portfolio management
Portfolio management refers to the management of financial assets like stocks, bonds, and cash. Explore how AI can enhance portfolio management offerings.

Portfolio management – a brief introduction

Financial portfolio management refers to the management of financial assets like stocks, bonds, and cash. They are usually held by individual investors and managed by financial institutions such as banks and hedge funds, or by financial professionals.

What is portfolio management?

The financial portfolio is created based on the risk appetite of the investor, their investment goals, and the duration of the investment. The risk/reward ratio of the portfolio is influenced by the value of every asset. This is also known as asset allocation.

The value of the asset may rise or fall in comparison to other assets in the portfolio depending on factors such as general economic conditions, geopolitical considerations, company performance. The various investment sectors include:

  • Precious Metals
  • Commodities
  • Cash
  • Currencies
  • Bond
  • Real-estate
  • Stock sectors

What are the types of portfolio management?

Asset allocation

Effective portfolio management is all about a good mix of assets for the long term. Assets include stocks, bonds, and cash in the form of deposit certificates. Other kinds of assets known as alternative investments include real estate, commodities, and such. Each type of asset has a different degree of volatility. Hence a balanced mix of assets provides better stability and protection against market risks.


The only thing certain about investing is the impossibility of predicting winners and losers. The best way to about it is to diversify investments across various asset classes. As they say – don’t put all your eggs in one basket! This approach provides a broad exposure within each asset class. It spreads the risk and reward within each asset class. Real diversification is done across various classes of securities, sectors of the economy, and geographical regions.


Rebalancing refers to the returning a portfolio to its original target allocation at regular intervals. It reinstated the original asset mix and it is usually done annually. For instance, if a portfolio starts with a 60% equity and 40% fixed-income allocation, after an extended market rally, it shifts to a 70/30 allocation. This results in good profits for the investor. However, there is also risk higher than the investor’s risk appetite. By rebalancing, high-priced securities are sold and the money is invested in lower-priced securities.

Active Portfolio Management

For an active management approach, investors typically resort to the assistance of fund managers or brokers to help them buy and sell stocks to outperform a specific index. An actively managed investment fund has a portfolio manager, co-managers, or a team of managers actively making investment decisions for the fund. The success of an actively managed portfolio requires in-depth research, market forecasting, and the expertise of the portfolio manager or management team.

Passive Portfolio Management

Passive portfolio management is also known as index fund management. It duplicates the return of a particular market index or benchmark. Portfolio managers typically buy the same stocks that are listed on the index, using the same weighting that they represent in the index making this a passive strategy. Such portfolios are usually constructed as an exchange-traded fund (ETF), a mutual fund, or a unit investment trust. The fees for managing a passive portfolio lower than that of managing active portfolios.

What are the principles of portfolio management?

Make strategic decisions

Individual securities are important only because they affect the portfolio’s aggregate. Decisions regarding the portfolio should focus on the impact these decisions will have on the aggregate portfolio.

Larger risks, larger returns

The first and the biggest decision concerning portfolio management is determining the risk appetite of the investor. This defines how assets are allocated within a portfolio, the duration of the investment, and the funds to be invested. This can be a difficult decision since the risk vs return can vary across asset classes.

Tailored to investor needs

Investors have varying tax rates, knowledge, transaction costs, etc pertaining to the portfolio. Those with a high marginal tax bracket prefer portfolio strategies that result in high after-tax returns. It’s often best to hire a portfolio manager or team to take care of your portfolio if you do not have prior knowledge of investments and portfolio strategies.

Extensive competition

Private investors and investment firms are continually attempting to use a large variety of techniques to obtain abnormal returns – something that’s larger than the risk associated with the portfolio. Most likely, assets that are believed to be undervalued are bought and then sold when the prices rise to the desired level. Similarly, assets that are believed to be overvalued are sold until the price falls to the desired level.

Application of AI in portfolio management

Artificial intelligence (AI) is changing how the financial industry operates. Portfolio management forms one of the key pillars of the financial industry, and it is exploring ways in which AI can be utilized to enhance portfolio management offerings

The ability of artificial intelligence to crunch large chunks of data in no time is what makes it easy for portfolio managers to make the right decisions swiftly. It also allows portfolio management organizations to look beyond traditional analysis and apply a more sophisticated approach to data-heavy tasks. Here are some of how AI can be applied for portfolio management.

  • Automated insight where the AI can read earnings transcripts automatically to assess the management sentiment.
  • Relationship mapping where the AI identifies non-intuitive relationships between securities and market indicators
  • Alternative datasets where the AI analyzes alternative data to structure hedging strategies
  • Identifying growth opportunities using client behavior patterns
  • Intuitive client outreach and demand generation through alternative data sources
  • Automating functions and delivering operations intelligence
  • Monitoring suspicious transactions and relaying response protocols
  • Bots powered by machine learning that respond to investor queries
  • Building on-demand reports about the management of assets and investments
  • Monitoring employee conduct risk and morale

Closing thoughts

The next big question is where do investment firms start? There are four key things you can do – define your AI strategy, determine your go-forward path, focus on short-term value and quick wins, and work with industry experts. Though the AI journey can seem daunting, there are plenty of AI platforms and tools that can help you ace your portfolio strategy.

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