Different Features of Portfolio Management
Aug 07, 2022 By Triston Martin

Individuals can construct and manage their own portfolios, while customers of professional certified portfolio managers are managed on behalf of those clients. In either scenario, the ultimate objective of the portfolio manager is to get the highest possible rate of return on the assets while maintaining an acceptable degree of risk exposure.

Portfolio Management

To effectively manage a portfolio, one must be able to objectively assess each investment's merits, including its prospects and potential risks. The options entail trade-offs, such as whether to invest in debt or equity, whether to focus on the local or foreign market, and whether to prioritize growth or safety. The management of a portfolio may either be done passively or actively.

Passive management is a long-term approach that involves doing nothing but setting it and forgetting it. It might entail purchasing shares in one or more exchange-traded funds (ETFs), also known as index funds. Indexing or index investing is widely used to refer to this practice. Modern portfolio theory, often known as MPT, is a tool that may assist in optimizing the asset allocation of indexed portfolios. Active management is a strategy that includes actively buying and selling individual stocks and other types of assets to outperform an index's performance. Active management is often used for closed-end funds. To assist them in assessing possible investments, active managers may use a vast array of quantitative or qualitative models.

Key Elements of Portfolio Management

Asset Allocation

The proper allocation of assets over the long term is essential for successful portfolio management. In most cases, this refers to investments in stocks, bonds, and so-called "cash" instruments like certificates of deposit. Real estate, commodities, and derivatives are examples of the various types of investments, also known as alternative investments.

The concept of asset allocation is predicated on recognizing that various forms of property do not move in unison and that certain forms of property are more susceptible to market fluctuations than others. A diverse portfolio offers balance and risk resistance, making it an ideal investment strategy. While maintaining the integrity of the portfolio's initial risk/return profile, rebalancing allows for the preservation of profits and the creation of new possibilities.


The only thing that can be said with absolute confidence about investing is that it is impossible to forecast winners and losers constantly. The concept of creating a basket of assets that gives wide exposure within an asset class is the wise way to go about things. Spreading the risk and potential return of individual investments over many asset classes or asset classes means "diversification." Because it is difficult to determine which subset of an asset class or sector is likely to perform better than another. This is accomplished by distributing risk across a larger number of investments.


Rebalancing is periodically, often once a year, bringing a portfolio back to its goal allocation when it was first created. When the fluctuations of the markets have caused the asset mix to become unbalanced, this is done to restore it to its original condition. For instance, a portfolio that begins with an equity allocation of 70 percent and a fixed-income allocation of 30 percent may transition following a protracted market rise to an equities allocation of 80 percent and a fixed-income allocation of 20 percent. The investor has been able to make a healthy profit, but the portfolio now contains more risk than the investor is comfortable with.

Active Portfolio Management

In the active management strategy, investors utilize fund managers or brokers to purchase and sell stocks to beat a certain index, such as the Standard & Poor's 500 Index or the Russell 1000 Index. This strategy is used by investors who take the active management approach. Active investing requires constant attention from portfolio managers to market movements, fluctuations in the economy, alterations in the political scene, and news that impacts firms. This information is used to determine the optimal timing to buy or sell assets to capitalize on market abnormalities. Active managers assert that the techniques they use will increase the possibility for returns greater than those that can be attained by replicating the holdings of a certain index.

Passive Portfolio Management

The managers invest in the same equities that are included in the index and use the same weighting assigned to each stock in the index while doing so. Because each index fund has a portfolio manager whose responsibility is to replicate the index rather than choose the assets bought or sold, these funds are referred to as being passively managed.