About Portfolio Management and its Importance: For MBA

INTRODUCTION

The term portfolio refers to any collection of financial asset such as stocks, bonds and cash.  It is also known as the science and art of making decisions about investment mix and policy, matching investment to objectives, assets allocation for individuals and institutions, and balancing risk against performance. In this ever changing era, Portfolio management is becoming a dynamic decision process, whereby the investors list of active new projects is constantly up-dated and revised. In this process, new investment alternatives are evaluated, selected and prioritized; existing investments may be accelerated, killed or de prioritized; and resources are allocated and re-allocated to active projects.

Constructing a right portfolio is more than simply individual project selection; rather it’s about the entire mix of projects. It consists of risk in a proportion to its return and sometime more than that though it depends on investors risk taking behavior. Investors try to minimize such a risk by constructing a portfolio. Portfolio management is all about strengths, weaknesses, opportunities and threats in the equity choice of national vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk. Portfolio may be held by individual investors and/or managed by financial professionals, hedge funds, bank and other financial institutions. It is a generally accepted principal that a portfolio is designed according to the investor’s risk tolerance, time frame and investment objectives. The dollar amount of each asset may influence the risk/reward ratio of the portfolio and is referred to as the asset allocation of the portfolio.

Portfolio management by the investor sound like a fairly mechanistic exercise of decision-making and resource allocation but there are many unique facets of the problems which make it perhaps the most challenging decision-making faced by the investors. Generally portfolio management deals with future events and opportunities; thus much of the information required to make project selection decisions is at best uncertain, and at worst very unreliable. Also the decision environment is a very dynamic one. The status and prospects for projects in the portfolio are ever changing, as new information becomes available. Finally, resources to be allocated across projects are limited. A decision to fund on one alternative may mean that resources must be taken away from another; and resource transfers between projects are not totally seamless.

IMPORTANCE OF PORTFOLIO MANAGEMENT

Portfolio management is a critical and vital to every investor. Investors try to maintain high rate of return on their investment as much as possible. So, primarily for financial purpose that is to minimize risk and to maximize return, the Portfolio management is vital. But offcourse the risk consists in a proportion to the return. Though it can be minimized it can not be avoided. For the reason, the Portfolio management will be crucial to investors.  Instead, it help to determine whether the potential return from investing in a specific stock or fund is worth the incremental risk that this stock or fund adds to investor’s portfolio. It also help to achieve balance- the right balance between long and short term investment alternatives, and high risk and low risk ones, consistent with the business’s goals.

In portfolio management, it is important for an investor to monitor his or her portfolio regularly in addition to asset allocation, because it must be determined whether or not the return results of the portfolio meet the expectations of the investor, or whether there is a need to change the strategic asset allocation. The monitoring process also provides comprehensive, detailed information on the investment positions of the investor. The result of the controlling monitoring might require changes in the asset allocation in order to realign the long-term asset allocation strategy. It is important to note that portfolio management, as an investment process, is not a static, but a dynamic one, where you should regularly adapt your decisions to changes in the market and in your own circumstances.

Major importance of portfolio management can be point out as follows. These are also known as four macro or high level goals of portfolio management for investors.

       I.            Value maximization: Here the goal is to allocate resources so as to maximize the value of investors’ portfolio. That is, investor’s select projects so as to maximize sum of the values or commercial worth of all active projects in their pipeline in terms of some business objective ( such as long term profitability, return-on-investment etc.)

    II.            Balance:  Here the principal concern is to develop a balanced portfolio – to achieve a desired balance of projects in terms of a number of parameters; for example, the right balance in terms of long term projects’ versus short ones; or high risk versus lower risk projects; and across various markets, technologies, product categories, and project types.

 III.            Strategic Direction: The main importance here is to ensure that, regardless of all other considerations, the final portfolio of projects truly reflects the business’s strategy – that the breakdown of spending across projects, area, markets, etc., is directly tied to the business strategy.

 IV.            Right Numbers of Projects: Most investors have too many alternate projects underway for the limited resources available. The result is pipeline gridlock: projects end up in a queue; they take longer and longer to get to market; and key activities within projects. Thus an over-riding importance is that it ensures a balance between resources required for the “Go” projects and resources available.