Investing money is a tricky business. You must constantly keep an eye on your investments and alter them to reflect your goals and the existing market conditions. The goal is to achieve higher returns with less risk. So that was a simple explanation of what portfolio management is.
A portfolio is built from a group of different investment assets. You include or exclude these assets at regular intervals as per your needs. While you can manage your portfolio by yourself, it is best to leave it to professional portfolio managers. They have a better knowledge of the market. And they are the artists that bring their best to the table, helping you strategically allocate your assets and achieve your investment goals.
In this article, we will get to the core of portfolio management, its objectives, types, and every other thing you need to know. So let’s get rolling, shall we?
Portfolio management refers to selecting, allocating, and maintaining financial assets in a portfolio. The goal is to help investors achieve their goals and minimize their risk while maximizing their returns.
A portfolio manager holds a certified degree in finance or a related field. They follow certain analysis techniques and with their knowledge, help you mitigate your risk and achieve higher returns. Your goals and risk tolerance play vital roles in helping a fund manager create a well-constructed portfolio.
There are multiple objectives, which are mentioned below.
The common goal of investing money is to get it back with some appreciation, correct? Portfolio management does the same. A fund manager uses certain analysis techniques to allocate funds to certain assets, usually in different asset classes. These are assets they believe can yield better returns in the future and appreciate your investment amount.
It can be challenging to plan investments on your own, especially if you are a beginner. Opting for portfolio management services helps you with this job by taking the responsibilities of constructing and managing your investment off your shoulders. Fund managers include assets in your portfolio according to your long-term goals. Subsequently, they help you attain maximum returns.
While investing, you cannot avoid risks. Each investment option has some level of inherent risk. For example, equity investments are affected by market volatility, debt instruments are affected by government policies and interest rates, etc. Thus, it is important to shift the risk of investments or reduce it. This is one of the primary tasks when managing portfolios.
You would have heard thousands of times that you shouldn’t put all your eggs in one basket. The question is: how to decide in which baskets should you put your eggs? Well, you don’t need to decide that on your own. Your fund manager divides your assets into different financial securities. This includes equity, fixed income, and alternative investments, which help you spread your investment spectrum and diversify your portfolio.
If there is any single factor that impacts your investment returns the most, it is asset allocation. There is no point in investing heavily in equity if you are investing for the short term. Just like that, there is no point in investing in fixed income tools if you are beginning your journey and are in your 20s. Thus, allocating assets based on your life stages, requirements, and risk appetite is very important. Portfolio managers do this job for you and regularly rebalance it to reflect the existing market conditions.
There are mainly four types.
Active portfolio management involves engaging in purchasing and selling stocks actively to ensure higher returns. The goal here is to beat the market returns or benchmark index. This portfolio management style requires portfolio managers to constantly keep a tab on market activities. Apart from that, they also need to keep an eye on economic changes, national and global politics, and a lot more.
Active portfolio management requires a great deal of effort and time from portfolio managers. This is clearly reflected in the fee structure. As a result, you have to pay a higher commission or fees for active portfolio management. This type of portfolio management also involves undertaking higher risk. However, you also get rewarded for that if the trades are in your favor.
This is the complete opposite of active portfolio management. A passive style of managing portfolios is more fixed and relaxed in beating the market. The investment avenues are fixed in the passive management of portfolios.
Portfolio managers focus on replicating an index to construct this type of portfolio. For example, if the Nifty 50 index is taken as a benchmark, the portfolio manager would build a portfolio consisting of 50 stocks of Nifty 50 in the same proportion. As a result, the job of the manager becomes easier. And as there is no active management of your assets, you pay low fees.
This portfolio management style refers to hiring a manager and entrusting them with complete control over your investment decisions. They act on your behalf to add or exclude any security at their discretion. You pay certain fees in this case and also have to rely on the skills of the portfolio manager.
In non-discretionary portfolio management, you are advised on which securities you should purchase or sell. You take the ultimate decision. In this portfolio management type, you get suggestions to make better investment decisions. The sole responsibility and execution part falls under your authority.
Now that we have understood what portfolio management is, let’s get into how it is undertaken step by step.
| Index | Process | Detailed Instructions |
| Step 1 | Identify your goals | It is important to ponder why you are investing and building a portfolio. Goals can be short-term (buying a car, saving for a foreign trip, etc.) or long-term (retirement, buying a house, etc.) |
| Step 2 | Learn about the market and your risk tolerance | Once you identify your goals, learn about the market and how it functions. Additionally, analyze the kind of risk you can afford to undertake. |
| Step 3 | Create an efficient asset allocation strategy | Now that your goals and risk appetite are clear, the next step is to make an efficient allocation strategy. It depends on your age, investment goals, horizons, etc. This is the most important factor in portfolio management. |
| Step 4 | Execute the portfolio strategy | Once you decide the ratio in which you prefer to include assets in your portfolio, it’s time to execute the trade. Go ahead and add those securities to your portfolio. |
| Step 5 | Portfolio tracking and analysis | It is important that once you have a well-built portfolio, you analyze the same at regular intervals. |
| Step 6 | Portfolio rebalancing | At least once a year, you should rebalance your portfolio to minimize the impact of market changes. It is also important to rebalance your portfolio to reflect your goals if they have changed by any measure. It reduces your risk and helps you stay focused. |
Portfolio management services help retail investors in the following manner.
For cryptos particularly, you can leverage the benefits of portfolio management by investing in Coin Sets. These are expert-managed crypto designed to help you have a smooth crypto ride.
We hope that this blog resolves your queries on what portfolio management is and helps you understand which type of management service to opt for. It is better to seek expert advice on subjects you aren’t experienced in or are unsure about. Start slow, and build up your portfolio from there. You are likely to make mistakes on your investment journey. However, that’s the key to learning and creating wealth over time.
The main aim is to help investors attain the highest possible returns and lower their risk undertaking. It helps investors to stay focused on their goals without any stress of tracking or actively managing their investments.
There is no specific need that makes you opt for portfolio management. In general, it is beneficial to do so as you get expert advice on investment decisions. You also save time and effort by opting for these services.
A portfolio consists of different financial assets, which we can call holdings. Thus, we cannot say that portfolio and holding are the same thing. Because holding refers to different assets, and a portfolio is made of such holdings.
A portfolio manager is someone having a degree in finance or similar background. They have expert knowledge and skills to handle investment portfolios, and lead them to yield better returns with minimum risks.
