Top Tips for Successful Investment Portfolio Management

Now that we understand the basics, let us understand the importance of diversification in financial portfolio management. Historically, domestic equities have done well and given good returns in the long run. However, the stock markets fell sharply during certain phases like 2008-09 (US subprime crisis), 2020 (Covid pandemic), etc. The markets recovered over time. However, during big stock market falls, a diversified portfolio is cushioned from the impact of the fall of one asset class on the entire investment portfolio. 

 Similarly, there have been phases when gold and fixed income have outperformed. During such phases, a diversified portfolio benefits from the outperformance of these asset classes. 

 So, having a diversified portfolio reduces the risk from the overall investment portfolio and helps earn better risk-adjusted returns.

Active vs. Passive: Financial Portfolio Management Strategies 

There are various investment portfolio management strategies that investors can follow. One of the choices investors have to make is between active or passive portfolio management strategy. Let us discuss them. 

a)      Active portfolio management strategy

As the name suggests, an active portfolio management strategy involves the active buying and selling of portfolio securities. The aim is to outperform the market/benchmark and generate higher returns. It is a hands-on strategy. The management expenses are higher because there is active buying and selling of securities. It involves the cost of researching which securities to buy/sell, the brokerage and associated costs.

b)      Passive portfolio management strategy

In this strategy, the portfolio performance is benchmarked to an index or the overall market performance. It is a hands-off or buy-and-hold strategy. The aim is to mirror/replicate benchmark performance and earn similar returns. The management expenses are lower as there is no research required to be done on security selection. Also, as it is a buy-and-hold strategy, the transaction costs like brokerage and associated costs are lower.

When building an investment portfolio with equity mutual funds, an investor can use a mix of active and passive portfolio management strategies. For example, for large-cap funds, an investor can choose index funds; for mid and small-cap funds, an investor can choose active funds.

How to Build a Personal Investment Portfolio

Now that we understand some portfolio management strategies, let us look at how can an individual investor do personal portfolio management. Some of the factors that an individual may consider include the following.

1)      Define clear financial goals

An individual can have several goals; financial and others. So, the individual should define clear financial goals and quantify them. The next step is to classify them into short, medium, and long-term financial goals based on the timeline to achieve them.

2)      Diversify your investment portfolio

You should diversify your investment portfolio across asset classes and further within each asset class. Diversification helps reduce the overall portfolio risk and helps earn risk-adjusted better returns. However, you should avoid over-diversification as discussed in the earlier section.

3)      Focus on long-term growth

When investing in equity mutual funds, you should always invest for the long term. In the long term, you give time for your money to grow and benefit from the power of compounding that can create wealth for you.

4)      Monitor performance

You should review the performance of your investments regularly, once every six months to one year. The review helps you assess whether the investments are performing on expected lines and whether you are on track to achieve the financial goals.

5)      Rebalance regularly

From time to time, certain asset classes will outperform or underperform by a wide margin. During the regular review, if you notice that a specific asset class has outperformed significantly, you should rebalance. You should sell some portion of the asset class that has outperformed and invest the redemption proceeds in the other asset classes. It will help you revert to the base asset allocation.

6)      Reduce risk based on goal achievement

For long-term financial goals, as you move nearer to the goal, you should reduce the risk by shifting money from equity mutual funds to fixed income. It will help protect your goal money from any sudden stock market fall.

Work With an Investment Expert to Get a Customised Investment Portfolio

Every individual’s financial needs are different. Hence, for customised investment analysis and portfolio management, you should work with an investment expert. They can analyse your personal requirements and accordingly provide a customised plan to suit your needs. Apart from making a customised investment portfolio, they can help you with portfolio management with regular reviews. The investment expert can handhold you during phases of market volatility till your financial goals are achieved. An investment expert can help you with portfolio creation, management, review, and rebalance till your financial goals are achieved. Thus, they can be your one-stop solution for investment and portfolio management services.

FAQ

What Are Discretionary and Non-discretionary Portfolio Management?

While availing of the services of a market intermediary like a broker, you can give or deny permission to execute transactions on your behalf. When you authorise the market intermediary to execute securities-related transactions like the purchase/sale of securities on your behalf, it is known as non-discretionary portfolio management.

Similarly, when you want to retain control over the execution of securities-related transactions, it is known as discretionary portfolio management.

How can different types of investors approach investment portfolio management?

Depending on the individual risk profile, investors can take different approaches to investment portfolio management as follows.

a)      Aggressive

An aggressive investor has a high-risk appetite. They are comfortable investing in high-risk instruments like equity, corporate bonds below investment grade rating, cryptocurrencies, etc. The aim is to earn high returns by taking high risk.

While equity is volatile and has high risk in the short term, the risk reduces in the long term. Hence, investors with a long investment horizon should consider investing in equity mutual funds.

b)      Conservative

A conservative investor has a low-risk appetite. They are content investing in low-risk instruments like debt funds, bank fixed deposits, Government securities, Government small savings schemes, etc. The aim is to protect the principal and earn low to moderate returns.

c)      Moderate

A moderate investor has a limited risk appetite. They try to balance the risk and the safety of principal. Some part of the investment portfolio is invested in high-risk instruments like equity, and the remaining is invested in low-risk instruments like fixed income.