5 Phases Of Portfolio Management Explained For Smarter Investing

According to the PGIM Retirement Readiness Survey, 51% of Indians are not financially prepared for retirement¹. This highlights how poor financial planning and investment decisions can seriously impact your future financial security. This underscores the importance of wise investing and effective fund management.

To achieve your financial goals and minimize risk, it is crucial to have a solid portfolio management plan. Portfolio management is the process of organizing and managing your investments to meet specific objectives while balancing risk and return. The 5 phases of portfolio management—security analysis, portfolio analysis, portfolio selection, portfolio revision, and portfolio evaluation, provide a structured approach to building and maintaining a strong investment portfolio.

If you are unfamiliar with these phases, read on to learn how mastering them can enhance your financial planning and wealth management.

5 Phases Of Portfolio Management

The process of portfolio management requires five phases. These phases together help in providing a well-balanced investment decision. 

1. Security Analysis

The first phase of portfolio management is security analysis, in which you will need to evaluate your financial stocks to determine their value and the potential for growth. With enough information, you will be able to make informed decisions on your investments so that you do not take risks with them.

Key Methods for Analyzing Securities

Here are the ways you can analyse the security of assets for better financial growth:

• Evaluate a company’s financial statement, such as the balance sheet, cash flow, etc.
• Analyse price movements and identify patterns like financial trends by using tools like averages, RSI, etc.
• Evaluate the reputation of a brand through its customer base and market position.

How To Identify Undervalued Investment Opportunities

Here are the ways to identify undervalued assets with security analysis:

• The price-to-earnings (P/E) ratio compares stock prices to a company’s earnings.
• Discounted Cash Flow(DCF) analysis forecasts future cash flow and calculates the current worth of a company with a discounted rate.
• Analysing assets can help in better investments by determining their worth based on tangible and intangible assets.

2. Portfolio Analysis

The portfolio analysis allows you to review and adjust the collection of investments and determine its characteristics. It helps in dividing assets and allocating them, managing risks associated with investments, evaluating returns, and diversifying in order to minimize risks without causing loss in returns.

Assessing Risk and Return for Different Asset Combinations

With the assessment of risk and return for different asset combinations, you can analyse potential losses and estimate potential gains as well. 

• Covariance measures the way in which two different assets move in relation to each other. 
• Correlation measures the relationship between two assets and their movements.
• The efficient frontier is a graphical representation of portfolios that can provide the highest returns within a certain risk range.

Factors Influencing Portfolio Construction 

Here are the factors that can influence portfolio construction:

• The investment horizon is the time period to hold your investments to gain returns.
• Risk tolerance is the kind of risk an investor would take to have better returns.
• The market conditions, like inflation, growth, recession, etc., can impact the performance of a portfolio.

3. Portfolio Selection 

Portfolio selection is where you choose a specific investment policy that will align with your risk tolerance and return expectations. You can select assets that will help you meet your financial goals while considering the market conditions like economic trends, interest rates, and market volatility.

How to Balance Risk and Return Ratio 

To balance risk and return ratio, you need to maximize your gains and minimize your potential losses through perfectly laid out strategies:

• With asset allocation, you can distribute your assets across different classes like bonds, equities, etc., which will help you with the growth of return
• By mixing stable or income-generating assets with high-growth investments, you can reduce overall risk.
• Through rebalancing, you can adjust your asset allocation based on economic trends, market conditions, and personal growth.

How to Build a Portfolio Aligned with Investor Objectives 

A well-aligned portfolio with investors' objectives will reflect a few features:

• The goals of the investor with respect to their investments include retirement, paying loans, etc.
• The amount of time that will take for them to achieve that goal.
• They need to adjust themselves to market fluctuations and have as few risks as possible.

4. Portfolio Revision 

Portfolio revision allows you to review and adjust the portfolio's asset allocation to ensure that it remains aligned with your objectives and goals. It is necessary to be able to adapt to changes in market fluctuations, changes in asset performance, changes in personal financial goals, risk tolerance, and other such conditions.

Strategies for Portfolio Rebalancing 

Rebalancing your portfolio requires two common strategies that can ensure that the portfolio remains aligned with your objectives:

• Calendar-based rebalancing, that is, reviewing and adjusting your portfolio on a quarterly or annual basis.
• With threshold-based rebalancing, you can set a limit for asset allocation, and when it deviates beyond the limit, you can then rebalance the portfolio.

How to Respond to Market Changes and Life Events 

Sometimes during significant changes like life events such as retirement, inheritance, etc., and economic changes like recession, inflation, etc., it becomes necessary to revisit your portfolio. 

• It is time to reassess your goals and update your financial objectives while keeping in mind the risk factor.
• Rebalance asset allocation and mix them to save your investments from potential risks.
• Stay up to date and keep an eye on trends and economic shifts while continuously adapting to new strategies.

5. Portfolio Evaluation 

The final phase of portfolio management is portfolio evaluation. In this phase, you can assess your returns relative to your financial goals. You can also evaluate the risks that have been taken to achieve returns. Through this process of evaluation, you can check the areas for adjustments and make better decisions for your future investments.

Key Metrics for Portfolio Evaluation 

For portfolio evaluation, there are a few common metrics that can provide insights on whether you are getting the correct value for the risks taken. These metrics include rate of return, Sharpe ratio, standard deviation, and measures of performance with market and volatility.

How to Use Portfolio Evaluation Results to Improve Future Investment Decisions 

After portfolio evaluation, you now have the chance to improve your decisions while investing in the future. 

• Adjust the mix of assets to have better performance with minimum risk.
• Identify the investments and learn if they are undervalued or overvalued.
• Make better decisions in your future investments.

Conclusion

Managing your portfolio is just as easy as sticking to these five steps. With security analysis, portfolio analysis, portfolio selection, portfolio revision, and portfolio evaluation, you can now become a successful investor. With these phases combined, you can have a structured strategy that can provide you with the highest returns while adapting to all conditions, be it personal or market changes.

Now that you have a portfolio management plan in place, you need a trustworthy place to invest your funds. This is where signing up with Grip Invest comes in handy.  It is an intuitive investment platform that facilitates numerous high-yield alternative investment avenues. 

This includes corporate bonds, SDIs, LeaseX, etc. Moreover, the company strives to provide a convenient and user-friendly investment experience for all categories of investors, which is also why it allows you to start investing at just INR 1000! 

FAQs On 5 Phases Of Portfolio Management

1. Can portfolio management reduce investment risks?

Yes, portfolio management can significantly reduce investment risks. Through diversifying assets, allocating your investments, and rebalancing them frequently, you can achieve long-term financial stability.

2. How do investor goals influence portfolio management phases?

The goals and objectives of an investor highly influence the phases of portfolio management. Through asset selection, risk tolerance, and multiple strategies, the management process takes place while aligning with investors’ demands.

3. How do you analyze and select the right assets for a portfolio?

Analysing and selecting the correct assets for a portfolio requires several measures. It includes evaluating financial performances, risks, market trends, etc., thus ensuring that the assets are risk-free and return high income.

References:

1. Fi Money, accessed from: https://fi.money/guides/personal-finance/financial-planning-in-india-in-2023

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