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Portfolio Management "Don’t put all your eggs in one basket." |
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Portfolio management is a technique of matching the components of one’s investment mix with predetermined financial goals. This includes selecting the most suitable investment options after assessing their performance in the past and estimating their growth in future. A portfolio is held as part of an individual’s investment strategy of diversification, whereby varied assets are owned, so as to reduce investment risk.
The factors that one should consider in choosing exposures to different asset classes (equities, bonds, fixed deposits & money market/ cash instruments) are as follows: |
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Risk Profile : |
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Most investors know that the return they can expect from the market depends on the amount of risk they are willing to accept. Investors who take this higher risk do so in the hope of achieving a higher return over time. A person’s Risk Profile is the combination of his Risk Behaviour and Risk Taking Capacity. |
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Risk Behaviour Analysis: Generally, two persons with same income level may have different behaviour to risk. One person is like to put his money in bank deposits and the other one is like to play in the stock market. This is the individual behaviour of the person towards taking Risk. |
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Risk Capacity Analysis: The extent of decline in value that a person can tolerate, psychologically and financially is the Risk Capacity. |
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Investment Objective : |
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Different objectives would demand that one tailor their investment portfolio to meet these goals. Objectives could be: |
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A person nearing his/her retirement would want a regular stream of income from the investment, while preserving the capital value, and should hence choose a safer portfolio. |
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If one is looking at growth along with preservation of capital, and is investing for a goal that is very important, such as saving for one's child's education, then one can take some more risk in pursuit of higher returns, but not at such a high risk that it might erode one's capital. |
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If one is looking at high growth and investing for a goal that is not very important then one can afford to take more risk. |
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3) |
Time Horizon : |
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The time for which one would like to hold an investment also impacts the level of risk that one can undertake. If the goal for which the investment is being made is occurring after a long time, then one can pursue higher returns by investing in a more risky portfolio as over the period of time the risk reduces. However if one needs the money in the near future then one must invest in a safer portfolio. |
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