Portfolio Management is the process of managing individual investments to maximize earnings within a certain amount of time. Additionally, it ensures that the capital investment of an individual is not exposed to high market risks at all times.
The entire process of portfolio management is based on only the ability to make sound decisions. Generally, such choices are related to achieving several profitable investment mixes, allocating assets as per expected risks and financial goals, and the diversification of resources to ensure capital investment protection.
Primary portfolio management serves as a SWOT analysis for various investment avenues with investor objectives and risk appetite. As a result, portfolio management helps generate substantial earnings and protects all earnings against market risks.
The primary objective of portfolio management is to assist the selection of the best investment options based on income, age, time horizon, and risk appetite.
Other core objectives of portfolio management are:
- Capital appreciation
- Return on Investment maximization
- Improvement of overall proficiency of the portfolio
- Risk optimization
- Optimal resource allocation
- Ensuring portfolio flexibility
- Protection of earnings from market risks
Nevertheless, to make the most out of portfolio management, investors need to choose a suitable management type for their investment pattern.
Types of Portfolio Management
Portfolio management can be classified into four major divisions.
Active Portfolio Management
Active portfolio management mostly concerns with generating the maximum return from an investment. As a result, active portfolio management puts a significant share of resources in the trading of securities. Typically, they purchase stock when it is undervalued and sell them when the market increases.
Passive Portfolio Management
Passive portfolio management is a particular type of portfolio management that concerns a specific profile perfectly aligned with the current market trend. The managers are likely to invest in index funds with substantially low but steady returns, which are generally profitable in the long-run.
Discretionary Portfolio Management
This particular type of portfolio management entrusts managers with authority to invest as per their discretion on behalf of the investor. The investments are made based on the investor’s goals and risk appetite, and the manager is free to choose any investment strategy; they seem fit for better returns.
Non-discretionary portfolio management allows managers to provide the investor with investment choice advice. It is the investor’s choice of whether to accept or reject the recommendation. Financial experts often recommend investors to look into the advice provided by professional portfolio managers and not disregard them entirely.
Who Should Opt for Portfolio Management?
Here is a list of investor types who should opt for portfolio management:
- Investors looking to invest across several investment avenues like bonds, stocks, funds, commodities, etc., but do not have the required knowledge or understanding of the process.
- Investors with limited investment market knowledge or understanding.
- Investors with a superficial knowledge of how market forces influence return on investments.
- Investors with insufficient time to keep proper track of all their investments or rebalance their investment portfolio.
To make the most of any managerial process, investors need to put into practice strategies that match their financial plan and return on investment prospects.