Are you planning to start investing? With so many investment options and strategies available in the market, it is easy to get overwhelmed. This is where portfolio management comes in.
Whether you’re a long-time investor or a beginner looking up “How to invest?”, portfolio management is crucial to reach your financial goals. It involves selecting and managing a wide array of investments to balance risk and return while aligning with your investment objectives and time horizon.
This article will take you through the basics of portfolio management, its benefits, types, and the working of portfolio management.
Before we get into the details of portfolio management, let us look at what is portfolio management. It refers to creating and managing a set of financial investments, including stocks, bonds, mutual funds, unit-linked insurance plans, fixed deposit, recurring deposit etc., known as a portfolio, to achieve financial objectives.
It is one of the most efficient tools to facilitate financial growth, used by both individual investors and organisations. The goal is to achieve the highest possible return on investment while minimising all possible risks.
Successful portfolio management requires a thorough understanding of the markets, the current financial climate, investment instruments, and risk management techniques. Therefore, choosing reputable portfolio management services and portfolio managers is paramount.
The importance of portfolio management comes from its benefits to everyone, from individuals to multinational corporations. It is essential to wealth management and investment planning. Here are some salient features of portfolio management that make it one of the best investment solutions.
Portfolio management will allow you to consider your past investments while developing your new investment strategy. You can make an informed decision after considering the age factor, risk propensity, income, and budget.
This comprehensive decision-making process will eliminate the risk of huge losses. Portfolio management is one of the best options for investing for beginners.
Risk management is a set of processes to identify, assess, and mitigate threats to capital and earnings. Effective portfolio planning also results in the minimisation of risks. Thus, the investor enjoys capital appreciation.
Regular monitoring and adjustments can help with risk management. For instance, investors with a high-risk tolerance can invest more heavily in stocks, while those with low-risk tolerance can choose to invest majorly in bonds and other less-risky assets.
As taxes usually deplete income, it is an important function of investment schemes to ensure minimum taxation on customers’ returns. This is another benefit of portfolio management. Portfolio management enables effective tax planning, which means you can structure your investments tax-efficiently to reduce the impact of taxes on your portfolio.
Diversification is one of the exceptional benefits that comes with portfolio management. It allows you to diversify your investments across different asset classes, sectors and regions. This ensures that the rest of the portfolio remains unaffected even if one investment sinks. It shields your portfolio against many of the effects of market fluctuations.
Now that we have explored the question “Why is portfolio management important?”, let us dive into “What are the types of portfolio management?”
In active portfolio management, the portfolio managers are actively involved in the process of buying and selling assets, aiming to outperform the market and secure maximum profits for individuals.
Investment decisions are made after adequate market analysis and investment research. Therefore, it calls for greater market knowledge and an in-depth understanding of the business cycle.
Instead of trying to beat the market, passive portfolio management aims to match the current market scenario. It involves investing in a diversified portfolio of assets and holding them for a long period.
It is mostly preferred by investors who wish to opt for a low-cost strategy that poses a reduced risk. This type of portfolio management is known to provide better gains in the long term.
In this type of portfolio management, the portfolio manager possesses the right to make decisions, including documentation, paperwork and filing, on the investor’s behalf, without seeking prior approval for every trade. Experts can only offer this kind of service in the field of portfolio management.
Discretionary portfolio management is usually favoured by high-net-worth individuals or organisations who do not have the time or expertise to manage their investments. A major advantage of this strategy is that all the decision-making is carried out by an expert, which eliminates a lot of hassle.
In non-discretionary portfolio management, the portfolio manager makes recommendations to the client and outlines the advantages and disadvantages of each option. However, the decision-making authority lies with the client.
As the client’s explicit approval is required before any transaction is made, individuals who wish to have more say in the investment decisions opt for this type of portfolio management.
If you’re still uncertain, an example of portfolio management might help you understand the process better.
Consider a client with a moderate risk tolerance with a certain amount to invest. The manager has to distribute this among different investment options. To start with, the client’s investment goals, time horizon, and risk tolerance are assessed, and a strategy that includes a mix of stocks and cash equivalents is settled upon.
Then, the manager selects individual securities while considering their potential risks and returns.
After the portfolio is constructed, it is regularly monitored to ensure it aligns with the client’s investment goals and risk tolerance. The manager also reports the portfolio’s performance to the client periodically.
Portfolio management looks different for every individual or organisation, depending on their requirements. However, these are the usual steps involved in portfolio management.
The portfolio manager is most crucial to the working of portfolio management. They are responsible for managing the portfolio of an individual or a group on a daily basis. They must thoroughly understand the client’s financial needs, income and risk tolerance and formulate an appropriate, customised investment plan. They may play an active or passive role in the management of portfolios.
Some of the key responsibilities of a portfolio manager include the following:
Portfolio managers possess several skills that will help you in portfolio management. An expert in this field can provide you with the following benefits:
Portfolio managers possess strong analytical skills that enable them to evaluate market trends to identify the most advantageous investment opportunities. They can also gather and interpret data and understand economic indicators. As a result, they can make well-informed decisions.
A seasoned professional would understand the different types of risk, including market risk, credit risk and liquidity risk. They would be capable of implementing strategies to manage these risks.
A portfolio manager’s extensive knowledge of range of available investment products, including stocks, bonds, and derivatives, will allow them to identify opportunities for diversification. This leads to optimised resource allocation.
Some of the key features of portfolio management include diversification, risk management, asset allocation, performance assessment, and rebalancing.
A few markers of an efficient portfolio manager include strong analytical skills, extensive updated knowledge of the market, strategic thinking and effective communication skills.
A portfolio management service is a professional financial service where expert portfolio managers offer customised investment solutions to help investors achieve the required rate of return within the desired duration.
A project portfolio is a collection of all the projects, programs and other related initiatives undertaken by an organisation to achieve its objectives.
Project portfolio management involves selecting and prioritising projects, then planning and executing them to maximise benefits and minimise risks. It is an important part of organisational strategy.
Passive income is income generated without active work from assets that generate a return on investment. A portfolio manager can identify these sources of passive income and diversify the sources of return, thus reducing risks.
While a portfolio manager is responsible for managing a collection of investments and a portfolio, and a financial advisor provides wide-ranging financial advice.
Some risks associated with portfolio management include market risk, credit risk, liquidity risk and operational risk.
The frequency of rebalancing varies, but it is typically done when the asset allocation has drifted considerably from the target allocation. This might occur annually, quarterly or even more frequently.
Some investment strategies include value investing, growth investing, income investing and momentum investing. Consult your portfolio manager before choosing the one best suited to your needs.
Disclaimer:
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
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