Assets and Asset Classes
An asset is anything that is expected to provide positive cashflow in the future. This is a rather broad definition and thus encompasses securities (e.g. stocks, bonds), real estate (e.g. land, houses), intellectual property (e.g. copyrights, patents) etc.

Asset classes are assets that have similar features and behave similarly. The main asset classes are – Equity (stocks), Fixed Income Securities (bonds etc), Commodities (gold, silver, oil, wheat etc), Cash Equivalents (short term deposits, money market instruments) and real estate.

Portfolio
A portfolio is the set of assets held by an individual or an institution. Typically, these assets consist of securities such as stocks, bonds, deposits, bills etc. These individuals/institutions hold these assets, expecting that they will appreciate in value (resulting in a capital gain) and/or provide income throughout their life (e.g. dividends, coupon payments etc).

Portfolio Management
Portfolio Management entails the management of the composition of the portfolio such that it meets the needs of the individual/institution holding it. This typically involves the following steps:
• Assessing the needs of the investor
• Understanding the unique constraints that apply to the investor
• Asset Allocation (deciding how much is invested in each asset class)
• Security Selection (deciding which securities to invest in)
• Portfolio Monitoring
• Adjusting the portfolio to meet changing needs/ market conditions

Understanding investor needs and constraints
Investors have different needs. These needs often stem from the goals of different investors, the unique constraints that they face, their risk profiles, tax environment and their individual natures. For example, a young professional is likely to want to grow his portfolio to meet a specific goal later on, such as an MBA degree, purchase of a home, marriage etc while a wealthy retiree is more likely to be interested in maintaining her standard of living and combating the effects of inflation.

Risk Profiles
Some investors are in a better position to take risks or are more willing to take risks than others. The distinction between the two is important since a willingness to take risk does not necessarily mean an ability to do so. Risk profiles are influenced primarily by age, financial situations and intrinsic natures. For example, young investors with decades of working life left are generally in a better position to make risky investments than older investors who are scheduled to retire in a short while. A young, unmarried IT professional is in a better position to make a risky investment than a single mother who has to provide for her daughter’s education and upkeep.

Thus, understanding your own risk profile before making investments is very important.

Tax Environment
Different countries have different tax structures. Some countries like Singapore have a light tax regime, exempting capital gains from tax, providing generous standard deductions and taxing income at a maximum rate of 15-20%. Countries like Sweden have marginal tax rates as high as 60%. Investors in countries with a high rate of income tax and low capital gains tax would prefer that their investments appreciate in value rather than pay regular dividends while investors in countries with a uniformly light tax structure would be indifferent to the manner in which their investment income presents itself. These are important factors in asset allocation and security selection.

Understanding the tax-liabilities resulting from your investments is critical. Do not ignore it.

We will cover Asset Allocation, Security Selection, Portfolio monitoring and adjustment in the next article.

management, portfolio, Risk