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By HWA | Publish On: May 21, 2017 | Posted In:

What is ‘Portfolio Management’

Portfolio management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. Portfolio management deals with determining strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other trade-offs encountered in the attempt to maximize return at a given appetite for risk.

There are two forms of portfolio management in the case of mutual and exchange-traded funds(ETFs); passive and active. Passive management tracks a market index and is commonly referred as indexing or index investing,  Active management deals with a single manager, co-managers or a team of managers who attempt to beat the market return by actively managing a fund’s portfolio through investment decisions based on research and decisions on individual holdings. Closed-end funds are generally actively managed.

Terminology:

The Issuer is the entity that issues the fixed income security and would be paying the fixed sum of money to the investor. The issuer is basically the borrower of funds.

The Principal is the amount of money that is raised by issuing the fixed income security (e,g, a bond)

The coupon is the fixed rate of interest that is paid on the security

Maturity is the total period for which the amount is raised and during which the fixed income will flow to the lender (or investor)

The indenture is the contract that states the terms and conditions of the transaction.

Of late, derivatives have also been designed based on these fixed income securities.

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