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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Portfolio Management Process

In the portfolio management process, which step is carried out first, before any asset allocation or security selection is decided for a PMS client?

The first step is preparing the Investment Policy Statement, which records the client's return objectives, risk tolerance and constraints such as horizon, liquidity and tax. Asset allocation, security selection, rebalancing and performance measurement all depend on this document, so none of them can properly precede it.

  1. ARebalancing the portfolio after market moves
  2. BPreparing the Investment Policy Statement based on the client's objectives and constraintsCorrect
  3. CMeasuring performance against the benchmark
  4. DSelecting individual stocks for the portfolio

Explanation

The process begins with understanding the client and documenting objectives (return and risk) and constraints (time horizon, liquidity, tax, legal, unique needs) in an Investment Policy Statement. Allocation, selection, rebalancing and performance measurement follow from it. Picking stocks first would ignore the client's suitability.

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