Portfolio Management

Introduction

Portfolio management is all about determining strengths, weaknesses, opportunities, and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other trade-offs encountered in the attempt to maximize return at a given appetite for risk.

Understanding Portfolio Management

The terms "portfolio management" and "financial planning" are not synonyms; they are not the same. Portfolio management is the act of creating and maintaining an investment account. Whereas financial planning is the process of developing financial goals and setting up a plan of action to achieve them. Professionally licensed portfolio managers are responsible for portfolio management on behalf of others, while individuals may plan their own investments and build their own portfolio. The end goal of portfolio management is to maximize the investments expected return, given an appropriate level of risk exposure.

Common Portfolio Management Strategies

Every investor's specific situation is unique. Therefore, while some investors may be risk-averse, others may be inclined to pursue the greatest returns (while also incurring the greatest risk). Very broadly speaking, there are several common portfolio management strategies an investor can consider:

Aggressive: An aggressive portfolio prioritizes maximizing the potential earnings of the portfolio. Often invested in riskier industries or unproven alternative assets, an investor may not care about losses. Instead, the investor is looking for the "home run" investment by striking it big with a single investment.

Conservative: On the other hand, a conservative portfolio relates to capital preservation. Extremely risk-adverse investors may adopt a portfolio management strategy that minimizes growth but also minimizes the risk of losses.

Moderate: A moderate portfolio management strategy would simply blend an aggressive and conservative approach. In an attempt to get the best of both worlds, a moderate portfolio still invests heavily in equities but also diversifies and may be more selective in what those equities are.

Income-Orientated: Often a consideration for older investors, some folks who do not have income may rely on their portfolio to generate income that can be used to live off of. Consider how a retiree no longer has a stable paycheck. However, that retiree may no longer be interested in generating wealth but instead of using their existing wealth to live. This strategy priorities fixed-income securities or equities that issue dividends.

Tax-Efficient: As discussed above, investors may be inclined to focus primarily on minimizing taxes, even at the expense of higher returns. This may be especially important for high earners who are in the highest capital gains tax bracket. This may also be a priority for young investors who have a very long way until retirement. By getting started with a Roth IRA, these investors may be able to grow their portfolio over their entire life and face no federal taxes on withdrawal when they retire.

Advantages of Portfolio Management

Makes Right Investment Choice

Portfolio management is a tool that helps the investor in choosing the right portfolio of assets. It enables in making more informed decisions regarding investment plans in accordance with the goals and objectives.

Maximizes Return

Maximizing the return is one of the important roles played by portfolio investment. It provides a structured framework for analyses and selecting the best class of assets. Investors are able to earn high returns with limited funds.

Avoids Disaster

Portfolio management avoids the disaster of facing huge risks by investors. It guides in investing among different classes of assets instead of investing only in one type of asset. If an investor invests in only one type of security and supposes it fails, then the investor will suffer huge losses which could be avoided if he might have invested among different assets.

Track Performance

Portfolio management helps management in tracking the performance of their portfolio of investments. A consolidated investment held within the portfolio can be evaluated in a better way and any of its failures can be easily detected.

Manages Liquidity

Portfolio management enables investors in arranging their investment in a systematic manner. Investors can choose assets in such a pattern where they can sell some of them easily whenever they need funds.

Avoids Risk

Investment in securities is quite risky due to the volatility of the security market which increases the chance of losses. Portfolio management helps in reducing the risk through diversification of risk among large peoples.

Improves Financial Understanding

It helps in improving the financial knowledge of investors. While managing their portfolio they came across numerous financial concepts and learn how a financial market works which will enhance the overall financial understanding.

Disadvantages of Portfolio Management

Risk Of Over Diversification

Sometimes portfolio managers invest funds among large categories of assets whose control becomes impossible. In his efforts to diversify the risk it goes beyond the limit to manage efficiently. Loss arising in such situations is quite high and can bring serious repercussions.

No Downside Protection

Portfolio management only reduces the risk through diversification but does not provide full protection. At times of market crash, the concept of portfolio management becomes obsolete. 

Faulty Forecasting

Portfolio management uses historical data for evaluating the returns of securities for investment purposes. Sometimes the historical data collected is incorrect or unreliable which leads to wrong forecasts.

Frequently Asked Questions:

What Is Portfolio Management Services in India?

PMS or Portfolio Management Service is a professional service where qualified and experienced portfolio managers backed by a research team manage equity portfolios on behalf of clients instead of clients managing themselves.

Portfolio management meaning?

Portfolio management is the selection, prioritization and control of an organization's programmes and projects, in line with its strategic objectives and capacity to deliver. 

What is Goal of Portfolio Management?

The goal is to balance the implementation of change initiatives and the maintenance of business-as-usual, while optimising return on investment.