What Is Portfolio Management? (Types And Process)

Investing your money is only the first step towards building a portfolio. You also need to decide how much to put into different investments, how to spread your money to manage risk, and when to make changes as your goals or market conditions change.

This is where portfolio management comes in. It covers everything from choosing investments and deciding how much to allocate to each one to reviewing the portfolio and making changes when needed. In this guide, we look at what portfolio management is, its different types, and how the process works.

What Is Portfolio Management?

Portfolio management means managing a group of investments with a particular financial goal in mind. A portfolio could include stocks, bonds, Exchange-Traded Funds (ETFs), mutual funds, or a mix of different investments.

You can manage your portfolio yourself or work with a professional portfolio manager who makes these decisions on your behalf. When managing a portfolio, you need to consider how much to allocate to each investment, how much risk you are comfortable taking and when it may be time to make changes.  

How often these changes are made can also tell you something about the way a portfolio is managed. This is where portfolio churn, or portfolio turnover, comes in.

Why Is Portfolio Management Important?

Portfolio management goes beyond diversifying investments. It involves analysing how much is allocated to each asset class and whether the overall mix suits you. Portfolio management is also about finding a balance between risk and return. The right mix depends on factors such as your financial goals, investment horizon and how much volatility you are comfortable with. 

For instance, if you are an investor with a low risk appetite, a 50-50 split between equities and debt may still feel uncomfortable, even though your portfolio is diversified. You may prefer to keep more of your money in lower-risk investments.

Portfolio management can help you in several ways:

• Spread risk: Keep your money across different investments, sectors or markets instead of depending heavily on a single investment. 
• Invest with a goal in mind: The mix can be different if you are looking for growth, regular income, or want to preserve your money.
• Make changes over time: Your situation and the market can change, so the investments you choose earlier may not always be the right fit.

What Are The Types Of Portfolio Management?

Portfolio management can be classified based on two main factors: how often the investments are changed and who makes the investment decisions. 

Active Portfolio Management

In active management, the portfolio is checked regularly. Investments can be bought, sold or moved around when the manager sees an opportunity or wants to reduce risk, usually with the aim of beating a benchmark.

Managers may look at company fundamentals, valuations, economic conditions and market trends when deciding which investments to buy or sell.

The frequency of these trades is reflected in portfolio churn or portfolio turnover. A portfolio with higher turnover sees investments bought and sold more often, which can increase transaction costs. A lower-turnover portfolio generally involves holding investments for longer.

Higher Portfolio Churn	Lower Portfolio Churn
More frequent buying and selling	Investments held for longer
More portfolio changes	Fewer portfolio changes
Potentially higher transaction costs	Generally lower trading activity
Common in strategies that respond actively to market opportunities	More common in long-term or index-oriented approaches

Active management usually comes with higher costs because the portfolio is researched and managed more actively. So, investors need to see whether this extra effort has actually added value. This is where alpha can help, it measures a portfolio’s performance against its benchmark. A positive alpha generally means the portfolio has outperformed its benchmark, while a negative alpha indicates underperformance. 

Passive Portfolio Management

Passive management follows a set approach instead of trying to pick investments that will beat the market. An S&P 500 index fund, for example, is designed to track the index rather than regularly change its holdings.

Passive does not mean that the portfolio never changes. An index-tracking portfolio may still be adjusted when the underlying index changes. 

Active vs Passive Portfolio Management

Active Portfolio Management	Passive Portfolio Management
Aims to outperform a benchmark	Generally aims to track a benchmark
Manager actively selects investments	Investments usually follow an index or predefined strategies
Holdings can change based on the manager’s views	Changes generally follow changes in the underlying index or strategy
Usually involves more research and trading	Usually involves less active trading
Returns can differ significantly from the benchmark	Returns generally move in line with the benchmark

Discretionary Portfolio Management

Here, the investor gives the portfolio manager the freedom to make investment decisions within an agreed strategy. The manager can decide when to buy, sell or change the portfolio.

Non-Discretionary Portfolio Management

The manager does the research and can suggest changes, but the investor gets the final say. Any recommended change is made only after the investor approves it.

Discretionary vs Non-Discretionary Portfolio Management

Discretionary Portfolio Management	Non-Discretionary Portfolio Management
The portfolio manager can make investment decisions on the investor’s behalf.	The portfolio manager can research and recommend investments, but the investor makes the final decision.
The manager can decide when to buy, sell or change investments within the agreed strategy.	The investor must approve the recommended changes before they are made.
Requires less day-to-day involvement from the investor.	Requires more involvement from the investor.
Suitable for investors who prefer to delegate investment decisions.	Suitable for investors who want to stay involved in investment decisions.

Steps In Portfolio Management Process

Building a portfolio is only part of the process. Once the investments are in place, they need to be checked from time to time and changed when required. Here are the steps usually involved in portfolio management:

1. Set Your Investment Goals: First, be clear about what you want to achieve. Your goal could be growing your wealth, earning regular income, or keeping your capital relatively safe. Your investment horizon also matters. Someone investing for a goal that is several years away may have different portfolio requirements from someone who needs the money soon. 
2. Assess Your Risk Tolerance: Every investor’s risk tolerance is different. It can depend not only on how much loss they are comfortable with, but also on their financial situation, investment horizon and liquidity needs. 
3. Analyse and Select Investments: This is where investment analysis and portfolio management meet. Look at the investment’s potential, risks and valuation, along with how it fits with everything else you own. 
4. Build the Portfolio: Once you know what you want to own, decide how much money should go into each investment. The split should reflect your goals and risk appetite. This is where asset allocation comes into play. It refers to deciding how much of the portfolio should be allocated to different asset classes, such as equities, bonds and cash. 
5. Monitor and Adjust: The portfolio may need to be adjusted later. Your investments may perform differently, your goals may shift, or your circumstances may change. Market movements can cause the portfolio to move away from its intended allocation. That is when managers rebalance or adjust investments to bring the portfolio closer to its target mix. 

Managing Your Own Portfolio Vs Professional Portfolio Management

Many investors choose their own stocks, funds or other assets and make changes to their portfolios themselves. Others prefer to have a professional or investment team handle the research and suggest changes.

The right choice often comes down to how much time and involvement you want. Professional management may often appeal to investors who do not have the time or expertise to research investments, monitor the portfolio and make adjustments themselves. 

Managing your own portfolio	Professional Portfolio Management
You research and select investments	A professional or research team handles the analysis
You decide how to allocate your money	The portfolio follows a defined strategy designed by the professional
You track your investments yourself	The portfolio is monitored for you by the portfolio manager
You decide when to buy, sell or rebalance	Changes are recommended or made based on the management approach

How Do Vested’s Managed Portfolios Fit Into Portfolio Management?

Managed portfolios put portfolio management into practice by combining multiple investments around a specific strategy, theme, or objective. You can choose to invest in them if the portfolio’s objective matches your financial goals. Instead of selecting and managing each investment individually, investors can choose a portfolio based on its strategy or objective and gain exposure to multiple investments through it. 

Vested Finance’s Managed Portfolios take this approach; it currently spans three broad categories:

• Megatrend Portfolios: These focus on long-term themes shaping industries and economies.
• Global Multi-Asset Portfolios: These combine different asset classes, such as global stocks, bonds, and other assets, to provide diversified exposure.
• Strategy Portfolios: These follow specific investment strategies designed around defined approaches to selecting investments.

Depending on the one you choose, you may have exposure to US stocks, global equities, bonds, or ETFs.

Things To Consider Before Choosing A Portfolio Management Approach

The right approach depends on how you invest, what you want to achieve, and how much involvement you want in managing your money. Keep these points in mind:

• Choose an approach that fits your investment goals.
• Make sure the strategy matches the level of risk you are comfortable taking.
• Your investment period can influence how much risk you can take.
• Decide whether you want to make investment decisions yourself or prefer professional guidance.
• Check the fees involved and understand how they may affect your overall returns.

Conclusion

Portfolio management is about choosing investments, spreading your money and reviewing the portfolio as things change. If you prefer a structured approach without managing every investment yourself, Vested’s Managed Portfolios offer different global strategies that are professionally researched and monitored.

Sources: 

Investopedia

The Economic Times