A portfolio refers to a collection of investment tools such as stocks, shares, mutual funds, bonds, cash and so on depending on the investor’s income, budget and convenient time frame.
Following are the two types of Portfolio:
- Market Portfolio
- Zero Investment Portfolio
The art of selecting the right investment policy for the individuals in terms of minimum risk and maximum return is called as portfolio management.
Portfolio management refers to managing an individual’s investments in the form of bonds, shares, cash, mutual funds etc so that he earns the maximum profits within the stipulated time frame.
Portfolio management refers to managing money of an individual under the expert guidance of portfolio managers.
In a layman’s language, the art of managing an individual’s investment is called as portfolio management.
Need for Portfolio Management
Portfolio management presents the best investment plan to the individuals as per their income, budget, age and ability to undertake risks.
Portfolio management minimizes the risks involved in investing and also increases the chance of making profits.
Portfolio managers understand the client’s financial needs and suggest the best and unique investment policy for them with minimum risks involved.
Portfolio management enables the portfolio managers to provide customized investment solutions to clients as per their needs and requirements.
Types of Portfolio Management
Portfolio Management is further of the following types:
- Active Portfolio Management: As the name suggests, in an active portfolio management service, the portfolio managers are actively involved in buying and selling of securities to ensure maximum profits to individuals.
- Passive Portfolio Management: In a passive portfolio management, the portfolio manager deals with a fixed portfolio designed to match the current market scenario.
- Discretionary Portfolio management services: In Discretionary portfolio management services, an individual authorizes a portfolio manager to take care of his financial needs on his behalf. The individual issues money to the portfolio manager who in turn takes care of all his investment needs, paper work, documentation, filing and so on. In discretionary portfolio management, the portfolio manager has full rights to take decisions on his client’s behalf.
- Non-Discretionary Portfolio management services: In non discretionary portfolio management services, the portfolio manager can merely advise the client what is good and bad for him but the client reserves full right to take his own decisions.
An individual who understands the client’s financial needs and designs a suitable investment plan as per his income and risk taking abilities is called a portfolio manager. A portfolio manager is one who invests on behalf of the client.
A portfolio manager counsels the clients and advises him the best possible investment plan which would guarantee maximum returns to the individual.
A portfolio manager must understand the client’s financial goals and objectives and offer a tailor made investment solution to him. No two clients can have the same financial needs.
The portfolio performance evaluation involves the determination of how a managed portfolio has performed relative to some comparison benchmark. Performance evaluation methods generally fall into two categories, namely conventional and risk-adjusted methods. The most widely used conventional methods include benchmark comparison and style comparison. The risk-adjusted methods adjust returns in order to take account of differences in risk levels between the managed portfolio and the benchmark portfolio. The major methods are the Sharpe ratio, Treynor ratio, Jensen’s alpha, Modigliani and Modigliani, and Treynor Squared. The risk-adjusted methods are preferred to the conventional methods.
The portfolio performance evaluation primarily refers to the determination of how a particular investment portfolio has performed relative to some comparison benchmark. The evaluation can indicate the extent to which the portfolio has outperformed or under-performed, or whether it has performed at par with the benchmark.
The evaluation of portfolio performance is important for several reasons. First, the investor, whose funds have been invested in the portfolio, needs to know the relative performance of the portfolio. The performance review must generate and provide information that will help the investor to assess any need for rebalancing of his investments. Second, the management of the portfolio needs this information to evaluate the performance of the manager of the portfolio and to determine the manager’s compensation, if that is tied to the portfolio performance. The performance evaluation methods generally fall into two categories, namely conventional and risk-adjusted methods.