Portfolio management is necessary for the growth and success of a client, business, or institution. A portfolio of any individual client or a company is a complete record of all their investments. Based on this portfolio, portfolio management services devise an investing strategy for a client based on three major factors: their goals, the estimated timeline of these goals, and how much risk they can tolerate in case an investment goes south. Portfolio management is achieved by applying various concepts such as tax minimization, diversification, and rebalancing. For a business of any size, portfolio management is essential. Here’s why.
The Significance of Portfolio Management
Although a business can choose to manage its own portfolio, the probable lack of expertise can trigger a series of miscalculated steps that can hinder or completely stunt the growth of the business. Availing portfolio management services can help avoid this as a portfolio manager can assess the market's past, present, and future state through an expert lens.
Portfolio management requires an analysis of a business's unique strengths and weaknesses, including opportunities and risks. Portfolio management firms consider the nuance created by all factors influencing a business’ standing. They then use this understanding to make calculated decisions to maximize the expected investment return.
The Different Types of Portfolio Management, Their Advantages, and Why They Are Important
Portfolio management is divided into four categories:
- Active
- Passive
- Discretionary
- Non-discretionary
Mainly, there are two main segments of portfolio management: active and passive.
Active portfolio management demands extensive expertise and research about the markets. Simply put, a portfolio manager will devise an active portfolio management strategy to gain higher returns than the market. The term ‘active’ comes from the need for constant monitoring of the state of the market and taking a favorable decision when the conditions are just right. This means assets are bought when undervalued and sold when their value rises.
Active portfolio management boasts the most potential for best returns compared to the other types of portfolio management. Its flexibility allows the strategy to be tweaked whenever needed to design the best strategy to ensure the company’s assets do well.
While active portfolio management competes with the market in its present state, passive portfolio management picks a benchmark index (for example, S&P 500), tracks its performance, and designs strategies to replicate it. For this reason, passive portfolio management is also referred to as index fund management. It places a heavier focus on risk minimization. While the returns of passive portfolio management can be low, the overall cost and risk are also low.
No matter the strategy, portfolio management plans an investment approach that helps a business generate maximum profits in the long term. Funds can be allocated across different asset classes to achieve this. Additionally, portfolio management caters to any risk appetite. This flexibility is offered through the passive and active approach and helps keep a business afloat when the market is not doing well.
Lastly, a business can reduce tax liability through asset allocation. Therefore, portfolio management helps a company with tax planning as well. With optimal asset allocation, a significant amount of the earned income which would have been given as tax can be saved. Portfolio management allows for wealth to be allocated to investors who need it. With this capital, they are able to grow their business and create opportunities that will improve the economy at large.
Head over to Enriched Investing Incorporated website to learn about our services. Our expert investment portfolio management can strategize your investment according to your needs.
