- No comments
A Portfolio Investment is basically a passive investment of securities in a portfolio, done with the objective of returns on investment. As in most cases, there is a direct correlation with the return expected and the risk expected.
There is a difference between Direct Investment and Portfolio Investment, while the former means having a substantial stake in a company of choice and a possible involvement on a daily basis, the later can span over a broad range of asset types, for example, Bonds, Real Estate, Mutual Funds, Exchange Traded Funds, etc…,
Arrangement of investments in a portfolio depends on many elements. One of the most important criteria being the ability of the investor in managing or tolerating risk factors, second being, the amount available for investment. For a modest investor, mutual funds or exchange traded funds might be the best option, however, for a high net worth investor, stock and commodities might be more appealing. It is interesting to note that portfolio investments for organisations generally need to span across time so that there is a match between their liabilities and assets.
Most of these investments are preferred basis, risk versus return combinations, from low-risk low returns to high-risk high returns, or on their income streams, like steady or fixed, or variable with the promise of growth.
Portfolio Management is a method which aids us in the decision making process of investments made in an organisation, aligning the investments to the objectives, appropriate asset allocation for the organisation or projects within an organisation, and managing risks, all comes under this umbrella.
It is basically a SWOT Analysis (strength, weakness, opportunities and threats) for the debts against equity, and many other similar endeavours that the organisation takes, to get higher returns, which in turn opens the doors for potential risk factors.
Now, service line head of departments will not be able to track how budgets are spent, or cannot validate the task on preference against priority, and all this could put them under pressure and perhaps lead to decision paralysis for fear of scrutiny.
Portfolio management is able to direct or redirect the business lines to the greater goal by asking and seeking simple, most basic, yet often ignored questions, on lines of value addition on the jobs performed.
Advantages of applying Portfolio Management method on Investments
Healthier Asset Allocation: managing a long-term assortment of assets. Ensuring harmony, and understanding of various kinds of assets. The basic objective is to ensure augmenting a profile of an investor which has a better return versus risk, by investing in a mix of assets.
Building Diversity: The only certainty in investing is unpredictability, winning or losing combinations cannot always be forecasted accurately. And to manage this, it becomes essential to diversify the investments, further down to the asset class. By spreading the risk and reward within the subset of an asset class, mitigates risk on losses. True diversification is observed, across various securities, geographies and sectors of economy.
Rebalancing: in this method the, a portfolio is returned to its original target allocation on an annual basis. Doing this gives an opportunity to align the portfolio to the investors risk return profile, by capturing the returns or gains annually, and further expanding the possibilities of growth in potential sectors.
Loved this blog? Read more here:
Use of Risk Management in Investment Banking
Core Investment Banking Activities That Can Help an Organization to Grow