What is Equity Portfolio Management? Techniques, Limits & Taxation

Mutual funds

The planning and implementation of diverse ideas, processes, and tactics for defeating the equity market is referred to as equity portfolio management. The primary goal of portfolio managers is making investment decisions or advising others on how to make their own investment decisions.

Professional portfolio managers follow a rigid policy with strictly defined parameters for investment management and stock selection. The portfolio managers are guarded by market capitalization guidelines and thus, equity portfolio management involves understanding the investment universe for selecting efficient investments.

Read on to know the equity portfolio management techniques, limits of portfolio managers, and taxation.

Equity Portfolio Management Techniques

The phrase “equity valuation” refers to all tools and procedures used by investors to determine the true worth of a company’s equity. If done correctly, it can lead to a profitable investment decision. It is that move if taken aptly can result in a successful investment decision. Primarily, there are three base users of equity valuation; 

• Small individual investors
• Hedge funds
• Government and institutional investors

Analysts can compare a company’s margin levels to those of competitors to gain a better sense of how it compares. An activist investor, for example, could argue that a company with below-average averages is ripe for a turnaround and eventual growth in value if adjustments are made. 

The second comparable technique examines market transactions in which competitors, private equity companies, or other types of major, deep-pocketed investors have bought out or acquired similar firms, or at least similar divisions. An investor can gain a sense of how much the stock is worth by using this method.

Limits on a Portfolio Manager

Professional portfolio managers who work for an investment management firm rarely have a say in the basic investing philosophy that controls the portfolios they monitor. Stock selection and asset management may be governed by tight rules at an investing business. Furthermore, market capitalization restrictions frequently restrain portfolio managers.

Some portfolio managers employ a bottom-up method, in which investing decisions are decided only on the basis of stock selection, with no regard for sectors or economic expectations. Others take a top-down approach, analysing and selecting stocks based on entire sectors or macroeconomic trends. 

A variety of approaches are used in several styles. Of course, the preferences of the individual manager play a part as well. Still, understanding your organization’s investment universe and motto is the first step in portfolio management, and you should respond or plan your next steps accordingly.

Tax Consideration in Equity Portfolio Management

In order to get the investment portfolio up and running, it’s critical to understand the tax implications of portfolio management activity. Taxes are rarely paid on many institutional portfolios, such as those for retirement or pension funds. 

Their portfolio managers have greater latitude than they would with taxable portfolios because of their tax-advantaged status. Stock holding periods, tax lots, short-term capital gains, capital losses, tax selling, and dividend income generated by their holdings may need taxable portfolio managers to exercise greater caution than usual. They can choose to have a lower portfolio turnover rate.

Building a Portfolio Model

Building and maintaining a portfolio model is a frequent part of equity portfolio management. Whether a manager is managing one portfolio or 1,000 in a single equity investment product or style – it does not matter. A portfolio model is a benchmark that is used to compare individual portfolios. In most cases, portfolio managers will give each stock in the portfolio model a percentage weighting. Individual portfolios are then adjusted to correspond to this weighing balance.

All of the portfolios are anticipated to yield standardised returns when compared to one another. They will also have a risk/reward profile that is similar to one another. As a result, the portfolio manager’s analytical and security evaluations are performed on a model rather than on individual portfolios. As the forecast for individual stocks improves or deteriorates over time, the portfolio manager merely needs to adjust the weightings of those stocks in the portfolio model to maximise the return of all the actual portfolios it covers.

Efficiency in Portfolio Management

Modeling enables a high level of analytical efficiency. Instead of knowing all of the stocks in all portfolios, the portfolio manager simply needs to know about 30 or 40 of them in identical proportions. By modifying the model weights in the portfolio model over time, changes to these 30 or 40 stocks may be simply applied to all portfolios. As the outlook on individual companies shifts over time, the portfolio manager merely needs to adjust the weights in his or her model to make an investment choice across all portfolios at the same time.

At the individual portfolio level, the portfolio model can also be utilised to handle all day-to-day transactions. By just buying against the model, new accounts may be established fast and efficiently. Deposits and withdrawals of cash can be done in a similar manner.

If the portfolio is large enough – the model can be applied just to the change in asset size to create a portfolio that closely resembles the portfolio model. Stock board lot limits may limit the portfolio manager’s ability to appropriately buy or sell to certain percentage weightings in smaller portfolios.

Final Word

Given the complexities of these rules, investors should seek the advice of their own financial and tax professionals to establish the best plan for their investment objectives and to ensure that they are reporting their taxes correctly. For more information about investments, visit Navi Mutual Fund.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

FAQs on Equity Portfolio Management 

• What is the difference between discretionary portfolio management services and non-discretionary portfolio management services? 

In a discretionary portfolio management service, the portfolio manager handles each client’s funds and securities separately and independently, according to the client’s needs. The portfolio manager in the non-discretionary portfolio management service administers the funds according to the client’s instructions.

• What is the minimal amount of funds or securities that the portfolio manager can accept from a customer when starting a PMS account? 

The portfolio manager must accept a minimum of INR 50 lacs from the client, or securities with a minimum value of INR 50 lacs.

• Can a Portfolio Manager offer indicative or guaranteed returns? 

No, they cannot offer guaranteed returns. Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.