To make the most of one’s investment portfolio investors must participate actively in portfolio management. By doing so, they will not only be able to cushion their resources against market risks but will also be able to maximise their returns successfully.
In this article
What is Portfolio Management?
Portfolio management’s meaning can be explained as the process of managing individuals’ investments so that they maximise their earnings within a given time horizon. Furthermore, such practices ensure that the capital invested by individuals is not exposed to too much market risk.
The entire process is based on the ability to make sound decisions. Typically, such a decision relates to – achieving a profitable investment mix, allocating assets as per risk and financial goals and diversifying resources to combat capital erosion.
Primarily, portfolio management serves as a SWOT analysis of different investment avenues with investors’ goals against their risk appetite. In turn, it helps to generate substantial earnings and protect such earnings against risks.
Objectives of Portfolio Management
The fundamental objective of portfolio management is to help select best investment options as per one’s income, age, time horizon and risk appetite.
Some of the core objectives of portfolio management are as follows –
- Capital appreciation
- Maximising returns on investment
- To improve the overall proficiency of the portfolio
- Risk optimisation
- Allocating resources optimally
- Ensuring flexibility of portfolio
- Protecting earnings against market risks
Nonetheless, to make the most of portfolio management, investors should opt for a management type that suits their investment pattern.
Types of Portfolio Management
In a broader sense, portfolio management can be classified under 4 major types, namely –
- Active portfolio management
In this type of management, the portfolio manager is mostly concerned with generating maximum returns. Resultantly, they put a significant share of resources in the trading of securities. Typically, they purchase stocks when they are undervalued and sell them off when their value increases.
- Passive portfolio management
This particular type of portfolio management is concerned with a fixed profile that aligns perfectly with the current market trends. The managers are more likely to invest in index funds with low but steady returns which may seem profitable in the long run.
- Discretionary portfolio management
In this particular management type, the portfolio managers are entrusted with the authority to invest as per their discretion on investors’ behalf. Based on investors’ goals and risk appetite, the manager may choose whichever investment strategy they deem suitable.
- Non-discretionary management
Under this management, the managers provide advice on investment choices. It is up to investors whether to accept the advice or reject it. Financial experts often recommended investors to weigh in the merit of professional portfolio managers’ advice before disregarding them entirely.
Who Should Opt for Portfolio Management?
The following should consider portfolio management –
- Investors who intend to invest across different investment avenues like bonds, stocks, funds, commodities, etc. but do not possess enough knowledge about the entire process.
- Those who have limited knowledge about the investment market.
- Investors who do not know how market forces influence returns on investment.
- Investors who do not have enough time to track their investments or rebalance their investment portfolio.
To make the most of the managerial process, individuals must put into practice strategies that match the investor’s financial plan and prospect.
Ways of Portfolio Management
Several strategies must be implemented to ensure sound investment portfolio management so that investors can boost their earnings and lower their risks significantly.
Typically, professionals use these following ways to manage investment portfolio –
- Asset allocation
Essentially, it is the process wherein investors put money in both volatile and non-volatile assets in such a way that helps generate substantial returns at minimum risk. Financial experts suggest that asset allocation must be aligned as per investor’s financial goals and risk appetite.
The said method ensures that an investors’ portfolio is well-balanced and diversified across different investment avenues. On doing so, investors can revamp their collection significantly by achieving a perfect blend of risk and reward. This, in turn, helps to cushion risks and generates risk-adjusted returns over time.
Rebalancing is considered essential for improving the profit-generating aspect of an investment portfolio. It helps investors to rebalance the ratio of portfolio components to yield higher returns at minimal loss. Financial experts suggest rebalancing an investment portfolio regularly to align it with the prevailing market and requirements.
Once investors have selected a suitable strategy, they must follow a thorough process to implement the same so that they can improve the portfolio’s profitability to a great extent.
Processes of Portfolio Management
|Steps||Process of Investment Portfolio Management||Description|
|Step 1 –||Identification of objectives||For a capable investment portfolio, investors need to identify suitable objectives which can be either stable returns or capital appreciation.|
|Step 2 –||Estimating the capital market||Expected returns and associated risks are analysed to take necessary steps.|
|Step 3 –||Decisions about asset allocation||To generate earnings at minimal risk, sound decisions must be made about the suitable ratio or asset combination.|
|Step 4 –||Formulating suitable portfolio strategies||Strategies must be developed after factoring in investment horizon and risk exposure.|
|Step 5 –||Selecting of profitable investment and securities||The profitability of assets is analysed by factoring in their fundamentals, credibility, liquidity, etc.|
|Step 6 –||Implementing portfolio||The planned portfolio is put to action by investing in profitable investment avenues.|
|Step 7 –||Evaluating and revising the portfolio||A portfolio is evaluated and revised regularly to evaluate its efficiency.|
|Step 8 –||Rebalancing the composition of the portfolio||Portfolio’s composition is rebalanced frequently to maximise earnings.|
The fact that effective portfolio management allows investors to develop the best investment plan that matches their income, age and risks taking capability, makes it so essential. With proficient investment portfolio management, investors can reduce their risks effectively and avail customised solutions against their investment-oriented problems. It is, thus, one of the inherent parts of undertaking any investment venture.