What is the Process of Portfolio Management?

PMS is not just an activity but a continuous and iterative process. Hence to best appreciate the importance of PMS, it is essential to understand the process of PMS. What does the PMS do and how does the PMS process work in practice. How does the PMS process help the portfolio manager do a better job? Is the PMS process of the manager fine-tuned to add value to clients? There is a lot of value in the process of PMS.

In this segment, we focus entirely on the portfolio management process. The process defines the success of the output which is why the portfolio management process assumes so much importance. Let us look at the portfolio management process in detail from end to end.

Portfolio Management Services Process

Here are some very important steps in the portfolio management process.

  1. The portfolio management process begins with Planning. This is the initial and perhaps the most crucial step as it lays down the foundation of the entire process. Planning out here entails the identification of objectives and constraints. Any desired outcomes that the client has regarding return and risk are the investment objectives that are evaluated in the planning stage itself.

  2. The second and perhaps the most important step in the portfolio management process is the Investment Policy Statement (IPS). The IPS comes after the objectives and constraints are identified. The IPS lays out the broad contours of the investment plan and the limitations within which to operate.

  3. The third step in the portfolio management process is the setting of capital market expectations. At this stage, the risk and return of various asset classes are estimated over the long term to choose portfolios. Portfolio choices have to be optimal in the sense that they must either maximize returns for a given level of risk or minimize risk for a given level of return.

  4. The next step is the all-important asset allocation. Now, asset allocation can be strategic or tactical or a mix of both; which is what normally it is. This is a critical part of the portfolio management process. Normally, in strategic asset allocation, the investment policy statement or IPS and capital market expectations are combined to determine the long-term weights of target asset classes. This is allocation at a strategic level. Then comes the tactical asset allocation, which entails the short-term change in portfolio strategy due to changes in circumstances of the investor or the market expectations.

  5. The next step in the portfolio management process is Execution; which is putting things into action. You first plan your work and then you work your plan. The first part of execution is portfolio selection. In this stage, the expectation of the capital markets is combined with the decided investment allocation strategy. Then specific assets are chosen.

  6. The execution part of the portfolio management process is topped off by portfolio Implementation. Here the actual investments are done through mutual funds or direct equities as the case may be. At this stage, the focus is the efficiency of execution, timing of execution and low transaction costs, and tax effectiveness.

  7. Portfolio management is not a one-off process but it is ongoing and calls for continuous engagement with the client. The next step in the portfolio management process is monitoring and rebalancing. Here, at this stage, the portfolio manager must monitor and evaluate risk exposures of the portfolio and compares them with strategic asset allocation. Portfolio rebalancing should also consider taxes and transaction costs.

  8. Finally, we come to the last part of the portfolio management process, which is Performance Evaluation. You may be doing well in absolute terms but are you doing well in relative terms compared to peers in the market. The investment performance must be evaluated regularly to measure the achievement of objectives and the skill and contribution of the portfolio manager. Here, we ideally look at absolute returns and relative returns to evaluate the fund manager.

What is a Fund Manager?

The fund manager in the PMS virtually owns the relationship. He is not only responsible for investing your assets most optimally but also has to ensure that you are in the right asset at the right time and also ensures that you are exposed to the risk that commensurates with your risk appetite and returns requirements

Why Should you Invest in PMS?

Investing through PMS proffers several benefits. Here are a few of them encapsulated.

  • It helps to create a personalized investment plan. The PMS designs present and executes plans as per individual income, budget, age, and ability to undertake risks. This is structured based on the unique requirements of the investor.

  • PMS has a role in minimizing risk. After all, it is the risk that you can manage because returns are created by the market. Minimizing the risks involved in investing also increases the chance of making profits.

  • PMS also helps the investor to achieve diversification of risk. Diversification of portfolios is the key to risk management. This will ensure higher risk-adjusted returns generated through the PMS route.

  • PMS allows you to leverage and make the best of opportunit9ies. For example, PMS offers various themes which help leverage different economic situations and helps make profits under different market conditions.

  • A dedicated fund manager ensures that you get customized and premium service. There is also greater accountability of the Fund Manager

Frequently Asked Questions Expand All

A portfolio manager will select stocks to be included in the portfolio based on its stated investment strategy or mandate. Therefore, an index fund manager will try to replicate a benchmark index, while a value fund manager will try to identify under-valued stocks. The PMS manager typically focuses more on customizing the portfolio to your unique needs.

Rebalancing is the process of realigning weightings of various assets in the portfolio. Rebalancing entails periodically buying or selling assets in a portfolio to maintain the desired level of asset allocation or risk. Let us take an example here. Say the original target asset allocation was 50% stocks and 50% bonds. If the index boomed and stocks performed well during the period, it could have increased the stock weighting in the portfolio to 70%. Rebalancing calls upon the portfolio manager to sell some stocks and buy bonds to get the portfolio back 50/50 allocation.