What is portfolio management: All investors need to know

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what is portfolio management

Investing in stock markets is undoubtedly one of the best ways to grow your money and accumulate wealth for your future. But to reap these benefits, you have to invest mindfully. This is where portfolio management comes into play. It allows investors to invest wisely without exposing their hard-earned money to various market risks. In this article, we will discuss each and everything about portfolio management, from portfolio management meaning to the procedure of portfolio management. Keep scrolling! 

What is an Investment Portfolio?

An investment portfolio in simple terms refers to collection of different investment instruments and tools like stocks, mutual funds, shares, cash, bonds, policies, etc. based on the income, budget and investment horizon of the investor. 

What is Portfolio Management?

Portfolio management refers to the process of selecting the best investment tools for an investor in terms of lowest risk and highest returns possible. It is an art of managing the investments of an individual so that he can earn maximum returns within a desired investment horizon. Another definition of portfolio management states it as a process of managing investments of an individual under the guidance of expert portfolio managers. 

Objectives of Portfolio Management

The main objective or goal of portfolio management is to invest in a way that helps you to maximize your returns while minimizing the risks to achieve your financial goals. 

Stable Return Rate

An investment portfolio should result in a steady flow of return income once investment safety is ensured. Note that your current returns should meet the opportunity cost of your funds at least. Moreover, by current return income, we mean the return generated through dividends and not capital gains. 

Higher Marketability 

A well-managed portfolio consists of investment instruments that can be marketed easily. Understand it in this way — if there are multiple inactive or poorly performing stocks or funds in your portfolio, you will face hurdles in marketing them. Therefore, it is very important to invest in established companies that are listed on the stock exchanges and are traded actively by other investors. 

Tax Planning

Taxation is one of the most important for any individual with a regular flow of income. Thus, a properly managed investment portfolio should offer a supportive tax shelter to its owner. It should be created by taking into account not only income tax but also other taxes like capital gains tax, gift tax, etc. 

Also, keep in mind that a good portfolio focuses on proper tax planning, and not tax avoidance. 

Capital Appreciation 

A good investment portfolio results in the appreciation of capital to protect its owner from the decrease in purchase power due to recession or inflation. Simply put, a great portfolio should have investments that are likely to appreciate in actual value after handling inflation. 

Optimum Liquidity

A balanced portfolio makes sure that the owner has enough funds at short notice to fulfill his liquidity needs. It is recommended to keep some credit ready to use in case of emergency. 

Investment Safety 

Last but definitely not the least, another key objective of portfolio management is to offer investment safety to the investor. Other factors like returns, gains, and growth, only come into play after your investment safety is ensured. 

Types of Portfolio Management

Now that we have discussed the key objectives of portfolio management, let's learn about its types. Following are the different types of portfolio management:

1.  Active Portfolio Management

Active portfolio management involves portfolio managers in buying and selling the securities directly in order to ensure maximum gains for the portfolio owners. 

2. Passive Portfolio Management

As the name suggests, in passive portfolio management, the portfolio manager handles a fixed investment portfolio in order to keep up with the market dynamics. 

3. Discretionary Portfolio management services

In this type of portfolio management, you hire a professional portfolio manager to manage your investments on your behalf. For this, you need to pay a specific amount of fee to your portfolio manager. In discretionary portfolio management, a portfolio manager has complete rights to make investment decisions on behalf of his client.

4. Non-Discretionary Portfolio management 

This type of portfolio management involves a portfolio manager advising his client to make wise investments. This is different from discretionary portfolio management because here a client is responsible for making his investment decisions and not the manager. The role of the portfolio manager is to only provide required guidance. 

So, these were the different types of portfolio management. Let's now talk about the steps in portfolio management you need to follow. 

Steps of Portfolio Management 

The process of portfolio management is very straightforward. It involves a good amount of research, thinking, and making wise investment decisions. Below are some steps involved in the portfolio management process:

1. Identify Your Goals and Investment Strategy 

Although it sounds pretty basic, this is the first step towards creating a well-balanced investment portfolio. This will help you in earning desired returns over a specific time period without dealing with huge market risks. Ask yourself the following questions to know about your financial goals:

  • What am I saving for? 
  • When will I need the money I'm investing now? 
  • What do I need to meet my financial goals? 

By answering these questions, you'll be able to determine your goals as well as an effective investment strategy. For instance, you may have a different investment strategy for your long-term goals (for example: say retirement), and a different strategy for short-term goals (for example: buying a car). 

2. Divide Your Assets 

The next important step is asset allocation. While it may sound like a tough job, it's actually very simple. This step involves dividing your portfolio into multiple categories like Mutual funds, stocks, bonds, etc. 

By doing this, you will be able to insulate it against the constantly changing market environment. Further, the balanced mix of different investment options results in a fruitful asset allocation, which is based on factors like:

  • Age
  • Financial goals
  • Risk tolerance 
  • Investing Duration

These key factors allow you to select the right investment options. For example: what portion of your portfolio will be made up with equity vs fixed income? 

Moreover, your asset allocation can change over time in a similar fashion to your investment strategies. This is especially true in the case of major events like extending family, buying a house, switching to a new job, etc. 

3. Rebalancing the Portfolio 

As you keep yourself invested in the stock market, your portfolio may get off track and can impact your returns and goals. This is the reason why it is very important to keep rebalancing your portfolio at regular intervals. 

Portfolio rebalancing allows you to bring your investment back on track so they align with your investment strategies and goals. And while there is no fixed time to rebalance a portfolio, it is advised to do so every 6 months or twice a year. 

4. Keep Your Investments Diversified

Just like a doctor recommends a diverse and well-balanced diet in order to maintain your health, a diversified portfolio helps you deal with market fluctuations in a better way. This simply means, not keeping all of your eggs (money) in a single basket (stock or industry). So, always invest in multiple options. All you need is some research and analysis to select the best investment tools for your portfolio. 

5. Learn How to Manage Your Investments on Your Own 

Managing your own investments is not as hard as it sounds. You don't always need to hire a portfolio manager. Thanks to technology, there are multiple tools and websites that can help you find out the right investment option for yourself. 

Although technology and the internet can offer a big help, it doesn't mean it can replace the power of personal research. Below are a few things to keep in mind while managing your portfolio:

  • Look at the fees if you're planning to hire a portfolio manager. This is very important because it can impact your returns. You'll have to pay them regardless of your gains or losses. So, always consider the fee structure of your manager. 
  • Be aware of taxes. Taxes play a huge role in investments. Thus, at the time of creating a portfolio or buying/selling stocks or funds, consider the tax implications. 
  • Mitigate your risk with stop orders. When this can be a bit tricky to understand, be comfortable while placing them to mitigate your risks. 
  • Always keep your financial goals and strategy on the top of your mind. This includes things like portfolio rebalancing, asset allocation, time horizon, etc. 

Final Words 

That's everything you needed to know about portfolio management. We know it takes a lot of work and patience to manage your portfolio, but there are some simple things that can make this process easy and swift. We have discussed all the important tips for portfolio management and now it's your time to understand and follow them. 

  • What are the 3 types of portfolio management?

  • What is the role of portfolio management ?

  • Who is a portfolio manager?