What is 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.
Importance of Portfolio Management
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.
Investment Planning
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
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.
Tax Planning
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
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.
Types of Portfolio Management
Now that we have explored the question “Why is portfolio management important?”, let us dive into “What are the types of portfolio management?”
Active 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.
Passive Portfolio Management
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.
Discretionary Portfolio Management
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.
Non-Discretionary Portfolio Management
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.
Examples 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.
How Does Portfolio Management Work?
Portfolio management looks different for every individual or organisation, depending on their requirements. However, these are the usual steps involved in portfolio management.
Planning
The first step involves outlining the objectives of the investment. It also includes asset allocation and security selection. Finally, after limitations have been calculated, a customised strategy is developed.Execution
Investments are made in the selected portfolio of securities after careful consideration. Several risk management techniques are utilised at this stage to minimise the portfolio’s risks.Monitoring
The portfolio undergoes periodical revaluation and analysis to determine its effectiveness. It is adjusted and rebalanced to maintain the desired asset allocation and risk level.
What is a Portfolio Manager?
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.
Role of Portfolio Manager
Some of the key responsibilities of a portfolio manager include the following:
- Developing and implementing optimal investment strategies according to the client’s profile.
- Taking uncertainties into account and making appropriate provisions.
- Ensuring that the client stays up-to-date on the several investment tools and their pros and cons.
- Tracking the performance of the portfolio and making necessary adjustments.
- Making quick and judicious decisions when an investment is not meeting expectations.
- Promptly communicating with the client in case of any developments.
How does a portfolio manager help?
Portfolio managers possess several skills that will help you in portfolio management. An expert in this field can provide you with the following benefits:
Better Decisions
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.
Enhanced Risk Managements
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.
Optimised Resource Allocation
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.
