How Important Is Portfolio Management?

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Have you ever thought how important it is to stay updated with the latest events happening around to adapt yourself to the ever-changing environment? That is why know about How Important Is Portfolio Management?

Similarly, it is important to stay updated in every field that concerns you, especially the financial one.

Building a portfolio that consists of diversified investments is necessary to earn good returns on your investments with minimum risk possible. That is why you need a Portfolio.

Also, read What Is Portfolio Rebalancing And Why Is It Important?

The aim of every individual is to meet his/her financial obligations in the short, medium, and long term is fulfilled by the PMS.

Significance of Portfolio Management

Let’s jump into the significance/importance of portfolio management, here you go

         1) Allocation of Funds for Maximum Returns

Portfolio management is done with many factors in mind like desired returns, risk-taking capacity, etc. If you actively manage your portfolio, you can ensure to maximize your returns on your hard-earned capital.

A good portfolio can earn you good returns but actively managing that portfolio has the potential of getting you even bigger returns.

           2) Reducing Risk

This is one of the most important benefits of portfolio management. You can adjust the risk you are taking on a specific percentage of your capital. There are all kinds of financial instruments available.

Fixed deposits and debt funds are some of the examples of the least risky instruments with low returns, whereas investments in the equity market are quite risky but have the potential to earn very good returns.

          3) Diversification

This is also one great advantage of having a well – balanced portfolio and managing it actively. Diversification means the allocation of funds in different types of financial instruments. It protects against the risk posed by one asset.

In the case of stocks investments too, diversification is suggested in stocks across different sectors of the economy.

          4) Tax Planning

Having a portfolio of investments having fewer tax obligations is a wise financial decision. Tax planning can be done as part of portfolio management. Investments of some amount of one’s capital in financial instruments like PPF, PF, etc. are good ways of saving a good amount of tax payments.

         5) Managing Adverse Conditions

Good portfolio management always takes into account some investments done in liquid instruments and having some cash balance for contingencies.

In times like the current pandemic, there is an even greater benefit of good portfolio management. It calls for the withdrawal of funds from poor performing assets and more investments into suitable and good returns generating financial instruments.

After establishing the importance of portfolio management, more questions can be raised about types of portfolio management techniques, how to actively manage your portfolio, etc.

For this, one can either study portfolio management himself/herself or take the help of a professional portfolio manager.


Ways of Portfolio Management

Portfolio Management is the term that most of us have come across. Let’s know its ways or PMS types and proceed further

  1. Active Portfolio Management
  2. Passive Portfolio Management
  3. Discretionary Portfolio Management
  4. Non-Discretionary Portfolio Management
  •  Active Portfolio Management

When the portfolio manager keeps an eye on the Investor’s investment portfolio and keeps them tracking is called active portfolio management.

Basically, the portfolio manager or the professional actively participates in an investor’s investment portfolio. The active portfolio managers rely on research, analysis for buying, and selling of assets.

  • Passive Portfolio Management

Passive Portfolio Management is the opposite of Active Portfolio Management. The portfolio manager refers to the Index for buying and selling the stocks as a strategy.

That is why passive Portfolio Management is also known as “passive strategy,” “passive investing,” or ” index investing”.

  • Discretionary Portfolio Management

The portfolio manager takes all the decisions related to the buying and selling of stocks. Thus, in Discretionary Portfolio Management the client must have the utmost trust in the portfolio manager.

  • Non-Discretionary Portfolio Management

Non-Discretionary Portfolio Management is the opposite of Discretionary Portfolio Management, in this, the portfolio manager acts as a broker and follows the instructions of his clients and acts accordingly.


Conclusion

It is quite clear that in current times where the conventional methods of keeping money like banks, fixed deposits do not grow the capital at all, we must look to make a well-balanced portfolio.

A good portfolio is a good mix of different kinds of assets where funds are allocated according to one’s own preferences and risk-taking ability.

The task does not just end here at building a portfolio. Active management is better than passive management in terms of returns and minimizing risk.

Therefore, managing a portfolio at regular intervals of time is equally important. Managing a portfolio includes active buying and selling assets in order to reap better returns in less time.

Portfolio management is important because it covers a certain amount of risk through diversification and shuffling of funds among different assets according to the returns they are generating.

It also helps in planning regarding tax obligations. Moreover, it helps in arranging funds in times of emergencies. Stay invested, stay wealthy.


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