What Are The Advantages And Disadvantages Of Investment Portfolio Management?
In the article, we’re going to rub off your doubts on investment portfolio management.
The success of a company depends on many factors, including having a sufficient number of customers who buy the product or service in an ideal volume to generate a competent profit margin. This obvious definition goes through paying special attention to the client portfolio.
Table of Contents
What Is Investment Portfolio Management?
Investment Portfolio Management is a service by which the client delegates the decisions to buy and sell assets in the Bank, who through a management entity makes the investment and divestment decisions on behalf of the client. To ensure that the portfolio profile is adapted to the characteristics of each client.
The Bank must first carry out a suitability test, asking about their knowledge and investment experience, their specific investment objectives, financial situation, and level of aversion to risk. With all these data, the Bank will have enough information about the client to offer them a portfolio suitable for their circumstances and investor profile.
When the profile is defined, the client signs a contract that contemplates, among other aspects, the delegation of the Bank to a managing entity; what are the general investment criteria; the time horizon has foreseen for the investment; the financial instruments that can be included in the portfolio and the operations that can be carried out with them; and the geographical area in which the manager may invest.
When the contract is signed, the managing entity, through its portfolio managers, will be the one who, depending on the vicissitudes of the markets, will decide which assets to buy or sell at any given time according to the client’s investor profile and investment criteria that established in the aforementioned signed contract. The entity providing this portfolio management service must periodically inform each client, among other issues.
This is about the composition and valuation of their investments, the returns obtained, and their comparison with a benchmark indicator. Additionally, the client will be informed when his portfolio presents a certain% of losses concerning the valuation of the portfolio reported in the previous month. The investment portfolio management service entails commissions and associated expenses of which the entity providing the service must inform the client before hiring.
Advantages Of Investment Portfolio Service
- It allows you to keep track of investments since the managing entity must periodically report all changes in the portfolio, and in this way, it is possible to check if the objectives set are being met before investing.
- Hiring a portfolio management service instead of investing directly allows the investor to delegate decision-making to a professional manager who has the appropriate qualifications and knowledge. This way of operating provides the client with an agile response capacity to what happens in the markets.
- The previous questionnaire that each client must complete allows the chosen portfolio of assets to be adjusted to both their risk profile and their investment objectives.
- We can add that in the case of clients who are resident individuals, they may benefit from the tax deferral regime when it comes to transfers between investment funds since taxes will only have to be paid once the capital is withdrawn through the refund of funds.
- Investing through portfolio management enables the individual investor to access a wide range of investment funds that, individually, they may not have access to. And it also involves a double diversification, both due to the efficient composition of the portfolio
Disadvantages Of Investment Portfolio Management
It is usually carried out through investment funds and this type of investment is not without risk. Thus, whoever is going to invest their capital through a portfolio management service must be aware of the possible credit risks like assets and their issuers, and market risks like among them, investing in equities, interest rate risks, exchange rate, emerging markets, or geographic and sector concentration.
And also the risk associated with investing in derivative financial instruments. There is another issue that a private investor must consider when opting for a portfolio management service is the trust generated by the entity that provides the service
Specifically, the managing entity that will manage the equity of your portfolio. It is said managing entity, through its managers, who will make the investment decisions and who will execute all the operations on their own, therefore the client must have full confidence in their criteria and capabilities.