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Why is it necessary to balance your portfolio?

28 Jan 2020

We have come across the term portfolio many times whenever we plan any investment. But very few of us know what a portfolio is and what is the significance of having one for getting the most out of your investments.

A portfolio defines a group of investment tools such as stocks, shares, mutual funds, bonds, cash and so on depending on the investor’s income, budget and limited time frame.

Portfolio Management implies wisely organizing an investment portfolio, by opting for the best investment mix in the right ratio and regularly shifting them in the portfolio, to increase the return on investment. The portfolio is basically accumulation of various type of financial instruments with an investor which can include stocks, bonds, mutual funds etc.

Portfolio management shows the best investment plan to the persons as per their income, budget, age, and ability to undertake complications. Portfolio management increases the risks included in investing and growing the chance of making profits.

Portfolio managers understand the client’s financial requirements and suggest the best and unique investment policy for them with minimum risks included. Portfolio management enables the portfolio managers to give customized investment solutions to clients as per their requirements.

Portfolio management includes deciding about the optimal portfolio, matching investment with the objectives, allocation of assets and balancing risk.

Portfolio management can be done in a number of ways. Based on the investment pattern and goal some of the portfolio management strategies include

A. Active Portfolio Management: - When the portfolio managers actively candidature in the trading of securities with a view to earning a maximum return to the investor, it is called active portfolio management.

B. Passive Portfolio Management: - When the portfolio managers are related to a fixed portfolio, which is created in alignment with the present market trends, is called passive portfolio management.

C. Discretionary Portfolio Management:  -The Portfolio Management in which the investor places the fund with the manager and authorizes him to invest them as per his discretion, on the investor’s behalf. The portfolio manager looks after all the investment requirements, documentation, etc.

D. Restricted Portfolio Management: - Restricted portfolio management is one in which the portfolio managers give advice to the investor, who can accept or reject it. All the profits earned, or the losses sustained belong to the investors only.

E. Activities involved in Portfolio management: -

• Selection of securities in which the amount is to be invested.

• Creation of proper portfolio, with the securities, opted for investment.

• Planning regarding the proportion of various securities in the portfolio, to make it an ideal portfolio for the concerned investor.

All these factors help in the creation of an optimized portfolio.

The portfolio management is usually done in several phases. Each of the phase has its own importance for creating an optimal portfolio. The phases of portfolio management include

Security Analysis: - It is the first stage of the portfolio creation process, which involves assessing the risk and return factors of individual securities, along with their correlation.

Portfolio Analysis: - After selecting the securities and calculating the risks associated with them, feasible portfolios are short listed.

Portfolio Selection: - The portfolio which is in accordance with the risk appetite of the investor, out of all the feasible portfolios is selected.

Portfolio Revision: - Once the optimal portfolio has opted, the portfolio manager, keeps a close watch on the portfolio, to make sure that it remains optimal in the coming time, in order to earn good returns.

Portfolio Evaluation: - The performance of the portfolio is calculated in this phase for a time duration. A quantitative measure of the risk and reward is obtained. The portfolio management services are provided by financial companies, banks, hedge funds, and money managers.

The complication of over-diversification: - Over-diversification happens when the number of investments in a portfolio overloads the point where the marginal loss of expected return is greater than the marginal profit of deducted risk. In all sort of investments your capital is at risk.

Any portfolio must only be diversified until a point where unsystematic risk becomes a minimum. Investors usually fall in the risk of over-diversification because this is solely a matter of judgement for investors. In that case the returns are very low for the investment.

It is very necessary to have an optimal balanced portfolio in order to achieve your investment goals. A good investment advisor can provide some help in managing your portfolio and making it more effective.

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As On 30th April, 2020
Beginning of month Received during the month Resolved during the month Pending at the end of the month Reason for pendency
214 0 0 1 Closed by us, Filed ATR, SCORES approval awaited

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