Types of Portfolio Management: Meaning and Process

Portfolio Management is the art of making informed decisions about investment policy, matching investments to asset allocation and objectives, and balancing risk against performance. It involves managing investment collections to meet long-term financial goals while accepting and maintaining an acceptable level of risk.

Portfolio management aims to maximise returns by managing investments in a structured and strategic manner.

This blog will cover different aspects, objects, and types of portfolio management to help you understand its fundamentals.

Defining Portfolio Management

Portfolio management is an approach to managing and mixing different investments to meet financial goals. It’s an essential part of financial planning, which involves strategically handling a broad group of investments, called a portfolio, to achieve some financial objectives while balancing risk and return.

This approach includes choosing, allocating, and tracking portfolio assets. A portfolio manager’s primary goal is to maximise return while considering investors’ risk tolerance, investment goals, and time frames.

Understanding the objectives and different types of portfolio management is crucial for your financial journey. This knowledge will help you make insightful decisions and manage your investments effectively.

Objectives of Portfolio Management

Here are the primary objectives of portfolio management given below:

Capital Appreciation: Increasing the investment value over time.
Income Generation: Ensuring a smooth income through different streams such as interest, dividends and other sources of income.
Risk Management: Equipping balanced risk and return between diversifying investments into other asset classes.
Liquidity: Making sure that the portfolio has liquid assets to meet short-term needs without sacrificing long-term growth and stability.
Tax Efficiency: Reducing tax liabilities by choosing strategies and investments that add and provide tax advantages.

Different Types of Portfolio Management

The different types of portfolio management are given below.

1. Active Portfolio Management

It is a dynamic investment process involving operational decisions to outperform the market. Skilled portfolio managers who can conduct in-depth analysis and market research to actively manage investments for superior returns are required.

Below are the pros and cons of portfolio management; let’s comprehend them:

Pros	Cons
Higher Return Possibility	Higher Cost
Adaptability and Flexibility	Underperformance
Opportunities to Stand Out in the Market	Increased Portfolio Turnover

2. Passive Portfolio Management
Passive Portfolio Management, also called index investing, is an investment strategy that aims to copy the performance of a market index rather than attempting to outperform it. Passive managers create portfolios that mirror the weighting and composition of a chosen index.
Passive portfolio management has its pros and cons; let’s understand them.

Pros	Cons
Low Cost	Limited Possibilities for Outperformance
Wide Market Exposure	Less Flexibility in Market Changes
Simplicity and Consistency	Lack of Customisation

3. Discretionary Portfolio Management
It is another type of portfolio management, known as a professional investment service offered by wealth managers or portfolio managers who can make investment decisions for their clients.
In this process, the portfolio manager can buy, sell, and make other changes to the portfolio without consent for other transactions.
Let’s check its pros and cons.

Pros	Cons
Time-Saving	Loss of Control
Effective Solutions	Possibilities of Mis-alignment
Adjustments for Active Portfolio	Lack of Learning Opportunities

4. Non-Discretionary Portfolio Management
Another type of portfolio management is non-discretionary portfolio management. It is an investment process in which the portfolio manager offers advice on investments and later recommends them to clients, but the clients make the final decision.
In non-discretionary management, clients retain entire control over their investment decisions and offer consent for each transaction.
Below are the pros and cons of non-discretionary portfolio management.

Pros	Cons
Collaborative Approach	Potential Conflict Between Client and Manager
Educational Options	Emotional Bias
Professionals Guidance	Limited Expertise

Benefits of Portfolio Management

Let’s look at some of the benefits of portfolio management.

Diversification: Make some investments across other asset classes, geographies and industries to mitigate risk.
Professional Management: Provide access to investment managers with potential market knowledge and experience.
Risk Mitigation: Use strategies such as asset allocation and diversification to reduce risk while maximising returns.
Tracking the Performance: Offering regular report updates on portfolio performance to help investors stay informed and make insightful decisions.
Target Alignment: Check if the investment strategy is aligned with the investor’s financial goals.

Conclusion

Portfolio management is not just an approach to financial planning; it’s a reassurance that one can achieve one’s financial goals while managing risk appropriately.

Whether you choose active or passive strategies or discretionary methods, portfolio management offers a range of benefits, such as diversification, target alignment, and professional management, that can instil confidence in your investment decisions.

By understanding different types of portfolio management and its other advantages, investors can make insightful decisions to optimise their investment portfolios.

Types of Portfolio Management: FAQs

Q1. What are the different 4 types of portfolio management?

The different types of portfolio management are:

Active
Passive
Discretionary
Non-discretionary

Q2. What are the types of portfolio management services?

The different portfolio management services are:

Discretionary Portfolio Management
Non- Discretionary Portfolio Management
Advisory Portfolio Management

Q3. What are the 4 Ps of Portfolio Management?

There are 4 Ps of portfolio management:

People
Philosophy
Process
Performance

Q4. What are the 4 different types of portfolio allocation examples?

Some common types of portfolio allocation examples are:

Target-date Funds
Balanced Funds
Income Funds
Growth Funds

Q5. What are the 5 phases of portfolio management?

The 5 phases of portfolio management are:

Be real with your finances
Note down your investment goals
Decide what you’ll invest in your asset
Select specific investments
Measure, Monitor and Rebalance