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Summary: Portfolio management involves two parts: First, building it with asset allocation, risk management, and diversification. Second, managing it with performance evaluation and regular rebalancing. Let's find out more.
You must have heard the proverb, "Don't put all your eggs in one basket". While the proverb applies to many aspects of life, it is equally relevant in investment decisions.
If you put all your money in a single asset class or a financial product, and that asset class/financial product falls sharply, you will incur huge losses, and you will have to compromise on your financial goals. Therefore, you should always have an investment portfolio and manage it until you achieve your financial goals.
You will learn what portfolio management is and some related concepts in this article.
Also read: Best investment options in India
The objective of portfolio management is to allocate money to a variety of asset classes and manage them to reach an investor's long-term financial goals. The asset classes and the money allocated to each are designed to match the investor's risk profile, and the portfolio earns optimal risk-adjusted returns.
Portfolio management is composed of two words:
Now that you understand what is portfolio management, here are some related concepts:
Asset allocation is the process of investing money in various asset classes. Each one of them has a specific role to play in your investment portfolio as follows:
Different asset classes outperform each other. You cannot predict which asset class will give the best returns next year and in the years ahead. Hence, your investment portfolio should have a diversified asset allocation.
In the earlier section, you understood why you should follow asset allocation. When building a diversified investment portfolio, you should consider your risk profile to decide the percentage allocation to each asset class.
Based on the above discussion, you have formulated an investment portfolio with appropriate asset allocation and diversification that suits your risk profile. Now you need to evaluate the investment portfolio's performance.
a) You should review the investment portfolio performance once every six months to 1 year.
b) Compare the returns of each asset class and the overall investment portfolio returns with the expected returns. If any financial products are not performing as expected, evaluate the reasons for the underperformance.
c) Take corrective action, such as replacing the underperforming financial product with an appropriate replacement.
d) If some new asset class or financial product has been introduced, consider including it in your investment portfolio if it fits the inclusion criteria.
While evaluating investment portfolio performance, you may notice that the weightage of a particular asset class has increased due to its outperformance compared to other asset classes. In such cases, you need to rebalance your portfolio.
For example, you have an asset allocation of equity and debt in a 75:25 ratio. Of every Rs. 100 invested, Rs. 75 goes to equity and the remaining Rs. 25 to debt.
Let us assume that the equity investment has appreciated by 20% and the debt investment has appreciated by 5% in the last year. In this case, the equity investment is worth Rs. 90 and the debt investment is worth Rs. 26.25, making the overall investment portfolio worth Rs. 116.25. The equity and debt asset allocation ratio has changed to 77:23.
To rebalance, you must sell some equity and invest the proceeds in debt, so that the equity and debt asset allocations return to 75:25.
You can invest in hybrid or multi-asset allocation mutual funds to avoid the challenges of portfolio rebalancing.
Investing in a hybrid fund exposes you to both equity and debt, while investing in a multi-asset class fund exposes you to at least three asset classes with a minimum allocation of 10% to each.
An expert fund manager rebalances portfolios regularly on behalf of investors in hybrid and multi-asset allocation schemes.
Also read: Invest in Fixed Deposits for these five reasons
There are two portfolio management styles- active and passive.
It involves actively buying and selling securities (equity, debt, gold, etc.) to beat benchmark indices or the broader markets. A hands-on approach is used to maximize returns. Undervalued securities are identified using quantitative or qualitative methods and then sold at a profit.
It involves buying a fixed set of securities (equity, debt, etc.) and holding them long-term. The objective is to earn benchmark returns. It is done using index funds and exchange traded funds (ETFs) on various equity and debt indices.
IDFC FIRST Bank allows you to invest in various mutual funds. You can choose from equity, debt, hybrid, multi-asset class funds, etc.
You can invest in active mutual funds if you prefer active portfolio management. IDFC FIRST Bank offers various index funds if you prefer passive portfolio management. The bank provides personalised investment solutions for your financial goals.
To sum up
Portfolio management is the key to achieving your financial goals.
Portfolio management involves building an investment portfolio based on asset allocation and diversification that suits your risk profile. Regularly reviewing and rebalancing the investment portfolio is essential once the portfolio has been built. Until you reach your financial goals, the process continues.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.