Business Growth Strategies In Hindi – Portfolio management is the art and science of selecting and managing a group of investments that meet the long-term financial goals and risk tolerance of a client, company or institution.
Some people do their own investment portfolio management. This requires a fundamental understanding of the key elements of building and maintaining a successful portfolio, including asset allocation, diversification, and rebalancing.
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While professional licensed portfolio managers work on behalf of clients, individuals can choose to create and manage their own portfolios. In either case, the portfolio manager’s ultimate goal is to maximize the expected return on investments within an appropriate level of risk exposure.
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Portfolio management requires the ability to weigh the strengths and weaknesses, opportunities and threats across the investment spectrum. Choices include trade-offs from debt versus equity to domestic versus international to growth versus security.
Passive management is a set-and-forget long-term strategy. This may include investing in one or more exchange-traded (ETF) index funds. This is often called indexing or index investing. Indexed portfolio builders can use modern portfolio theory (MPT) to help them optimize the mix.
Active management involves trying to beat the performance of an index by actively buying and selling individual stocks and other assets. Closed-end funds are generally actively managed. Active managers can use a wide variety of quantitative or qualitative models to help them evaluate potential investments.
Investors who practice an active management strategy use fund managers or brokers to buy and sell stocks in an attempt to outperform a particular index, such as the Standard & Poor’s 500 Index or the Russell 1000 Index.
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An actively managed mutual fund has an individual portfolio manager, co-manager, or team of directors who actively make investment decisions for the fund. The success of an actively managed fund depends on a combination of in-depth research, market forecasting and the expertise of the portfolio manager or management team.
Actively investing portfolio managers pay attention to market trends, economic changes, changes in the political landscape, and news affecting companies. This data is used when buying or selling investments to take advantage of irregularities. Active executives say these processes increase the potential for returns more than returns from simply duplicating assets in a given index.
Trying to beat the market necessarily involves additional market risk. Indexing eliminates this particular risk, as there is no possibility of human error in stock selection. Index funds are less traded, which means they have lower expense ratios and are more tax efficient than actively managed funds.
Passive portfolio management, also called index fund management, aims to multiply the return of a particular market index or benchmark. Managers buy the same stocks listed in the index using the same weighting they represent in the index.
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A passive portfolio strategy can be structured as an exchange-traded fund (ETF), mutual fund, or unit investment trust. Index funds are labeled passively managed because each has a portfolio manager whose job is to multiply the index rather than select assets bought or sold.
Another critical element of portfolio management is the concept of discretionary and non-discretionary management. This portfolio management strategy determines what a third party can be allowed to do with your portfolio.
An optional or non-discretionary management style only applies if you have an independent brokerage firm that manages your portfolio. If you want the broker to only perform transactions that you have expressly approved, you should choose a non-discretionary trading account. The broker can advise on strategy and suggest investment moves. However, without your approval, the broker is only an advisor who must remain at your discretion.
On the other hand, some investors prefer to leave all decisions in the hands of their brokers or finance managers. In this case, the financial advisor can buy or sell securities without the approval of the investor. The consultant has a duty of care to act in the best interests of his clients when managing their portfolio.
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The key to effective portfolio management is the long-term mix of assets. Generally, this means cash equivalents such as stocks, bonds and certificates of deposit. There are others, often referred to as alternative investments, such as real estate, commodities, derivatives, and cryptocurrency.
Asset allocation is based on the understanding that different types of assets do not act in harmony and some are more volatile than others. A mix of assets provides balance and hedges against risk.
Investors with a more aggressive profile weight their portfolios towards more volatile investments like growth stocks. Investors with a conservative profile weight their portfolios on more stable investments such as bonds and blue-chip stocks.
Rebalancing captures recent gains and opens up new opportunities while keeping the portfolio consistent with the original risk/return profile.
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The only certainty in investing is that it is impossible to consistently predict winners and losers. A prudent approach is to create an investment basket that provides broad exposure within an asset class.
Diversification involves allocating the risk and return of individual securities within an asset class or between asset classes. Because it is difficult to know which subset of an asset class or industry will outperform others, diversification aims to capture returns over time for all industries while reducing volatility at any given time.
Rebalancing is used to return a portfolio to its original target allocation at regular intervals, usually annually. This is done to restore the original asset mix when movements in the markets upset the balance.
For example, a portfolio that started with a 70% equity and 30% fixed income allocation may move to an 80/20 allocation after a long market rally. The investor made a good profit, but the portfolio now carries more risk than the investor can tolerate.
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Rebalancing often involves selling higher priced securities and turning that money in favor of lower prices and securities. Annual rebalancing allows the investor to capture gains and expand growth opportunity in high-potential industries while keeping the portfolio in line with the original risk/return profile.
A potentially important aspect of portfolio management has to do with how your portfolio is shaped in a way that minimizes taxes over the long run. This has to do with how different retirement accounts are used, how long the securities are held, and what securities are held.
For example, consider how certain bonds may be tax-exempt. This means that dividends earned are not taxable. On the other hand, consider how the IRS has different rules regarding short-term or long-term capital gains taxes. For individuals earning less than $41,675 in 2023, the capital gain rate could be $0. On the other hand, a 15% short-term capital gains tax may apply if your income exceeds this IRS limit.
Each investor’s particular situation is unique. Thus, while some investors are risk-averse, others (while also assuming the greatest risk) may be inclined to earn the highest returns. Very broadly, there are several common portfolio management strategies an investor can consider:
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Whatever the strategy chosen, portfolio management always encounters certain obstacles that cannot be completely eliminated. Even if an investor has an impeccable approach to portfolio management, investment portfolios are subject to unpredictable market fluctuations and volatility. Even the best management strategy can lead to significant losses.
While diversification is an important aspect of portfolio management, it can also be difficult to achieve. Finding the right combination of asset classes and investment products to balance risk and return requires a deep understanding of the market and the individual investor’s risk tolerance. It can also be expensive to purchase a wide variety of securities to meet the desired diversification.
To find the best portfolio management strategy, an investor must first know their risk tolerance, investment horizon and return expectations. This requires clear short-term and long-term goals. Because living conditions can change rapidly, investors should be aware of how some strategies limit investment liquidity or flexibility. In addition, the IRS may implement changes to the tax law that may mandate changes to your final strategy.
Finally, if an investor turns to a portfolio manager to manage their investments, they incur a management fee. The portfolio manager must often meet certain regulatory reporting requirements, and the manager may not have the same views or concerns about the market as you.
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In general, there are only two types of portfolio management strategies: passive investing and active investing. Passive management is a set-and-forget long-term strategy. Often referred to as indexing or index investing, it aims to multiply the return of a particular market index or benchmark and may involve investing in one or more exchange-traded (ETF) index funds. Active management involves trying to beat the performance of an index by actively buying and selling individual stocks and other assets. Closed-end funds are generally actively managed.
Asset allocation involves spreading an investor’s money across different asset classes to minimize risks and maximize opportunities. Stocks, bonds, and cash are the three most common asset classes, but real estate, commodities, currencies,