Today’s topic is – Portfolio Management, and in this article, we will know – What is Portfolio Management, What Is the Purpose of Portfolio Management, and also know how important is Portfolio Management for an investor.
A portfolio is a group of financial assets such as stocks, bonds, commodities, currencies, and cash equivalents, a portfolio can also consist of non-publicly tradable securities, like real estate, art, and private investment.
What is Portfolio Management?
Portfolio Management is a technique that helps an investor to make a better investment among the various investment options available to him for a predetermined purpose.
So that the investor also gets the desired rate of return, and that investment can be controlled by RISK CONTROL.
“Portfolio management is the method of managing investments with the help of the right tool and strategy to generate maximum return downsizing risk within a given time range.”
Why portfolio is important?
With the help of robust portfolio management, investors can create the best investment plan matching their income, financial goals, age, and risk appetite.
These pointers are given below highlight the inherent need for proactive portfolio management –
- Good strategies as per the current market conditions and help in rebalancing the asset composition so that investors can get the most out of their existing investments.
- This enables quick customization based on immediate financial needs and market conditions
- It helps in mitigating investment-oriented risks and increases the scope to generate higher returns.
- The best way to build a strong investment portfolio is to determine its financial objective and rebalance its components frequently. Thereafter, investors should focus more on diversifying their resources to obtain the best possible rewards at manageable risks in all situations.
- It helps to know which investments work best in which market conditions and how to distribute resources across different asset classes.
Objectives of Portfolio
A good portfolio should have many objectives and achieve a sound balance among them. Anyone’s purpose should not be given extreme importance at the value of others. Presented below are some essential objectives of portfolio management.
- The main objective of portfolio management is to protect the invested capital so that the capital remains safe.
- The second main objective of management is to keep getting consistent benefits from the investment.
- The third and main objective of portfolio management is that we can change our investment into cash in the shortest possible time, that is, whenever we want to sell our investment, the customer can get it immediately, and get their cash investment. be able to change.
- The fourth and main objective of portfolio management is that, by using the power of compounding, we can increase our wealth by using the power of compounding and can take better advantage of long-term investment.
- All areas of investment are not always profitable, what is in profit today may go in loss tomorrow, and the area of investment that is in loss today can also be profitable at any time.
- Another major objective of portfolio management is that we can earn healthy returns on our investments, and can take advantage of various types of tax saving schemes given by the government.
- The last objective of Portfolio management is designed to grow the powerful yield an investor gets from his surplus invested capital. By reducing the tax load, yield can be completely recovered. A good portfolio should give a beneficial tax defense to the investors. The portfolio should be estimated after analyzing income tax, capital gains tax, and other taxes.
What are the things to keep in mind while creating a portfolio?
Diversify: When you invest in the stock market, a good approach is to spread your investments across different market categories. That way, even if one or two sectors in the market are hit by the downturn, your entire portfolio doesn’t suffer.
Reduce investment costs: A major expense for investors is commission charges and management costs. This is especially relevant if you always buy and sell stocks. Consider investing with a discount brokerage firm. These companies charge very low fees to their clients. Also, while investing for long-term goals, it is best not to make decisions based on short-term changes in the market. In other words, don’t sell your shares just because of a small drop in the short term.
Regular Investment: It is important to invest daily to extend your portfolio. This will not only help you increase your wealth in the long run but will also inculcate the habit of investment discipline in you. And as your income level increases, you can try to increase the amount you invest.
Types of portfolio management
1. Active portfolio management
portfolio manager aims to generate better returns than the market. They actively participate in analyzing the market opportunity to make the right move. generally, they prefer purchasing stocks when they are undervalued. and sell them off when their value increase
2. passive portfolio management
This type of portfolio management is concerned with fix strategy that aligns perfectly with the efficient market theory. the manager generally tends to invest in an index fund that provides a low but consistent return in a long period.
3. Discretionary portfolio management
In this particular management type, the portfolio managers are entrusted with the authority to make decisions and invest at their discretion on behalf of investors. Based on client profiling they tend to decide the most suitable portfolio mix-matching with the client’s investment goal and risk appetite.
4. Non-discretionary management
The last type of portfolio management is non-discretionary management Under this management, the managers act as financial counselors who provide investment advice is up to investors whether to accept the advice or reject it.
process of portfolio management
Investors who intend to invest across various assets classes like a bond, stocks, mutual funds, commodities, etc. but have limited knowledge of the investment market. Investors who do not have enough time to track their investment or rebalance their portfolio.
Who Can Provide Portfolio Management Services?
There is no denying the fact that portfolio management services are being used as a great investment tool these days.
Investors are mostly HNIs, who do not have knowledge about the stock market, or who do not have much time to invest in the stock market, they take the services of Port Folio Management Service.
There are many PMS companies operating in the country, it has to be seen by the investors which portfolio they should trust.
There are many giants in stockbroking in the world providing PMS services. Apart from this, there are also many investment management companies, which provide similar facilities to the investors.
Investors who want to go for a well-established stockbroker can take the help of companies like Motilal Oswal, IIFL.
Disadvantages of Portfolio Management
Let us discuss some of the disadvantages related to Portfolio Management Services.
- Portfolio management service should not over-diversify the investment as it decreases the normal profit risk and increases the loss in normal returns. This hurts the position of returns.
- The second disadvantage of portfolio management is to take Portfolio Management Services, you have to invest a big capital (approximately close to 25 lakhs) which creates difficulties for normal investors who want to take their proper services.
- PMS costs also have to be taken care of, as some brokers charge a lot of money.
Benefits of Portfolio Management
- This serves you to make a more suitable choice in your investments. It gives information about each investment product and which products can get good returns with shorter risk.
- This provides you to maintain track of your investments and make changes in consultation with your portfolio manager (depending on the type of PMS provided to you).
- By taking the services of Portfolio Management, you will invest regularly and it will become your habit.
- This increases your financial education and also increases your investment.
- This manages the liquidity of the investment. With this, in case of an emergency, the investment can be converted into liquid money.
- This helps in increasing disposable income investments. Risk can also be overcome by this.
In the next article, we will talk about – how to create a portfolio and how to diversify the portfolio…. Till then KEEP LEARNING, KEEP EARNING.