Importance of Portfolio Management
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Importance of Portfolio Management

Importance of Portfolio Management
  • 16th Nov 2022 |
  • 5,215

Risk and return are the most critical aspects of financial planning, and individual investors prefer to minimize the risk to the maximum extent possible. A portfolio collects investment instruments like shares, funds, bonds, etc. The art of selecting the right investment tool in proportion to generate optimum returns is what makes up the portfolio investment. Investing money in a huge number of assets with different attributes helps to diversify the risk of a portfolio, thus increasing the reasonable assurance of the returns. The best portfolio management runs on the principle of minimum risk and maximum return for the invested amount in the given time frame. This is where the importance of portfolio management comes in. To elucidate, let’s boil down the essential reasons for managing the portfolio:

Significance of Portfolio Management

Better Investment Planning

A look at your past investments will help you frame a better investment strategy in the near future. You can also plan holistically while considering the age factor, propensity of risk, income, and budget. Finally, making an informed and prudent decision will help to reduce the likelihood of loss.

Minimizes the Risk

Portfolio management helps reduce the investment strategy risk to the extent that cannot be ignored. As a result, it enhances the likelihood of profit.

Though the risk is minimized, portfolio managers consider uncertainties such as critical illness, permanent disability, or even death. Therefore, investing in risk assessment financial tools like term insurance and insurance riders is always advisable to assure the risk.

Customizable Solution

Portfolio management allows you to plan and account for specific goals, as well as adapt your methods, expected returns, and risks based on your preferences.

Tax Planning

Taxes typically deplete your income; hence, people prefer to avoid paying any more tax payments. A smart and well-managed investing strategy, on the other hand, can go a long way.

Reduces Cost and Saves Time

Some investors may lack a solid financial foundation, while others may struggle to manage their funds, and still others may struggle to follow the factors influencing their investments. Therefore, managing personal finances and not doing it the right way can be costly. This is why availing of portfolio management services comes with a cost and goes a long way in protecting an individual’s finances.

Objectives of Portfolio Management

Now, since we know about the importance of portfolio analysis, let’s move forward to see the detail regarding the significant objectives of portfolio investment and its objectives:

Capital Appreciation

The primary objective behind managing the portfolio is to enjoy capital appreciation. Therefore, the principal amount invested should grow into a corpus at a higher rate than inflation. Furthermore, it should also minimize the risks of investment.

Frequency of Income Generation

Some investors prefer regular income that can be enjoyed through dividends, while others may prefer receiving a larger maturity corpus. A portfolio manager considers both factors while building a portfolio for the investor.

Tax Planning

Earning a handsome return but not being able to use or maintain it due to poor tax planning is disappointing. Different assets are taxed differently. Thus, the portfolio manager must consider the tax policies during asset allocation to help investors plan their taxes well.

Liquidity

Well-planned portfolio management helps to give an investor immediate access to their funds for an emergency or an expense. In addition, investing in a well-balanced mix of listed and unlisted shares is advisable because the former has more traceability than the latter.

Safety of Investments

Another crucial objective is that the portfolios constructed should match the investor’s risk potential. Therefore, funds should be allocated to minimize the risk and maximize the returns.

Diversification

The only way to enjoy maximum returns is by minimizing risk, which can be done through diversification. But, of course, zero risk is just an imaginary situation.

Types of Portfolio Management

Active and Passive Portfolio Management

Active PM refers to the service in which portfolio managers actively participate in buy-sell transactions for securities. It ensures that the investor’s investment objectives are met.

Passive PM refers to managing a fixed portfolio whose performance matches that of the market index.

Discretionary & Non-Discretionary Portfolio Management

Discretionary portfolio management importance is the method by which a portfolio manager has the authority to make financial decisions. It makes these judgments for the invested funds based on the investor’s investing requirements. Aside from that, he handles all of the documentation and filing.

Non-discretionary portfolio management refers to the method in which a portfolio manager only advises on which assets are lucrative and which are not. And the investor makes the final call.

Here are the most important reasons to manage your portfolio.

Better investment planning

A closer examination of your previous investment techniques can provide a little better indicator of your future investments. Not only that, but you may plan more holistically, taking into account your age, risk tolerance, budget, and income. When you evaluate all of these considerations before making an investment decision, your chances of losing money are much reduced.

Minimises the risk

This is simply a reminder, but it is really important. Portfolio management significantly decreases the risks of your investing strategy, which should not be overlooked.

Customisable investment solutions

Portfolio management allows you to prepare for and account for specific goals, as well as tailor your strategies, expected returns, and risks to your advantage.

Tax planning

Taxes are usually a drain on your income, and most people will do whatever to avoid paying any extra tax. A good plan and a well-managed portfolio can thus help a lot.

Portfolio management enables you to effectively achieve your long-term financial goals under a manager’s expertise. With the portfolio manager’s guidance, you can easily keep your finances in check, create wealth, and enjoy financial security.

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