Portfolio Management - Explained
What is Portfolio Management?
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Table of ContentsWhat is Portfolio Management?How Does Portfolio Management Work?Portfolio Management Objectives
What is Portfolio Management?
Portfolio Management is managing the diverse investments of a company or an individual. A good Portfolio Manager tailors investments to the goals of its holder, allocates assets judiciously to maximize profits, and balances risky investments with safe options. Portfolio Management is the science of studying market changes - both domestic and international, monitoring policy changes, analyzing net revenue and earning potentials of assets, and keeping a tab on all the moving parts of the financial markets to maximize portfolio gains while keeping losses at a minimum.
How Does Portfolio Management Work?
Active Portfolio Management involves investments in publicly traded entities like IPOs, stock units, commodities, Closed-end funds, etc. Passive Portfolio Management involves tracking investments in non-market assets like mutual funds, also otherwise known as index investing for it involves tracking indices. The Portfolio Management team could be made of a one-man army, or a team of people tracking the markets, and making investments based on research, on behalf of their clients. Allocation of Assets: Managing an investments portfolio successfully over a long term requires smart investments, diversification of assets and enough low-risk investments to cover for losses incurred in high-risk investments. The division of assets towards reaping long term benefits, making quick short term gains, and betting on highly volatile investments depends on the goals of the clients and what they are looking to get out of their investments.Diversifying Investments: Spreading the risk of investments over diverse assets like mutual funds, real estate, bonds and equities, and volatile stocks, and consistently moving them around in accordance with their market performance is called diversifying the basket of investments. A good Portfolio Manager chooses these options carefully to capture the best performing options at any given moment, while reducing the risks associated with volatility by covering base with low-risk investment options.Creating a basket of investments that covers different sectors of the economy, different types of assets, and different geographical locations, is a good diversification model.Keeping the baskets of investments aligned with the investors goals requires rebalancing. This is a tactic wherein the portfolio is periodically returned to its original asset allocation profile.
Portfolio Management Objectives
A Portfolio Manager plans the basket of investments in accordance with the nature of returns sought by the investors. It could be one or more of the following in combination:
- Raising capital
- Securing funds
- Ease of assets trading
- Spreading of risk across assets
- Consistent and periodic returns
- Tax accounting.