What is Portfolio Management? Meaning
First let's understand the meaning of terms Portfolio and Management.
- Portfolio is a group of financial assets such as shares, stocks, bonds, debt instruments, mutual funds, cash equivalents, etc. A portfolio is planned to stabilize the risk of non-performance of various pools of investment.
- Management is the organization and coordination of the activities of an enterprise in accordance with well-defined policies and in achievement of its pre-defined objectives.
Now let's comprehend the meaning of term Portfolio Management.
- Portfolio Management (PM) guides the investor in a method of selecting the best available securities that will provide the expected rate of return for any given degree of risk and also to mitigate (reduce) the risks. It is a strategic decision which is addressed by the top-level managers.
For example, Consider Mr. John has $100,000 and wants to invest his money in the financial market other than real estate investments. Here, the rational objective of the investor (Mr. John) is to earn a considerable rate of return with less possible risk.
So, the ideal recommended portfolio for investor Mr. John can be as follows:-
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Note:- This is just an example and may not be taken as a standard for PM.
Objectives of Portfolio Management
The main objectives of portfolio management in finance are as follows:-
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- Security of Principal Investment : Investment safety or minimization of risks is one of the most important objectives of portfolio management. Portfolio management not only involves keeping the investment intact but also contributes towards the growth of its purchasing power over the period. The motive of a financial portfolio management is to ensure that the investment is absolutely safe. Other factors such as income, growth, etc., are considered only after the safety of investment is ensured.
- Consistency of Returns : Portfolio management also ensures to provide the stability of returns by reinvesting the same earned returns in profitable and good portfolios. The portfolio helps to yield steady returns. The earned returns should compensate the opportunity cost of the funds invested.
- Capital Growth : Portfolio management guarantees the growth of capital by reinvesting in growth securities or by the purchase of the growth securities. A portfolio shall appreciate in value, in order to safeguard the investor from any erosion in purchasing power due to inflation and other economic factors. A portfolio must consist of those investments, which tend to appreciate in real value after adjusting for inflation.
- Marketability : Portfolio management ensures the flexibility to the investment portfolio. A portfolio consists of such investment, which can be marketed and traded. Suppose, if your portfolio contains too many unlisted or inactive shares, then there would be problems to do trading like switching from one investment to another. It is always recommended to invest only in those shares and securities which are listed on major stock exchanges, and also, which are actively traded.
- Liquidity : Portfolio management is planned in such a way that it facilitates to take maximum advantage of various good opportunities upcoming in the market. The portfolio should always ensure that there are enough funds available at short notice to take care of the investor’s liquidity requirements.
- Diversification of Portfolio : Portfolio management is purposely designed to reduce the risk of loss of capital and/or income by investing in different types of securities available in a wide range of industries. The investors shall be aware of the fact that there is no such thing as a zero risk investment. More over relatively low risk investment give correspondingly a lower return to their financial portfolio.
- Favorable Tax Status : Portfolio management is planned in such a way to increase the effective yield an investor gets from his surplus invested funds. By minimizing the tax burden, yield can be effectively improved. A good portfolio should give a favorable tax shelter to the investors. The portfolio should be evaluated after considering income tax, capital gains tax, and other taxes.
The objectives of portfolio management are applicable to all financial portfolios. These objectives, if considered, results in a proper analytical approach towards the growth of the portfolio. Furthermore, overall risk needs to be maintained at the acceptable level by developing a balanced and efficient portfolio. Finally, a good portfolio of growth stocks often satisfies all objectives of portfolio management.