The concept and the idea of investing is quite exciting and thrilling at the same time. Investing doesn't require any specific criteria, skill set or qualification, the only things that an investor needs is a keen eye and some knowledge of the rudimentary financial concepts associated with trading and investing .Investing is an activity that can be taken up by almost anyone who possesses the basic desiderata mentioned above ,after all what would life be if we never played the odds.
Investing however is double-edged sword, the risk that accompanies investing in a particular bond or share is a part and parcel of it and cannot be separated from it. The risk that an investor agrees to take upon himself is the sacrifice he has to make in return for potential returns. However, unlike typical gambling investing is a systematically manageable process and this where the idea of portfolio management comes into play.
What is Portfolio Management?
Portfolio management refers to the process of building a profile of various securities that matches the preferences and ideology of the investor. A good portfolio is a must for any serious investor. This article simply delineates the things to consider and the steps to be taken in the creation and maintenance of a portfolio in simple terms without delving into the nitty-gritty of it.
The first matter to consider before you decide to move forward would be your own financial situation (one needs to evaluate and determine one's own comfort zone in terms of disposable income). The second thing to consider would be your long-term and short-term objectives (figure out how far you want to take this to at very stage and how quickly you want some sort of return).Finally consider the effect that this would have on you and your dependant network of people. Once you're done factoring in all of the aforesaid, the next step would be the creation of a stellar portfolio.
Steps in Portfolio Management
Creating a good portfolio requires careful consideration, diligent research, utmost patience and frequent, hectic maintenance. A simplistic division of the process would be as follows:
- Security identification & analysis
- Portfolio creation
- Portfolio selection
- Portfolio revision
- Portfolio evaluation
Security identification refers to the stage where the investor is faced with an entire market of securities of different forms to choose from. Here the investor is tasked with identifying potentially good securities that align with his current and future interests. This stage is extremely crucial as it will form the very underpinning for the portfolio.
Portfolio creation is the stage where the investor has to arrange the securities into different potentially profitable portfolios .This might prima facie look the same as the aforesaid but each portfolio has a different personality (i.e. a portfolio is not just a sum of the characteristics of the securities that it contains)which makes this step indispensible in the creation of a good portfolio.
Portfolio selection is the stage where the investor has to pick the most favourable portfolio from among the different potentially lucrative permutations that he has set aside in the previous stage. The portfolio that the investor picks is the conduit to his dreams and ambitions.
Portfolio revision is the stage where the investor continuously monitors the portfolio to ensure that the portfolio stay optimal (the portfolio needs to be just as good as it was during its initial stages or better). The portfolio is continuously revised to adapt to the current changes and fads to give the investor optimal utility.
Portfolio evaluation is the stage where the investor evaluates the overall utility of the portfolio on the basis of either metrics or milestones. Unlike the previous stage, the portfolio here it is either discarded wholly or partly once deemed unviable. The entire portfolio is analysed in terms of the investors needs and the current risks and returns.
The afore-described stages are repeated and reiterated in a circular manner to maintain the portfolio at its optimal state. While all the stages may not be necessarily repeated, some or most are typically repeated.
Conclusion
Portfolio management has now become a mainstream activity directly associated with investing as opposed to its almost non-existent state years ago when people performed the same using mere raw financial statement data ,but with the advent of computers and other cryptic technology ,it has taken its rightful place in the hierarchy of investing priorities. A good portfolio that is well managed is essential to any investor who wants to achieve success in the perilous field of investing and trading.
Written By: T.S. Padma Charan
Edited By: Purav Nayak
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