers are investment decision makers; they devise and implement investment strategies and processes to meet the client goals and constraints, construct and manage portfolios, make decisions on what and when to buy and sell investments.”
They are the ones who comprehend the client’s financial goal and deliver a suitable investment plan accordingly. His/her main objective would be to deliver the optimum investment strategy considering the client’s risk/reward potential and deliver them the maximum ROI. Portfolio managers can work both for the individuals and on the organizational level.
Their daily activities include tasks such as gathering data, closely monitoring market conditions, gauging the portfolio performance, identifying the ongoing risks and issues associated with the portfolio, and so forth. Portfolio managers can work as either active or passive portfolio managers based on what they are trying to accomplish, be it outperforming the average return of the indices or mimicking the indices to deliver the aligned return with the indices over the haul.
What is a Portfolio Management Service?
Portfolio Management Service (PMS) refers to a professional service delivered by experienced portfolio managers through investments in assets—stocks, bonds, fixed income securities, or the custom-tailored—to meet the client’s investment objectives. Although portfolio managers manage numerous portfolios, each portfolio varies considering the client’s needs backed by extensive research to suit his/her requirement. With hundreds of investments to pick from, decision-making demands ample time, devotion, and extensive screening capabilities; this is where PMS comes in handy.
Portfolio Management Services in Nepal
In the context of Nepal, there exists numerous PMS. Mentioning some of them are Siddhartha Capital Limited, Global IME Capital Limited, and NIBL Ace Capital Limited.
Siddhartha Capital Limited providing Discretionary PMS and Non-Discretionary PMS.
Global IME Capital Limited providing Discretionary PMS, Non-Discretionary PMS, Advisory Services, and Administrative Services.
NIBL Ace Capital Limited providing Discretionary PMS, Non-Discretionary PMS, and Custodial Services.
How to Manage Your Portfolio on Your Own?
There exists no hard and fast rule to managing your portfolio on your own. The only aspects you need to take into concern are your investment goal, timeline, and risk tolerance. You need to determine the extent of your saving goals whether it be for your retirement, your children’s education, or their career in sports and so forth. Once done, you need to set your investing strategy and what suits you to achieve those objectives. You need to determine what rate of return you require and the time period you opt for—a period of years.
Extensive research to filter out an array of investment options is necessary. There exist advantages when you manage your own portfolio. For instance, you would be saving on the fees that you would otherwise be paying to your portfolio manager of PMS firms as you have to pay them on a consistent basis whether you bear loss or garner gain. Make sure you implement stop-loss orders to mitigate the risks. Also, one needs to be aware of the tax implications when buying or selling stocks. Asset allocation and portfolio rebalancing—when required must be comprehended before stepping down on your journey of managing your portfolio.
Example Exemplifying Portfolio Management
Suppose you have Rs. 20 lakhs to start with and you decide to manage the portfolio on your own. The very first thing you must be doing is the diversification of your amount across various investment spectrums. Based on your risk/reward ratio, suppose, you decided to divest your amount on assets such as FD, stocks, bonds, real estate, and the mutual fund.
Now, I will do the distribution of the amount on two bases: 1) Asset Specific and 2) Stock Specific
1) Asset Specific
|Asset Classification||Amount||Percentage Distributed||Investment Risk||Expected Returns|
2) Stock Specific (based on NEPSE)
|Stock Classification||Amount||Percentage Distributed||Investment Risk||Expected Returns|
Let’s take the example of the housing market crash of 2008 or the dot-com bubble burst of 1995, investors who invested their wholesome amount on real estate pre-2008 or tech companies blindfolded pre-1995 have suffered, that too, to an extent that is too harsh even to imagine. That’s why diving down directly into your investment journey without proper research regarding how the investment world operates makes you pay for it.
The major issue that arises when an investor focuses on individual securities is the higher risk associated with it—basically, putting all the eggs in a single basket. In such a scenario, portfolio management comes in handy as it diversifies your portfolio minimizing the risk that one could bear. If one possesses lack of knowledge on how to manage the portfolio, various asset management firms provide the service with their team of proficient portfolio managers. Nevertheless, extensive financial research when performed makes one capable to manage the portfolio on their own. Before delving down into any sort of investment be it stock market or commodity or bonds, one needs to grasp the fundamentals of portfolio management and the ways s/he can leverage this vital concept of finance and cope with the unprecedented risks in the near future.
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