The portfolio management process, step by step
Know the client, set objectives, allocate, select, rebalance, measure. Then loop back.
Portfolio management is a loop, not a one-time sale: understand the client, write down what the money is for, decide the asset mix, build the portfolio, then monitor, rebalance and measure. The output of the last step feeds straight back into the first.
XXI-A's Chapter 9 tests the order of these steps and which document or decision belongs to which step. As a distributor you own the first two steps far more than the portfolio manager does, because you are the one who meets the client.
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The six steps
The standard textbook sequence, with what happens at each stage of a PMS relationship.
- 1
Know the client
Gather facts: age, income, assets and liabilities (so you can work out net worth), dependants, existing investments, goals and timelines. Then assess risk: how much loss the client can afford (ability) and how much they can stomach (willingness).
- 2
Set objectives and constraints
Turn the facts into a return objective, a risk objective and the constraints: liquidity, time horizon, tax, legal and regulatory limits, and unique preferences. These go into the Investment Policy Statement (IPS).
- 3
Decide the asset allocation
Choose the long-term mix across equity, debt, gold and other assets (strategic allocation) and the range within which the manager may tilt it (tactical allocation). Most of a portfolio's long-run return pattern comes from this decision, not from stock picking.
- 4
Select securities and build the portfolio
The portfolio manager picks securities under the chosen investment approach and executes trades in the client's own account. In a discretionary PMS this is the manager's call; in a non-discretionary PMS the client approves each decision.
- 5
Monitor and rebalance
Markets move the weights away from target. The manager checks the portfolio against the IPS and brings it back when it drifts too far, and the client's circumstances are reviewed for changes (a job loss, an inheritance, retirement).
- 6
Measure and evaluate performance
Calculate returns, compare them with the benchmark and with risk taken, and report to the client. What you learn here goes back to step 1: the objectives may need to change.
Where the rules plug in
Several stages have a regulatory document behind them. The client agreement must state the client's investment objectives, the investment approach and any restrictions the client places on particular companies or industries (Regulation 22(2) of the SEBI (Portfolio Managers) Regulations, 2020). SEBI's Investor Charter for PMS lists appropriate risk profiling of investors as part of the business a portfolio manager transacts. Monitoring and measurement surface as the quarterly report every PMS client receives under SEBI's Master Circular for Portfolio Managers (July 16, 2025).
The IPS itself is a planning document, not a SEBI form. Its contents end up reflected in the agreement and the choice of investment approach.
Who does what in a PMS relationship
Know the client
Distributor
Leads: fact-find, risk questionnaire, KYC support
Portfolio manager
Runs its own risk profiling before accepting the client
Objectives and constraints
Distributor
Captures and explains them
Portfolio manager
Confirms them in the agreement
Asset allocation
Distributor
Explains the approach and its range
Portfolio manager
Decides within the agreed approach
Security selection
Distributor
No role
Portfolio manager
Decides (discretionary) or proposes (non-discretionary)
Monitor and rebalance
Distributor
Reviews the client's situation
Portfolio manager
Rebalances the portfolio
Measure performance
Distributor
Walks the client through the report
Portfolio manager
Calculates and reports
| Step | Distributor | Portfolio manager |
|---|---|---|
| Know the client | Leads: fact-find, risk questionnaire, KYC support | Runs its own risk profiling before accepting the client |
| Objectives and constraints | Captures and explains them | Confirms them in the agreement |
| Asset allocation | Explains the approach and its range | Decides within the agreed approach |
| Security selection | No role | Decides (discretionary) or proposes (non-discretionary) |
| Monitor and rebalance | Reviews the client's situation | Rebalances the portfolio |
| Measure performance | Walks the client through the report | Calculates and reports |
Free account, this exam preselected.
How XXI-A tests this
Expect sequencing questions ("Which step comes immediately after setting objectives and constraints?": asset allocation), classification questions (is liquidity an objective or a constraint? a constraint), and small calculations from the fact-find, such as a net worth sum where the trap option forgets to subtract a loan. A common wrong answer puts security selection before asset allocation.
A worked fact-find
Meera, 48, wants to move ₹75 lakh into a discretionary PMS. She owns a flat worth ₹1.6 crore with a ₹40 lakh home loan, holds ₹30 lakh in mutual funds and ₹20 lakh in a bank FD, and her daughter starts college in three years. Her net worth is ₹1.6 crore + ₹75 lakh + ₹30 lakh + ₹20 lakh, minus ₹40 lakh, which is ₹2.45 crore.
The college fee is a near-term liquidity need, so it should stay outside a long-horizon equity PMS. That single fact shapes steps 2 and 3 before any stock is chosen.
FAQs
What are the steps in the portfolio management process?expand_more
Know the client, set objectives and constraints (written into an IPS), decide the asset allocation, select securities, monitor and rebalance, then measure and evaluate performance. The last step feeds back into the first.
Which step of portfolio management matters most for long-term returns?expand_more
Asset allocation. The split between equity, debt and other assets drives most of the variation in a portfolio's returns over time, which is why it is decided before individual securities.
Is the portfolio management process a one-time exercise?expand_more
No. It is continuous. Performance results and changes in the client's life send you back to revisit objectives, constraints and the allocation.
What is the distributor's role in the portfolio management process?expand_more
Mainly the front end: understanding the client, profiling risk, checking suitability and explaining the approach, fees and reports. Security selection is the portfolio manager's job.