The importance of the portfolio management process can be well understood from the points given below: –
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Security of principal invested
The first and primary role played by portfolio management is the security of the investor’s hard-earned money. Every individual investor their money with the aim of earning the best return at the lowest possible risk. There are a lot of risky securities being traded in the market which seem to be profitable and may result in a loss of the principal amount invested by individuals. Portfolio management assists in the easy identification of risky and optimum assets so that investments can be made in assets that fall within the risk/return appetite of individuals.
Allocation of funds for maximum returns
There are many factors for which the portfolio management process is carried out such as desired return, risk-bearing potential, etc. Active management of portfolios can ensure your maximum return at the lowest risk on your hard-earned money. A good portfolio has the potential of earning you good returns but its right management can bring bigger returns for you. Management of the portfolio makes sure that the portfolio remains optimum at all point time during the investment period and goes in the direction of investor goals.
Bring down overall risk
It is one of the crucial benefits offered by the process of portfolio management. Every investor wants to avoid every part of the risk associated with his/her desired profit level. Portfolio management can help you a lot in adjusting the risk you are taking on your capital for earning returns. It helps in doing an easy distinction between high-risk assets and low-risk assets so that investors can accordingly pick them as per their capabilities. Debt funds and fixed assets are some of the low-risk assets having fewer returns whereas equity markets are highly risky with the potential of making good returns.
Informed decision making
Portfolio management provides a sufficient amount of information regarding market assets which leads to informed decision-making by investors. It provides greater insight into the cost, risk, return, volatility, growth potential, etc. of investment securities. When individuals are well-informative on all these crucial factors then they build portfolios out of optimum assets resulting in maximum return at low risk.
Diversification
An actively managed and well-balanced portfolio offers a great advantage of diversification to investors. Diversification stands for spreading your overall risk by doing investments in multiple-class securities. It saves from encountering risk posed by a single asset as when different types of assets are included in a portfolio then a loss by one asset is covered by profit generated by other assets.
Tax planning
Portfolio management results in efficient tax planning for investors. Individuals holding a portfolio of investments can have fewer tax obligations. It is possible to do tax planning as part of portfolio management. By doing investment of some amount of capital in instruments like PPF, PF, NPS, NSC, etc., investors can save a good amount of their money which they might have paid as tax payments.
