Managing financial investments in the contemporary scenario requires specialised knowledge and skills that a portfolio manager possesses. Today, numerous variables impact the performance of a business or investment. Taking these variables into account is very important to make accurate predictions. Portfolio monitoring services has gained more importance over the past decade with the increasing complexity in the corporate world. The ever-evolving compliance norms have further added to this complex mechanism. Read on to know more about what is portfolio management and why it’s important today.
Understanding portfolio management
Portfolio management can be defined as the process of managing and overseeing financial investments to achieve a long-term financial objective. The investments are carefully picked after multiple considerations including the risk appetite of the client, long-term and short-term financial goals, etc. After meticulously considering various factors, the investment decision is made and investment assets are picked. Portfolio monitoring services that use an active approach create investment strategies to meet their long-term and short-term goals.
Types of portfolio management
Portfolio management can be categorised into two segments, i.e., active portfolio management and passive portfolio management.
- Active portfolio management
An active portfolio management strategy is designed to outperform a specific index such as S&P 500. It is actively managed by an investment manager who allocates funds to different asset classes based on research and other market conditions. Portfolio monitoring services play a key role in active portfolio management.
- Passive portfolio management
A passive portfolio management strategy is also known as an index fund management strategy. It is designed to replicate returns offered by a particular market index. In this case, the portfolio managers allocate funds to different assets based on the inclusions of the market index.
Key elements of a portfolio management
Here are some key elements related to portfolio management and portfolio monitoring services that you must be mindful of.
- Asset allocation
Effective portfolio management starts with a diversified asset base that can help meet long term objectives. These assets include stocks, bonds, certificates of deposits, and cash. Other assets that are a part of the investment plan for long term investors include real estate, commodities, derivatives, alternative investments, etc. Different assets have different properties from an investment point of view. Some are more volatile than others. If investors have an aggressive approach that allows for a higher degree of risk, they prefer to invest in volatile assets which can help them obtain above-average profits.
- Diversification
Most investors agree that it is almost impossible to accurately predict the performance of an asset class. Consistently predicting the winners and losers is a challenging game because multiple variables impact the performance. This has created a growing need for diversification. Diversification in the investing landscape is a process that helps to mitigate risk by allocating funds to different asset classes. It is a common practice that investors take part in hedging their risks. Some investors also diversify their portfolios by investing across multiple geographies and sectors of the economy.
- Rebalancing
Rebalancing refers to the process that is used to take a portfolio back to its original target allocation. This is done at regular intervals depending on the portfolio manager’s discretion. This is usually done annually as a corrective measure to keep things on the right track so that the investment objective can be met. At the core of the rebalancing act lies the idea of selling high-priced assets and putting these funds into low-priced assets.
Importance of portfolio management
Portfolio management is important to balance risks and get the desired profit through a long-term investment approach. Here’s why portfolio management plays an important role.
- Maximum returns through meticulous asset allocation
One of the most important benefits of portfolio management is that it helps to get the desired long-term return by allocating funds across different asset classes. Actively managing an investment portfolio can earn above-average returns in the long run.
- Balancing risk
Different investors have different risk appetites. Portfolio management provides the flexibility to adjust the risk by putting funds into different types of assets. It also helps to hedge the risk during adverse market situations. Risk is naturally a part of any business venture and different asset classes have different risk levels.
- Tax planning
Portfolio management also helps in tax planning. One can allocate funds to assets that reduce the tax liability. It can help investors save a good amount of tax on their earned income. One can consult with their portfolio manager regarding their tax planning goals before investing funds into different asset classes.
