Introduction to Portfolio Management
Portfolio management is the process of managing an individual or a company’s investments in order to maximize their earnings within a given time frame. It is the process of choosing and managing a collection of investments to suit the long-term financial goals and risk tolerance of a client, a business, or an organization.
It involves the capacity to assess strengths and weaknesses, opportunities and risks throughout the whole investment spectrum. The decisions involve trade offs ranging from debt against equity, growth versus safety to domestic versus global. In other words, it serves as a SWOT analysis of different investment spectrums with the investors goals against their risk capacity.
Individuals may opt to develop and manage their own portfolios, while qualified professional portfolio managers act on behalf of clients. Either way, the ultimate objective of the portfolio manager or an individual is to maximize the expected return on investments while maintaining a reasonable degree of risk exposure. Diversification of your portfolio is easy by balancing investments among different asset classes, industries, companies or countries to get higher returns.
Importance of Portfolio Management
Portfolio management is an important aspect of investing and can make or break your financial goals. There are three main reasons why it is important to have a good portfolio management strategy in place:
- Risk Management (ensuring that you are not risking too much of your capital)
- Diversification (ensuring that you are not putting all your eggs in one basket)
- Performance Analysis (ensuring that you know where you stand in terms of performance).
Types of Portfolio Management Techniques
There are generally 4 different types of portfolio management techniques, which are as follows;
Active Portfolio Management
Here, the portfolio manager is mainly concerned with maximizing revenue. So, they basically invest a significant amount to trade with securities. Basically, they buy stocks at a low value and sell them off when their value increases.
Passive Portfolio Management
The passive portfolio management involves investors that are likely to invest in index funds (this is a type of mutual fund which matches or tracks the components of a financial market index) that gives steady returns. This type of portfolio management generates profitability in the long run.
Discretionary Portfolio Management
In this type of portfolio management, the client gives the authority to the portfolio manager to invest on their behalf without any discretion. Thus, the manager will choose the best investment strategy based on their clients’ goals and risk capacity.
Non-discretionary Portfolio Management
Unlike discretionary portfolio management, here the clients receive investment advice from their managers. It’s their choice on whether to invest or not invest based on the recommendations received.
Objectives of Portfolio Management
A solid portfolio should have numerous objectives that are well balanced. Some significant objectives of portfolio management are listed below.
- When investment safety is ensured, the portfolio ought to produce a stable current income. At the very least, the current returns should cover the investor’s opportunity cost. Here, we’re talking about current income in the form of dividends and interest unlike capital gains.
- An effective portfolio consists of liquid investments that are sellable. If your portfolio contains an excessive number of unlisted or inactive shares, you will have trouble encasing them and transferring them from one investment to another. It’s preferable to make investments in actively traded companies with substantial stock exchange listings.
- A solid portfolio should allow its owner to benefit from a favorable tax scheme because taxation is a significant factor in overall planning. The portfolio should be created taking into account not just the income tax but also capital gains tax and gift tax. A successful portfolio focuses on tax planning instead of tax evasion or avoidance.
- To protect the investor from any loss in purchasing power due to inflation, a strong portfolio should increase in value. In other words, those investments that tend to increase in actual value after adjusting for inflation must be included in a balanced portfolio.
- A strong portfolio should ensure that there are sufficient funds available quickly to meet the investor’s liquidity needs. It’s advisable to maintain a bank credit line for use in case of any essential partaking in legal proceedings or any other personal purposes.
- Regardless of who owns the portfolio, the primary objective is to ensure the full security of the investment. After the investment is guaranteed to be safe, other factors like income, growth, etc. become essential.
Advantages of Portfolio Management
There are many benefits to having a strong portfolio management system, which are listed below.
- The quality of a portfolio might be compromised by unskilled or insufficient market knowledge, even though a significant amount may be advantageous when it comes to investments. Portfolio management allows investors to make investment plan decisions that are more informed and in line with their (the investors) goals and objectives.
- One of the crucial responsibilities that portfolio investments perform is maximizing return. It offers a well-structured framework for analysis and choosing the optimum asset class. With little money, investors can get high profits. Experts closely monitor an investor’s portfolio, conduct in-depth market research, maintain track of their profile, and make investments when the right market conditions are present.
- By using portfolio management, investors can avoid the disaster of taking substantial risks. Instead of investing solely in one sort of asset, it advises investing among various asset types. If an investor exclusively invests in one form of security and it fails, the investor would suffer significant losses that could have been avoided by having diversified investments over different kinds of assets.
- Management uses portfolio management to monitor the success of their investment portfolio. The portfolio’s investments can be assessed more effectively, and any failures can be quickly identified.
- Investors can organize their investments in a systematic way with the help of portfolio management. Investors are able to choose their assets in a way that makes it simple for them to sell some of them whenever they require money.