Investing is not just about making random financial decisions because an offer caught your eye . You have to make very calculated moves that bring in profit and multiply your assets. For that, you need plans, and your plans need backup plans. Making a strategy based on the objectives and risk tolerance of the investor is what portfolio management is all about. But, it is a broad domain. There are four types of portfolio management to be exact. They all have the same objective which is capital appreciation. With these types, you can meet your long-term financial goals in 2024, maximise your returns based on your income and budget and minimise risk. So, let’s explore each of them in detail.
4 Types of Portfolio Management
- Active Portfolio Management
This type of investment aims to outperform the typical market returns. It includes tricky and bold methods like quick buying and selling, trying to predict when to invest, and other similar moves.
You need to do your research to execute the workings of the active portfolio management. You must also make investment plans and keep an eye on your investments over time. You can also greatly benefit from having information about exactly what you are investing in and how such investments “act” in certain financial situations.
- Potentially Higher Returns: Managers have the opportunity to generate higher returns by identifying mispriced assets. Such types of portfolio management allow them to take advantage of short-term market opportunities.
- Flexibility and Adaptability: Active managers adjust their investments across various assets such as stocks, industries, and individual companies when the market or the economy changes. This flexibility makes it easier to make wiser investing decisions. .
- Opportunity to Stay Ahead in the Market: Active managers aim to surpass typical market performance, potentially helping investors achieve returns higher than the norm. Like all other types of portfolio management, this one is also not without some drawbacks-so, so let’s have a look.
- Passive Portfolio Management
If you want to look for one of those types of portfolio management that attempts to match an index or benchmark’s performance, passive portfolio management has your answers.
Its strategies help investors reap the rewards of long-term investing. It allows you to invest in low-cost index funds and mutual funds that track popular benchmarks. Even though they do not yield outstanding returns, this type of portfolio management offers a steady return over time.
- Lower Costs: Passive management totally incurs lower costs in comparison to active strategies. The passive managers strive to replicate indexes but they have lower research and trading expenses.
- Wide Exposure in the Market: Passive managers give investors a way to invest in the whole market or a particular part of it by mirroring an index. This approach diversifies investments across multiple assets, preventing excessive impact from a single stock’s performance. .
- Consistency and Simplicity: Passive management follows clear rules, making it easy to comprehend and utilise. Investments will perform in a way that matches the index.
- Discretionary Portfolio Management
Discretionary is a portfolio management type that grants professionals to make a decision regarding their client’s holdings without any ongoing authorisation from the investor.
This strategy works for investors who prefer to leave certain areas of their money to professionals and value the knowledge of licensed investment advisors.
- Time Saving: When you let a discretionary manager handle your investments, you save time and effort. You don’t have to spend hours doing research and making decisions about your money.
- Personalised Solutions: Discretionary managers create investment plans that match what you want and how much risk you’re comfortable with. They make your portfolio just for you, so it fits your specific goals and needs.
- Making Changes as Per Needs: Discretionary managers keep an eye on your investments and adjust them when the market changes. They do this to catch good opportunities when the market is doing well and reduce risks when it’s not.
The last type is non-discretionary.. If you, the investor, want to take active decisions when it comes to your investments, then you should choose non-discretionary management.
- Non-Discretionary Portfolio Management
Among all types of portfolio management, the non-discretionary one allows the investor, that is, you, to actively make decisions on what you buy and sell. The manager will only provide guidance and advice for investments. The investor (you) can buy or sell. However, you do not have final authority. With that in mind, let’s look at the benefits of this type of portfolio management.
- Client Control: With non-discretionary management, clients stay in charge of their investment choices. They have the final say in deciding whether to follow the advice given by the Portfolio Manager. This makes them feel like they have a big role and ownership in the investment process.
- Personalised Advice:Non-discretionary managers give custom investment advice that matches a client’s specific situation and goals. Clients can benefit from the manager’s knowledge while considering their unique preferences and needs.
- Educational Opportunities: Non-discretionary management offers chances to learn. By working closely with the Portfolio Manager, clients can understand investment strategies, market analysis, and how to make decisions. This can improve their knowledge about investments helping them make well-informed choices.
With all these types of portfolio management, investors must be aware of “asset classes.” They need to know what they are investing in, and therefore, these asset classes help them to make smart investing choices. They can build a balanced portfolio, which helps foster capital growth with limited or controlled risk. Here is what is present in their portfolio. Find out below.
What are the Different Types of Components in Portfolio Management
Equity, or stock, is the major component. It represents ownership in the company, or the number of shares of the shareholder. This particular asset class has seen a rise in popularity in the last few decades. There are various types of equity. There are large-cap, mid-cap, and small-cap based on the company’s market capitalisation.
Equities in the concept of portfolio management become a source of income. This usually happens when the company makes a profit. It distributes such profits to investors through dividends. They can also buy or sell shares at a higher price, depending on marketing conditions, if they want to make a profit.
- Fixed Income
This is an old component as well. It comprises corporate bonds, government bonds, and schemes. These financial products stay covered for a set amount of time and provide investors with regular interest payments until they mature. Fixed-income instruments are generally less risky than stocks, but they come with smaller potential returns.
- Cash and Similar Equivalents
This component, also called a “money market instrument” in various types of portfolio management, is for a short duration. It includes treasury bills, commercial paper, certificates of deposits, etc. Its main benefit is that it comprises highly liquid assets, which you can easily redeem within 90 days. Also, it is a safe investment in an investor’s portfolio owing to its liquidity.
- Real Estate
Real estate component is available in many forms, both tangible and intangible. Here, investors make money on price appreciation. The tangible investment focuses on plots, apartments, villas, and commercial buildings. Investors can buy these in a dematerialised form through real investment trusts.
Another type of portfolio management that is popular and prevalent is gold investment. This is really popular with Indian investors. Investors use gold to hedge portfolios and portfolio management to hedge value in them. This component performs well when the economy is weak, and other components perform poorly.
You can also add alternative investments to your various types of portfolio management. These are assets that have the potential to increase in value. For example, assets like oil and derivatives.
FAQs:2024’s Hottest Investment Trend: Exploring 4 Types of Portfolio Management
What is a renewable energy portfolio?
A strategic collection of investments that you can make in renewable energy sources and projects makes up your renewable energy portfolio. It helps in diversifying energy resources, bringing down greenhouse gas emissions, and curbing climate change.
Can you invest in multiple assets?
Investing in multiple projects helps to diversify your assets. You can do so by spreading your investments across different projects. This will minimise risk and optimise your overall investment strategy.
What are Renewable Energy Portfolio Standards (RPS)?
Electricity providers have to source a portion of their electricity from a renewable energy source as per government regulations . They need to do so within a time period. Such standards have the aim of reducing greenhouse gas emissions.
What are portfolio management services?
Portfolio Management Service (PMS) is an investment approach utilised by both individual investors and businesses seeking exposure to a range of financial products, including equities, fixed income, and structured products.
Successful investing demands strategic planning, with each type aiming for capital appreciation. Asset classes like equity, fixed income, cash equivalents, real estate, gold, and alternatives are key to diversified portfolios, fostering growth with controlled risk. Understanding these methods for the need of portfolio management is crucial to navigating the investment landscape effectively. Before you invest, assess all types of portfolio management to make informed financial decisions. Take a step forward in sustainable energy investment with Sustvest and fast-track your investments toward profitability while also contributing to a greener Earth!
Founder of Sustvest
Hardik completed his B.Tech from BITS Pilani. Keeping the current global scenario, the growth of renewable energy in mind, and people looking for investment opportunities in mind he founded SustVest ( formerly, Solar Grid X ) in 2018. This venture led him to achieve the ‘Emerging Fintech Talent of the Year in MENA region ‘ in October 2019.