Definition of Portfolio Management

Portfolio Management Definition

It is a process of encompassing many activities of investment in assets and securities. The portfolio management includes the planning, supervision, timing, rationalism and conservatism in the selection of securities to meet investor’s objectives. It is the process of selecting a list of securities that will provide the investor with a maximum yield constant with the risk he wishes to assume.

The portfolio management is growing rapidly serving broad array of investors — both individual and institutional — with investment portfolio ranging in asset size from few thousands to crores of rupees. Despite growing importance, the subject of portfolio and investment management is new in the country and is largely misunderstood. In most cases, portfolio management has been practiced as a investment management counseling in which the investor has been advised to seek assets that would grow in value and / or provide income.

Portfolio management is concerned with efficient management of investment in the securities. An investment is defined as the current commitment of funds for a period of time in order to derive a future flow of funds that will compensate the investing unit:

The portfolio management deals with the process of selection of securities from the number of opportunities available with different expected returns and carrying different levels of risk and the selection of securities is made with a view to provide the investors the maximum yield for a given level of risk or ensure minimize risk for a given level of return.

Investors invest his funds in a portfolio expecting to get a good return consistent with the risk that he has to bear. The return realized from the portfolio has to be measured and the performance of the portfolio has to be evaluated.

It is evident that rational investment activity involves creation of an investment portfolio. Portfolio management comprises all the processes involved in the creation and maintenance of an investment portfolio. It deals specially with security analysis, portfolio analysis, portfolio selection, portfolio revision and portfolio evaluation. Portfolio management makes use of analytical techniques of analysis and conceptual theories regarding rational allocation of funds. Portfolio management is a complex process, which tries to make investment activity more rewarding and less risky.

Application to Portfolio Management

Portfolio Management involves time element and time horizon. The present value of future return/cash flows by discounting is useful for share valuation and bond valuation. The investment strategy in portfolio construction should have a time horizon, say 3 to 5 year; to produce the desired results of say 20-30% return per annum.

Besides portfolio management should also take into account tax benefits and investment incentives. As the returns are taken by investors net of tax payments, and there is always an element of inflation, returns net of taxation and inflation are more relevant to tax paying investors. These are called net real rates of returns, which should be more than other returns. They should encompass risk free return plus a reasonable risk premium, depending upon the risk taken, on the instruments/assets invested.

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