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What is Portfolio Management

What is Portfolio Management and Why is it Good for Investment Planning

Portfolio management is a key tool for financial growth and is relevant to both individual investors as well as organizations. Making the most of an investment portfolio involves developing a focused strategy that can help gauge market risks and maximize returns successfully. Investors benefit from assistance provided by skilled professionals in managing their investment portfolio. Let’s dig deeper into what is portfolio management and how it works. 

What is Portfolio Management

What is Portfolio Management?

In simple terms, portfolio management is the process of choosing and managing a set of investments to meet the specific financial goals of a company or an individual. There is a science behind selecting the right investment mix for a client and perfectly balancing the risk tolerance. Let’s understand this with some examples. 

Examples of Portfolio Management

Let us say an individual is looking to explore multiple investment avenues such as stocks, bonds, or funds. However, they only possess limited knowledge about the investment market and know very little about the market forces that can influence returns on these investments. In such situations, portfolio management plays a key role as it can not only help enhance returns but also put the right financial strategies into practice. 

If this hypothetical investment corpus amounts to $1,000, a portfolio manager will distribute it across different units like real estate, mutual funds, and shares, for example, to enhance profitability. This division is generally based on the individual’s financial goals and risk appetite.  

How Does Portfolio Management Work

How Does Portfolio Management Work? 

There is no one-size-fits-all approach when it comes to portfolio management. Every individual or organization has a unique investment portfolio that requires a customized and strategic investment plan. Now that you know what is portfolio management, here is a breakdown of how it actually works: 

Planning

  • Identify clients goals: Understand clients needs, long- and short-term goals, define clear financial objectives in terms of capital appreciation or stable returns
  • Factor in limitations: Calculate associated risks, liquidity prospects and expected returns from different asset combinations
  • Develop a strong strategy: Involves strategic and customized asset allocation based on investment goals and market behavior

Execution  

  • Invest in profitable revenues: Making investments in the selected portfolio of securities after thoroughly assessing their fundamentals, liquidity, and credibility
  • Minimize risks: Diversifying the investment mix based on budget, timeline and financial goals

Feedback

  • Evaluate efficiency: Monitor and analyze the portfolio’s ratio of risk to return to determine its effectiveness 
  • Rebalance the composition: Revise the portfolio’s composition based on current market conditions to maximize earnings

Importance of Portfolio Management

Portfolio management is so much more than just picking profitable investments. It also involves learning about the investor’s goals, timelines, budget and creating an investment strategy that is well-diversified and yields high returns. Good portfolio management can result in greater returns as it takes both long- and short-term financing options over a given period of time into consideration. This enhances the likelihood of efficient resource allocation and capital appreciation.  

Most investments are far from being a one-and-done deal. They need to be tweaked and rebalanced from time to time in order to maximize returns. This is also called portfolio adjustment. For example, in case of mutual fund investments, fund management may undergo some changes if it is actively managed. In such cases, a portfolio manager can take charge and make the required changes to other fund holdings. In this manner, portfolio management also helps monitor and evaluate financial portfolios on a regular basis.  

The Role of the Portfolio Manager

The Role of the Portfolio Manager 

Since we have established what is portfolio management, let’s look at what a portfolio manager does. A portfolio can have a variety of investments that are held in a single account or across multiple accounts. This can be a retirement account or even a taxable investment account. A portfolio manager helps make such decisions with ease. 

These are the main responsibilities of a portfolio manager:

  • Inform the client about relevant investment tools 
  • Create and implement customized investment solutions  
  • Choose the optimal asset class based on investment goals 
  • Develop and manage financial portfolios
  • Evaluate and monitor assets 
  • Measure performance and manage risk 
  • Rebalance the portfolio depending on market conditions 

In simple terms, a portfolio manager is someone who essentially helps design and implement the best financial investment plan that is well-diversified and yields high returns. 

Portfolio Management: Things to Keep in Mind

Now that you have a detailed understanding of what is portfolio management, it’s time to find out what really goes into making portfolio management effective and successful. Once you have the initial strategy in place, here are the key areas to explore: 

Asset Allocation

It refers to how your assets are divided across different types of investments. Risk tolerance plays a crucial role here. A good portfolio manager will help customers make informed investment choices taking aspects such as age, budget, and goals into account and recommend the kind of risks they can take when investing.  

Diversification

The best way to explain this concept is this: avoid putting all your eggs in one basket. This ensures that even if a certain investment sinks, the entire portfolio does not get affected. A good example of asset diversification is investing in funds that offer different securities, which means more diversification as compared to a single stock. 

Rebalancing

It involves evaluating and adjusting the investment strategy as per market fluctuations and main financial goals. Rebalancing is an important element of a good portfolio management strategy. 

Tax Considerations

Tax-efficient investing is incredibly important to ensure that a minimum amount of tax is levied on the customers’ returns. 

Portfolio Manager Career Path

The role of a portfolio manager is not an entry-level one and most professionals begin their careers at an associate level as a financial analyst or junior analyst. They typically contribute to the investment decision-making process by working on securities or conducting research and analysis at a firm.  

Portfolio Manager Skills

A good portfolio manager should primarily have these key skills – a good understanding of investment processes and strategy, portfolio construction, risk analysis and performance measurement, strategic decision-making, analytical abilities and strong communication skills.  

Portfolio Manager Job Description

A portfolio manager works closely with clients to translate financial objectives into profitable investments that can yield returns. They work on creating impactful investment strategies that match the client;s financial goals. They create reports on investment performance, communicate with clients on asset diversification and analyze risk management processes. 

ALSO READ: Top 15 Highest Paying Jobs in Finance: A Quick Guide

Portfolio Manager Salary

The average annual salary of a portfolio manager in the United States is $137,103. The range is likely to vary between  $116,080 and $160,082 depending on your qualifications, experience, location, and additional skills, among other parameters. Some of the top companies for portfolio managers include Meta, Capgemini and Genentech. 

ALSO READ: The Ultimate Salary Guide 2023 That Every Job Seeker Should Know About  

Although it is not mandatory, most successful portfolio managers hold a masters’ degree in economics, business, finance or a related field. It is important to consider that portfolio management is a highly competitive industry, which is why it is beneficial to upskill and stand apart from the competition. If you have understood all about what is portfolio management and want to build a successful career in the field, check out professional online finance courses on Emeritus to shape a career in portfolio management the right way.  

By Neha Menon

Write to us content@emeritus.org 

What is Portfolio Management

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