Portfolio Management: Portfolio Planning, Construction and Managing Risk

Portfolio management is a vital step in the investment and financial sector. It benefits investors in various ways, such as mitigating risks, making profitable investments, getting a better understanding of the capital markets and much more. Portfolio management consists of multiple factors where portfolio planning, construction and risk management are crucial aspects.

The most important function of portfolio management is to analyse several investment areas by applying a SWOT analysis while keeping the investors’ ambitions and risk tolerance level into consideration. Consequently, it allows companies to generate large profits and protect revenues from the risk associated with the financial and securities markets. A top-notch certification course with minimal CFA course fees can help you learn all that you need to know about portfolio management and how it works.

What is Portfolio Management?

Portfolio management is the concept and process of choosing, overseeing, handling and controlling several investment classifications and segments. It primarily concentrates on long-term investments and financial objectives while considering every organisation’s or investor’s abilities and risk tolerance capacity. To put it differently, controlling and monitoring an investor’s funds, possessions and assets for a predetermined amount of time is recognised as portfolio management.

Effective portfolio management is key to preserving and safeguarding the investors' funds against potential market risks and hazards in the money market. The main objective of portfolio management is to enable customers to make better financial decisions with their savings and assets. Moreover, this helps shield their investment funds against market risk, which doubles up as a way of improving returns on investments.

Steps in Portfolio Planning

The major steps in portfolio planning have been enumerated as follows:

Step 1– Evaluate the present situation

To plan the future investments of an investor, it is very important to have a clear idea of the current circumstances of the investor in terms of money and risk tolerance capacity. It is also important to ascertain whether the investors are looking for a short-term or long-term investment. Hence, it requires an in-depth understanding and assessment of the assets and liabilities, cash flow, and investments to meet the investor’s objectives.

The goals need to be clearly laid out and quantified so as to find any discrepancies or inconsistencies between the stated goals and the current investment plan. Investors should precisely discuss their values, convictions, opinions and priorities in detail as these factors play a very important role in designing an investment strategy.

Step 2- Establish investment goals

Identifying the risk-return profile of the investor is the first step in defining the investing goals. It is important to know the degree of volatility an investor can undertake and the degree of risk they can afford to take in order to form an investment strategy and generate the desired results. 

Benchmarks for measuring the outcome of the portfolio can be constructed once an appropriate risk-return profile has been established. Gradual alterations or changes can be implemented by reviewing the efficacy of the portfolio in light of the benchmarks.

Step 3 – Regulate asset allocation

An investor can use the risk-return profile to manage asset allocation. They can choose from a variety of asset classes and investment options for achieving diversity in investments. 

In addition, an investor may also elect a suitable spectrum of variability for the portfolio, which may include stocks, cash, debentures, bonds, and so on. Modifications in the asset allocation plans can also be made as per the objectives and current circumstances of the investor. 

Step 4 – Choose investment options 

The criteria for asset allocation strategy are taken into account while evaluating individual investments. Whether an investor chooses active or passive portfolio management significantly impacts the specific portfolio strategy that is adopted. If there are sufficient funds in an actively managed portfolio to achieve adequate diversity, individual stocks and holdings could be incorporated.

However, in the case of smaller portfolios, to reach a suitable degree of diversification, mutual funds and exchange-traded funds that are managed by experienced professionals can prove to be impactful. An investor might employ index investments selected from an array of different asset classes to construct a passively managed portfolio.

Step 5– Monitor, calculate and readjust

The management approach begins when a portfolio strategy is put into operation. This involves keeping an eye on the investment and evaluating how effectively the portfolio performed. It is very important to keep a record of the investment performance from time to time so that an overall review of the same can be done at the end of the portfolio plan.

A good portfolio construction involves annually reviewing the investment plan so as to employ any modifications if required. The review mechanism helps to ascertain whether the investment strategy is working or not. It offers another important insight as to whether the investment strategy is being followed properly. if not, then the portfolio is re-adjusted accordingly by selling or buying investments to achieve the target.

Portfolio Risk Management Strategies 

Some of the most effective portfolio risk management are stated as follows:

  • Diversification: This strategy involves distributing assets among a variety of sectors, asset classes and investment areas to mitigate the effect of one single risk indicator on the portfolio using diversification.
  • Asset allocation: This is the process of combining the best of several kinds of assets within a portfolio, considering the financial goals, investment objectives and risk tolerance of an investor.
  • Rebalancing: Rebalancing is the technique of frequently revising and altering the distribution of assets in the portfolio so that it keeps the optimum balance of risk and earning possibilities.
  • Hedging: Hedging is the process of reducing or mitigating the risk of undesirable or adverse price shifts in the portfolio through the use of financial instruments and securities such as derivatives or alternative investment approaches.
  • Risk-adjusted returns: Risk-adjusted returns necessitate the analysis of investment performance by taking into consideration both the amount of return and the level of risk involved. Adopting a risk-tolerant approach, this strategy helps investors in examining investments in order to make wise decisions.


Effective portfolio, planning, construction and risk management are very important for investors who want their investment performance to reach the target they have set for themselves. Such targets may include higher returns, retirement securities and so on. In this way, investors can choose viable investment options for themselves and protect their funds in terms of investment performance.

If you are a finance professional looking to learn more about investment management and its various aspects, sign up for the Chartered Financial Analyst course by Imarticus. With comparatively lower CFA course fees, it provides you with a platform to connect with industry experts and make way for a high-paying global career. 

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