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In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/492
Portfolio management helps in reducing the risk of the investment strategy. Understand the importance of portfolio management to customize your investment strategies and expected returns.
When you think about investing, it is easy to feel overwhelmed by the idea of risk. What if you lose money? What if your investments do not grow? Risk and return are the most critical aspects of financial planning, and individual investors prefer to minimize risk to the maximum extent possible. This is why learning how to manage your portfolio effectively has become so important.
Now, you must be wondering exactly what is portfolio management? It is a smart way to manage and grow your investments while reducing risk. What you do here is create a smart plan to balance your money across various asset classes. This will help you make the most out of your investment with the least amount of risk.
But just knowing this is not enough. There is a lot more you must know about portfolio management meaning and why it matters.
Let us start with the portfolio management definition. It is all about managing a collection of investment instruments, like shares, funds, bonds, etc., to achieve your financial goals. It is a strategy where you balance risks with rewards, ensuring that your money grows while minimizing the chances of loss.
Example:
Imagine your portfolio is a basket. Now, instead of putting all your eggs (money) into one basket, portfolio management means spreading those eggs into different baskets (investments). This way, even if one basket falls, the others are still safe. This process helps in reducing the risk of losing all your money.
Portfolio management involves several important factors that work together to create a balanced investment plan. Here are the key elements, with examples, to help you understand:
| Element | Definition | Example |
|---|---|---|
| Asset Allocation | Deciding how to divide your money among different investments (stocks, bonds, etc.). | 60% in stocks, 30% in bonds, 10% in cash |
| Active Management | A strategy where a portfolio manager actively buys and sells investments to outperform the market. | A fund manager frequently buys and sells stocks based on market trends to achieve higher returns. |
| Alpha | The extra return earned by an investment over its benchmark or expected performance. | If the benchmark returns 6% and your portfolio returns 9%, your alpha is 3%. |
| Benchmark | A standard or index used to measure the performance of a portfolio. | The S&P 500 is a common benchmark used in the U.S. to evaluate how well a portfolio is performing. |
| Beta | A measure of how much a portfolio’s value moves compared to the overall market. | A beta of 1 means the portfolio moves in line with the market, while 1.5 means more volatile. |
| Index Fund | A type of mutual fund that aims to replicate the performance of a market index. | An S&P 500 index fund invests in the same companies as the S&P 500 to match its returns. |
| NAV (Net Asset Value) | The total value of a fund’s assets minus liabilities, divided by the number of shares. | If a mutual fund has an NAV of ₹20, it means each share of the fund is worth ₹20. |
| Passive Management | A strategy where a portfolio mimics a market index and does not involve frequent buying and selling. | An index fund is a form of passive management because it follows a market index without active trading. |
| Portfolio Optimization | The process of selecting the best mix of assets to achieve the highest return for a given level of risk. | A portfolio manager might mix stocks and bonds to maximize returns with minimal risk. |
| Risk-Return Trade-Off | The balance between the risk of losing money and the potential for higher returns. | Riskier stocks may offer higher returns, while safer bonds provide lower but more stable returns. |
| Sharpe Ratio | A metric that compares the return of an investment to its risk. A higher ratio means better risk-adjusted returns. | A portfolio with a Sharpe ratio of 1.2 offers more return per unit of risk than one with a ratio of 0.8. |
| Tracking Error | The difference between a portfolio’s performance and its benchmark. | If an index fund aims to track the S&P 500 but lags by 0.5%, that is its tracking error. |
| Turnover | The rate at which a portfolio’s assets are bought and sold over a period of time. | A portfolio with 80% turnover means 80% of its investments were sold and replaced in a year. |
Whether you are new to investing or experienced, portfolio management can be beneficial for everyone. Let us look at two main types of investors:
These are people like you and me who want to grow their savings by investing wisely. Maybe you are saving for college, a home, or retirement. Management of the portfolio helps you create a plan to meet those goals while considering your financial situation and risk tolerance.
These are large organizations like banks or insurance companies that manage a huge amount (millions or even billions). They use portfolio management to ensure they are making smart investment decisions that will grow their clients' money over time.
The purpose of managing your portfolio goes beyond just making money. Let us understand some of its key objectives:
The primary objective behind managing the portfolio is to enjoy capital appreciation. By managing a portfolio, your money can increase in value (appreciate), helping you beat inflation and reach your financial goals.
Some investors prefer regular income through dividends, while others may prefer receiving a larger maturity corpus. A portfolio manager considers both factors when building a portfolio for an investor.
Did you know that different investments have different tax rules? Earning a handsome return but not being able to use or maintain it due to poor tax planning can be disappointing. This is when a good portfolio manager can help reduce the amount of tax you pay by choosing the right mix of investments.
Well-planned portfolio management helps investors immediately access their funds for sudden or unexpected expenses. It also allows you to plan for emergencies by ensuring some of your investments are easy to sell and convert to cash.
Another crucial management objective is ensuring that the investments are safe and in line with your risk tolerance. This means that it will prevent you from taking unnecessary risks that may cause you to lose money.
The only way to enjoy maximum returns is by minimizing risk, which can be done through diversification. Diversification is the idea of not putting all your eggs in one basket. This is because investing in multiple assets reduces the risk of losing money if one investment does not perform well.
Portfolio management can be done in different ways. If you want to know what they are, the following are the main types:
Here, the portfolio manager actively buys and sells investments to try to get the best returns. They constantly track market trends and make changes based on how the market is performing.
In passive management, the portfolio manager creates a fixed portfolio and does not make frequent changes. The goal is to match the performance of a market index (like the S&P 500).
The difference between passive and active investing is that active investing involves frequent buying and selling, while passive investing aims to grow with the market without much change. Understanding this difference can help you choose the best strategy for your goals.
In this type, your portfolio manager makes all the investment decisions on your behalf based on your financial goals. You do not have to worry about day-to-day decisions.
Here, the portfolio manager only gives advice, but the investor makes the final decision on what to buy or sell.
Portfolio management follows a few key steps. Let’s look at the process in a simplified way:
| Process | Description |
|---|---|
| Identification of Objectives | Set clear goals for your investments, such as whether you are aiming for growth, regular income, or preserving your wealth. |
| Estimating the Capital Market | Analyze current market trends, economic conditions, and the potential performance of different asset classes like stocks, bonds, etc. |
| Asset Allocation | Decide how to divide your investment across different asset types (stocks, bonds, real estate, etc.) to balance risk and return. |
| Making Portfolio Strategies | Develop a strategy based on your objectives, risk tolerance, and market outlook. This can be active, passive, or a mix of both. |
| Choosing Profitable Investments and Securities | Choose specific stocks, bonds, or other securities that match your strategy and are expected to perform well. |
| Implementing the Portfolio | Put your strategy into action by purchasing the selected assets and building the actual investment portfolio. |
| Evaluating and Revising the Portfolio | Regularly check your portfolio's performance to ensure it is meeting your goals and make adjustments if necessary. |
| Rebalancing the Portfolio | Adjust the asset mix (like stocks vs. bonds) in your portfolio over time to maintain your desired level of risk and return. |
Management of your portfolio is important for many reasons, especially if you want to grow your money and reduce the risks involved. Here are some key benefits:
A look at your past investments will help you frame a better investment strategy in the near future. You can also plan holistically while considering the age factor, propensity of risk, income, and budget. Finally, making an informed and mindful decision will help reduce the likelihood of loss.
Investing is something that always comes with risk. However, portfolio management helps reduce this risk by diversifying your investments. As a result, it enhances the likelihood of profit.
Portfolio management allows you to plan and account for specific goals, as well as adapt your methods, expected returns, and risks based on your preferences.
Taxes typically deplete your income; hence, people prefer to avoid paying any more tax than necessary. A well-managed portfolio helps you save on taxes by making smart investment choices that reduce the tax burden.
Some investors may lack a solid financial foundation, struggle to manage their funds or understand the factors influencing their investments. Letting a portfolio manager handle things for you can save you time, effort, and money in the long run.
By now, you already know enough about how significant managing a portfolio can be for you. Just in case you still have doubts about why it is important to invest in portfolio management, here is why:
A closer examination of your previous investment techniques can better indicate your future investments. Not only that, but you may plan more holistically, taking into account your age, risk tolerance, budget, and income. When you evaluate all of these considerations before making an investment decision, your chances of losing money are much reduced.
This is simply a reminder, but it is really important. Portfolio management significantly decreases the risks of your investing strategy, which should not be overlooked.
Portfolio management allows you to prepare for and account for specific goals, as well as tailor your strategies, expected returns, and risks to your advantage.
Taxes drain income, and most people will do anything to avoid paying any extra tax. A good plan and a well-managed portfolio can thus help a lot.
Portfolio management enables you to effectively achieve your long-term financial goals under a manager’s expertise. With the portfolio manager’s guidance, you can easily keep your finances in check, create wealth, and enjoy financial security.
To put it simply, portfolio management is like having a roadmap for your investments. It helps you stay on track, reduce risk, and achieve your financial goals in a smart and organized way. Whether you are just starting out or have been investing for a while, a well-managed portfolio allows you to grow your money safely without putting all your money in one place. Plus, with the help of a good portfolio manager, you can customize your investment strategy, save on taxes, and make sure your finances are always in check.
So, think of it as your personalized investment plan, helping you go through the ups and downs of the financial world while aiming for success.
1
Portfolio rebalancing is the process of adjusting the amount of money you have in different investments to make sure your portfolio stays aligned with your goals. It is crucial to prevent over-exposure to risk as markets fluctuate.
2
Market volatility refers to the ups and downs in the value of investments. During volatile times, portfolio managers may need to adjust the portfolio to reduce losses and take advantage of opportunities.
3
An asset manager selects and manages assets to help meet your investment objectives while managing risk.
4
Portfolio management may involve management fees, performance fees, and transaction costs, depending on the service provider and investment strategy.
5
The key metrics include risk-adjusted returns, Sharpe ratio, alpha, and beta, which help assess how well the portfolio is performing relative to the market.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/521
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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