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Process of Portfolio Management 🛠️📋

Portfolio management is not a one-time event; it is a dynamic, ongoing process. Professional wealth managers follow a logical 5-step cycle to ensure that the portfolio stays aligned with the investor's goals.

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1. Specification of Investment Policy

The first step is to create an Investment Policy Statement (IPS). This is a document that outlines the investor's constraints and goals.

  • Objectives: How much return is needed? (e.g., Retire with ₹5 Crores in 20 years).
  • Constraints:
    • Liquidity: How soon is the money needed?
    • Time Horizon: Long-term (10+ years) or Short-term (1-2 years)?
    • Tax Position: What is the investor's tax bracket?
    • Legal/Regulatory: Any restrictions on where they can invest?

2. Investment Analysis

Once the goals are clear, the manager analyzes the world of opportunities.

  • Macro Analysis: Looking at the economy, interest rates, and inflation.
  • Sector Analysis: Identifying which industries are growing (e.g., AI/Tech vs. Oil).
  • Security Analysis: Picking individual stocks or bonds based on their value and risk.

3. Portfolio Construction

This is where the actual "buying" happens. The manager decides the Asset Allocation.

Tip

Asset Allocation (e.g., 70% Stocks, 30% Gold) is responsible for over 90% of a portfolio's long-term performance—it's more important than picking the "perfect" stock.

4. Portfolio Revision

The market is always changing. A stock that was good today might be bad next year.

  • Rebalancing: If your stocks grew too much and now make up 90% of your portfolio, you sell some and buy bonds to get back to your original 70/30 target.
  • Switching: Selling underperforming assets and moving into better ones.

5. Portfolio Evaluation

Finally, the manager checks: "How did we do?"

  • Performance Measurement: Comparing the portfolio's return against a benchmark (like the Nifty 50).
  • Risk Evaluation: Checking if the targets were met without taking unnecessary risks.

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Summary

  1. Planning (IPS) is the foundation.
  2. Analysis helps find the right ingredients.
  3. Construction builds the initial portfolio.
  4. Revision keeps the portfolio healthy.
  5. Evaluation provides the scorecard for success.

Quiz Time! 🎯

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