A portfolio is, simply put, a collection of all your investments. This includes different types of assets such as equity shares, fixed deposits, mutual funds, life insurance, cash, and non-financial assets such as gold, real estate etc. Grouping all the assets together enables you to easily assess your investments and make informed decisions.
To ensure that your investments are performing as expected and that they continue to be aligned with your goals, it is essential to manage your portfolio. Managing your portfolio means:
- Checking the performance of your investments regularly
- Exiting non-performing assets that are no longer aligned to your goals
- Making fresh investments that suit your life goals
The goal of portfolio management is to maximize your returns and minimize your risk.
Managing your portfolio effectively is the best way of growing your wealth. You can use your portfolio to plan for your life goals such as retirement, child’s education expenses, wedding expenses etc.
Portfolio management helps you in more ways than one. Here are six:
1. Make the right investment choices:
Often, people accumulate assets or make investments in an ad hoc or haphazard manner. A portfolio gives you a holistic view of all your assets and enables you to see the gaps in your investment plan vis a vis your financial objectives. Portfolio management allows you to take more informed decisions about the kind of investments you should make. For example, you may have an over-exposure to equities which increases your risk.
2. Track performance:
Consolidating all your investments into one portfolio enables you to track the performance of assets and compare them easily. If a particular investment is not performing as planned, you can sell it and reinvest the funds in a more profitable investment. Also, portfolio management helps to readjust funds based on life goals. For example, for a long-term goal of your child’s education, you can invest in equities and capitalize on their superior return. As you come closer to your goal, you can switch to safer debt mutual funds so that you don’t incur any losses.
3. Invest in a regular and disciplined manner:
The goal of portfolio management is to maximize your return. One investment technique to multiply your earnings is to invest often. For example, if you have a small amount you want to invest every month, you can start a systematic investment plan (SIP) in a mutual fund. That way, you will invest a dedicated amount every month. This disciplined investment will help to grow your funds faster.
4. Manage your liquidity:
Nobody can predict when the need for funds will arise. Proper portfolio management can help you plan your investments in such a way that some you can easily sell off some assets when you urgently need funds. For example, you could keep some money in liquid funds, which you can sell off if you want money in a medical emergency.
5. Balance risk and reward:
Not all assets are made equally. Some are riskier but can be more rewarding (equities). Some are safe but illiquid (PPF). Others are safe and liquid but deliver lower returns (liquid mutual funds). Portfolio management enables you to strike a balance between various investments depending on your needs.
6. Readjust your investments with time:
When you manage your portfolio actively, you can make sure that it stays true to your goals. Let’s assume, for example, that you start your portfolio with 60% in equity and 40% in debt. In a couple of years, equity does very well. It’s quite possible that in such a scenario, equity may comprise 70% of your portfolio – which means you must readjust it to bring them back to your original 60-40 ratio.
7. Improve your financial understanding:
One of the benefits of managing your portfolio of investments actively is that you learn how financial markets work. Even if someone else manages your portfolio, just dealing with a professional can improve your knowledge about different investments and their interactions.