Role of portfolio management in financial market

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What is portfolio management?

Portfolio management is an activity that is used for the selection of right investment policy for the individuals so that they can minimize the risk and maximize return. In other words, portfolio management is defined as “managing the investments of the individuals in the form of mutual funds, shares, cash etc. so that they can earn maximum interest within timeframe”. The main purpose of portfolio management is to execute strategic plan, deliver business values, enhance decision making, and manage organizational change so that organizations can earn maximum profitability within stipulated time frame. There are various portfolio management benefits such as organization gain high return on project investments, organizational risks reduce to great extent, workload will be managed properly, increased project throughput etc. that organization gain with the help of portfolio management

Need for portfolio management
  1. Portfolio management enables and helps the portfolio managers to provide an optimal customized investment solution to clients as per their requirements.
  2. Portfolio management increases the chance of making profits and reduces the risks that are involved in investing.
  3. Portfolio management provides best investment plan to the individuals according to their budget, age, income and ability to undertake risks.
Types of portfolio management

There are three types of portfolio management namely discretionary, non-discretionary and advisory

Discretionary portfolio management- In case of discretionary portfolio management, an individual authorizes and gives privileges to portfolio manager to take care of his financial statements and needs on his behalf so that the risks that are associated with financial needs will be reduced. Moreover, for the purpose of financial management an individual issues money to portfolio manager who is taking care of his financial needs.

Non-discretionary portfolio management- In this type of portfolio management, the portfolio manager suggests an optimal investment idea for the management of financial needs. Here, the person itself is responsible to take care of his financial needs. Moreover, here the choice of individual matter who is going to invest and portfolio manager is responsible to provide best investment plan.

Advisory portfolio management- in this case of portfolio management, portfolio manager only suggests an optimal investment plan or ideas to investors but the decision making and execution plan are done by the investor itself.

Processes of portfolio management
  1. Assess goals and current financial situations- it is important for the investor to understand the current situations regarding investment policies and plans. In order to understand the current status of investment policies investor access the current liabilities, cash flow, and investments so that investor can effectively identify gaps between stated goals and current investment strategies.
  2. Establish objectives of investment- In this step, investor establishes the objectives of investment in order to identify risks that are associated with their investment plan. Portfolio manager formulates portfolio strategy according to the requirement of the customers so that customers can accept the level of risk. Once accepted risk profile is developed, for the tracking of portfolio’s performance a benchmark can be established.
  3. Selection of investment options- The investments of individual are selected based on the asset location strategy. The investor selected investment type (mutual funds, shares, cash) so that they can earn maximum interest within timeframe.
  4. Portfolio management- Here the investor or portfolio manager plays an important role which implies that the financial needs can be managed by the individual or portfolio manager depends upon the type of portfolio management.