Portfolio is a group of financial assets such as shares, stocks, bonds, debt instruments, mutual funds, cash equivalents, etc. A portfolio is planned to stabilize the risk of non-performance of various pools of investment.
Management is the organization and coordination of the activities of an enterprise in accordance with well-defined policies and in achievement of its pre-defined objectives.
Portfolio Management (PM) guides the investor in a method of selecting the best available securities that will provide the expected rate of return for any given degree of risk and also to mitigate (reduce) the risks. It is a strategic decision which is addressed by the top-level managers.
Types of Portfolio Management
Passive Portfolio Management: In a passive portfolio management, the portfolio manager deals with a fixed portfolio designed to match the current market scenario.
Active Portfolio Management: As the name suggests, in an active portfolio management service, the portfolio managers are actively involved in buying and selling of securities to ensure maximum profits to individuals.
Discretionary Portfolio management services: In Discretionary portfolio management services, an individual authorizes a portfolio manager to take care of his financial needs on his behalf. The individual issues money to the portfolio manager who in turn takes care of all his investment needs, paper work, documentation, filing and so on. In discretionary portfolio management, the portfolio manager has full rights to take decisions on his client’s behalf.
Non-Discretionary Portfolio management services: In non discretionary portfolio management services, the portfolio manager can merely advise the client what is good and bad for him but the client reserves full right to take his own decisions.
Importance of Portfolio Management
Minimizes the Risk
Portfolio management helps in reducing the risk of the investment strategy to the extent that cannot be ignored. Therefore, it increases the chances of making profits.
Though risk is minimized, portfolio managers also consider uncertainties such critical illness, permanent disability, or even death. To assure the risk factor, it is always advisable to invest in risk assessment financial tools like term insurance, insurance riders etc.
Better Investment Planning
A look at your past investments will help you frame a better investment strategy in the near future. You can also plan holistically while taking into consideration the age factor, propensity of risk, income, and budget. Finally, making an informed and sensible decision will help in reducing the chances of loss.
With portfolio management, you get the opportunity to plan and account for the specific goals that you have in mind and customize your strategies, expected returns, and risks according to your preference.
Reduces Cost and Saves Time
Some investors may not have a sound financial background, while some may find it challenging to manage their finances, and yet others find it hard to track the factors impacting their investments. Therefore, trying to manage personal finances and not doing it the right way can be a costly expense. This is why availing portfolio management services come with a cost and go a long way in protecting an individual’s finances.
Taxes usually drain your income; thus, people try to avoid any excess tax payments. However, a sound and well-managed investment plan can go a long way.
Consistency of Returns:
Portfolio management also ensures to provide the stability of returns by reinvesting the same earned returns in profitable and good portfolios. The portfolio helps to yield steady returns. The earned returns should compensate the opportunity cost of the funds invested.
Security of Principal Investment:
Investment safety or minimization of risks is one of the most important objectives of portfolio management. Portfolio management not only involves keeping the investment intact but also contributes towards the growth of its purchasing power over the period. The motive of a financial portfolio management is to ensure that the investment is absolutely safe. Other factors such as income, growth, etc., are considered only after the safety of investment is ensured.
Portfolio management guarantees the growth of capital by reinvesting in growth securities or by the purchase of the growth securities. A portfolio shall appreciate in value, in order to safeguard the investor from any erosion in purchasing power due to inflation and other economic factors. A portfolio must consist of those investments, which tend to appreciate in real value after adjusting for inflation.
Portfolio management is planned in such a way that it facilitates to take maximum advantage of various good opportunities upcoming in the market. The portfolio should always ensure that there are enough funds available at short notice to take care of the investor’s liquidity requirements.
Diversification of Portfolio:
Portfolio management is purposely designed to reduce the risk of loss of capital and/or income by investing in different types of securities available in a wide range of industries. The investors shall be aware of the fact that there is no such thing as a zero risk investment. More over relatively low risk investment gives correspondingly a lower return to their financial portfolio.
Portfolio management ensures the flexibility to the investment portfolio. A portfolio consists of such investment, which can be marketed and traded. Suppose, if your portfolio contains too many unlisted or inactive shares, then there would be problems to do trading like switching from one investment to another. It is always recommended to invest only in those shares and securities which are listed on major stock exchanges, and also, which are actively traded.
Favourable Tax Statu:
Portfolio management is planned in such a way to increase the effective yield an investor gets from his surplus invested funds. By minimizing the tax burden, yield can be effectively improved. A good portfolio should give a favourable tax shelter to the investors. The portfolio should be evaluated after considering income tax, capital gains tax, and other taxes.