What Is Portfolio Management, and Why Is It Important?
Whether you trade in mutual funds or are a hardcore equity share trader, as an avid investor, you would know creating a portfolio of mixed asset classes keeps you safe in bad situations. However, if you are new to the world of investing and are trying to create a safe yet rewarding portfolio, you should know the basics of it, at least. Well, selecting the right investment with the right portion of asset classes is portfolio management.
- Managing funds of and for investors
- Managing risk
- Capital appreciation
- Maximising returns
So in layman terms, portfolio management is the process of maximising returns for investors with their funds using strategic objectives and techniques of asset allocation, investment mix and policies. Portfolio management is about maximising returns while assessing the risks and weaknesses of the portfolio.
How portfolio management works
Portfolio management is the process through which managers and financial planners invest money in shares, asset classes, and policy mixes and define the objective of the investment. But before a manager plans to invest in any asset class, plans are set in motion and executed to maximise the benefits for the investors. So the four steps to portfolio management are:
- Identifying objectives
Every investor is different. Some are risk-averse, and some are risk-takers. Therefore, the portfolio managers and financial planners should plan to identify the investors’ objectives and then go forward with how to invest their funds.
- Setting a plan for investmentBefore you think about constructing your home or going about your day, we all make plans, either in writing or mentally, but planning is what we all do at the beginning of any job. Similarly, before investing in any asset class or making a portfolio, a plan must be set in motion, defining the portfolio’s ability to endure the risk. The objective of planning before investing is to think of all possible outcomes and the best asset classes to make investments in.
Now that the plan is set and the investment classes have been decided, the next step is to execute the plan. To allocate funds and manage the risk-return profiles according to the plan.
- See results and monitor the performance
Once the plan is in motion, the third part of the performance is to monitor the performance of the asset classes. If there are any issues with investment and the returns are much lower than anticipated, the investment classes can be readjusted to achieve better results and help the investors earn more.
Types of portfolio management
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