The basic objective of portfolio management is to maximise return for a given amount of risk and portfolio managers can employ a variety of strategies to do this. Several crucial tactics include:
- Diversification: This technique spreads investments across several asset classes, industries and regions in an effort to lower risk by avoiding putting all of one’s eggs in one basket.
- Risk management: Identifying, evaluating and ranking the various risks to which a portfolio of investments is exposed. Numerous techniques including scenario analysis and stress testing can be used to accomplish this.
- Rebalancing: This technique entails gradually changing the mix of investment in a portfolio to match the objectives and risk tolerance of the investors.
- Active management: The method of consistently purchasing & disposing of assets in an effort to outperform a reference index.
- Passive management :Investing in a portfolio that closely mirrors the performance of a benchmark index is known as passive management (optional).
- Tactical asset allocation: This short-term technique involves adjusting a portfolio’s asset mix in response to market conditions such as sector performance or economic data.
The portfolio manager develops a thorough investment plan to manage a portfolio taking into account the investor’s objectives, risk tolerance and time horizon. The manager will then monitor the portfolio and make any necessary adjustments using a number of tools and strategies including financial analysis, market research and risk management.
Individuals and institutional investors such as pension funds, endowments, foundations and sovereign wealth funds may both benefit from portfolio management. It’s critical to note that different investor types may have varied objectives, risk tolerances & time horizons which will influence the portfolio manager’s strategy.
