Steps in Portfolio Management Process

The investment managers will typically follow the following investment management process to manage a client’s investment portfolio.


The first step is planning, which involves understanding the needs of the customer. This involves analysing the investor’s objectives and constraints, and creating an Investment Policy Statement (IPS). Without really understanding investor’s objectives for investing and the constraints they have, it is difficult for an investment manager to come up with a suitable investment plan. The IPS is a written document that officially documents the objectives and constrains for each investor and that needs to be followed for making the investments. The investment manager will typically review the IPS every few months or on the occurrence of a specific event and make any necessary revisions.


Once the planning is done and the Investment Policy Statement has been made, the next step is to actually make the investments. This starts by first deciding on how we will allocate the funds between different asset classes. This is called asset allocation. The major asset classes include equities, fixed income, commodities, and real estate. After asset allocation, we need to analyse the individual securities for possible investment. Finally the portfolio manager will construct the portfolio by considering all the information he has including the investment policy statement, asset allocation, and security analysis. While constructing the portfolio the portfolio manager has to make many decisions including weights for different asset classes, weights for assets within an asset class, security selection, etc. This step also involves trading in the financial markets as the manager will have to actually purchase the required securities for the required amounts.


This step involves monitoring and rebalancing the portfolio as the market conditions and product prices change. For example, if the original plan was to invest 80% in equities and 20% in fixed income, and equities have done really well, then with the new prices, the proportion would have changed and equity portion would have become higher (e.g., 85:15). In this case the portfolio manager will rebalance the portfolio by selling some equity (mostly the ones not performing well) to bring the balance back to 80%:20%. The portfolio manager depending on his style will monitor and rebalance the portfolio from time to time.

As a part of the feedback process, the portfolio manager will also measure the performance of the portfolio in terms of meeting the investor objective such as the risk-return objectives. Such performance evaluation may bring up the need for reviewing and making adjustments to the portfolio or to revise the investment objectives.

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