An ideal portfolio of investment comprises various securities such as fixed deposits, shares, mutual funds, bonds, etc. However, not everyone invests in all these securities.
While there are a group of individuals who only invest in low-risk instruments, some prefer investing in other securities with different risk levels.
Managing your portfolio could be tricky at times as you cannot spare as much time to study the market’s movements as your portfolio managers.
Hence, if you want to optimise returns on your portfolio, you need to first understand what portfolio management is, how it is done and the factors considered while managing your portfolio.
So, understanding portfolio management in detail.
What Is Portfolio Management
In simple terms, portfolio management is a method of optimising your returns while keeping in mind your investment objectives, risk appetite, and asset exposure.
It also looks at investing in different investment instruments keeping in mind your investment goal and tenure. Portfolio managers usually run a SWOT analysis on your investment objective and decide an investment strategy to manage your portfolio most efficiently.
Why Is Portfolio Management Important?
Portfolio management is important for all investors to take note off due to the following reasons:
- It helps you maximise returns on your portfolio and enable you to invest efficiently;
- Portfolio Management can help you build your portfolio based on your risk-taking ability. If you are a risk-averse person, portfolio managers help you suggest less risky securities;
- With minimum risk, you will be able to make the most out of your portfolio returns through portfolio management services;
- The experts help you frame your investment strategy based on requirements, along with their insightful suggestions;
- Portfolio management works the best when you do not have time to study the market and want experts to do it for you.
Who Should Avail for Portfolio Management Services?
Portfolio management services is largely suitable for everyone.
However, those who want to invest in various securities actively, have little knowledge about investing and have no time to study the market, should avail such services.
It offers dual benefits:
1. You get experts to manage your risk to return ratio and frame the most suitable investment strategies for you. These experts also educate you about the exposure you should have to equity instruments and debt instruments subsequently. And the instruments you can put your money in;
2. You earn efficient returns from your portfolio by diversifying your risks across various securities with the help of portfolio managers.
Also Read: Share Class: Meaning, Types, Merits & Demerits
Methods of Portfolio Management
Based on the objectives and financial needs of the investors, the portfolio managers follow specific methodologies to manage their clients’ portfolios. So, let’s discuss which are these types and methods.
1. Active Portfolio Management
Under this method, portfolio managers actively trade in the stock market to attain maximum returns from shares. Portfolio managers can actively participate in trading on an exchange and make decisions based on an investors’ requirements.
Active portfolio management should be considered when you are 100% sure of your portfolio managers’ expertise and research skills. Because under this method, risk appetite is significantly high due to the expectation of higher returns.
2. Passive Management of Portfolio
Under passive portfolio management, the managers track the index performances and invest money in index funds. It is called duplicating a market index or a benchmark where returns are considerably better in the long run.
Passive portfolio management suits those investors who want to make good returns in the longer run.
The fees charged by managers to manage the portfolio under this method are also quite reasonable compared to the active method.
3. Discretionary Portfolio Management Method
Under this method, the portfolio managers are given the freedom to invest clients’ money in the securities they find best for them. The portfolio managers understand investors’ needs, and they can invest the money given by the client at their discretion.
4. Non-Discretionary Portfolio Management Method
The non-discretionary portfolio management method allows managers to suggest and provide insights on which securities an investor should invest put their money in.
The portfolio managers will perform their analysis and research based on the current market trends. At the same time, the investor will hold rights to invest their money as suggested by the manager or even reject the suggestion.
Key Considerations While Managing Your Portfolio
Portfolio managers will broadly understand your objectives as well as risk appetite and consider the following factors while managing your investment portfolio efficiently.
The key to any successful investment strategy is diversification. It refers at diversifying your portfolio of investments into various sectors within an asset class.
While it is uncertain to predict the best securities and performance of a particular industry, diversifying your portfolio into multiple sectors reduces volatility to a large extent.
2. Asset Allocation
Asset Allocation refers to building a portfolio across various asset classes such as shares, bonds, mutual funds, and fixed deposits. The primary benefit of asset allocation is that you will have complete portfolios where your money is invested in assets with varied risks.
The strategy to use asset allocation can be modified based on personal needs where risk-averse investors can select less risky assets while aggressive investors can select riskier assets.
The rebalancing requires modifying the asset allocation at regular intervals to its original asset mix. A portfolio that started with 50% allocation into fixed income products and 50% equity investments may end up with 60% investments in equity and 40% in fixed income products at the year-end.
The rebalancing requires you to return to the original asset mix from where you started initially, at regular intervals, usually every year. Hence, it ensures the consistency of the asset mix over the entire investment tenor.
While it is not always required to have a dedicated portfolio manager, having an expert advice can help you manage your investments more efficiently.
Investors with less time to review the market regularly can avail portfolio management services to make the most of their portfolio with the right strategy.