Portfolio Management is the application of financial tools such as stocks, shares, mutual funds, term deposits etc to maximise the return on investment.
There are 2 types of portfolios that are practised –
1. Market Portfolio – Is the weighted average return of all the investment profiles/areas available. It is a theoretical tool that gives results with different proportions of investment through different ‘tools’.
2. Zero Investment portfolio – In this case, the total sum of INR from the portfolio is always kept at zero. For example one sells share worth 1000 INR and uses the sale proceeds to purchase shares of some other company. Thus the money with the investor is zero. One important fact is a ZIF has no weight as the weight cannot be calculated. This is because weight is given by – the value from the portfolio divided by the INR from the portfolio and since the denominator is always zero- the equation cannot be defined.
Types of portfolio management –
1. Active -involves continuous buying and selling of securities to ensure maximum return.
2. Passive -Fixed portfolio designed to meet the current market.
3. Discretionary – the manager trades over the portfolio to yield returns for the client/ customer.
4. Non-discretionary- the manager is restricted to only an advisory role.