Active portfolio management is one of the most dynamic strategies available to investors for outperforming the market. Unlike a passive strategy in which portfolios track the movement of a certain index, active management makes strategic decisions regarding buying or selling particular assets to achieve maximum returns over benchmarked indices.
Do you know? According to the figures issued by the Securities and Exchange Board of India (SEBI), AUM (assets under management ) for Portfolio Management Services in India surged by 71% in one year, from Rs. 13.7 lakh crore at the end of March 2020 to Rs. 23.5 lakh crore by March 2021 end. It also witnessed a rise of 50% in the number of PMS clients, which had risen from 1.63 lakh at the end of March 2020 to 2.45 lakh at the end of March 2021.
But what does active portfolio management really involve, and why do some investors swear by it while others are much more sceptical? In this blog, we’re going to discuss the important aspects of this approach and how they can add significant value to one’s returns.
What is Active Portfolio Management?
Active portfolio management is a hands-on investment strategy. Buy, sell, or hold decisions made at regular intervals on the basis of market research, forecasts, and careful analysis of a security by a portfolio manager or team of managers form the crux of this strategy. The philosophy underlying it is to capture any short-term price movement and other opportunities to outperform the market index over some given period, whether Nifty 50 or S&P 500.
What are some characteristic features of active portfolio management?
Some of the major characteristics of active portfolio management include:
Research-Driven Decisions:
Active portfolio managers invest in in-depth research and analysis. This may include studying macroeconomic factors, company fundamentals, industry trends, or even geopolitical events. They may also use quantitative models, but qualitative judgments—such as evaluating management quality—often play a critical role.
Higher Flexibility:
Unlike passive investors who adhere to an index or a fixed strategy, active managers have the flexibility to adjust their portfolios in response to market conditions. They can overweight or underweight certain sectors, industries, or asset classes based on current opportunities or risks.
More Costly:
Due to the frequent trading and hands-on management, actively managed portfolios typically incur higher costs than passive strategies. These costs include management fees, trading costs, and even performance fees. Active fund investors should ask themselves whether the potential returns generated by active management justify such added expenses.
- Increased Risk, Increased reward potential:
Active management is riskier than the passive approach. The potential to perform better than the market is an excellent lure, but the possibility of underperformance exists if the manager’s choice is a bad one.Why choose Active Portfolio Management?There are many benefits of active portfolio management, including but not limited to:
- Market Outperformance
The quality or attribute of active management is its ability to attain higher-than-market returns. A good manager will be able to pinpoint an underpriced asset, take advantage of short-term price movements, and hedge against downturns. - Adaptability to Current Market Conditions:
The active manager can adapt his strategy according to the current market conditions. In times of a falling market, for instance, the manager may shift assets into defensive stocks or bonds and other asset classes that tend to fare relatively better under falling market conditions. It can hedge loss situations and even benefit from wider market volatility.
- Tailored investment strategy:
Active management permits a more customised approach. A manager could position a portfolio according to an investor’s unique objectives, risk tolerance, and time horizon, thus making asset allocation or sector exposure consistent with those requirements.
- Active Risk Management:
Active portfolio managers will proactively use many strategies that can reduce the risk of their portfolios, such as using derivatives, setting stop-loss orders, or even diversifying the portfolio to minimise exposure when the markets decline negatively. And it is especially valuable in volatile or uncertain market conditions.
Is Active Portfolio Management for You?
The choice of active over passive portfolio management thus depends upon investment objectives, risk tolerance, and general confidence over professional managers’ ability to outperform the market consistently.
Active management could work out if you:
- Are interested in getting potential market-beating returns and are willing to pay higher fees for the chance of doing that.
- Are willing to take on more risk and accept the likelihood of lower-than-hoped returns in search of potentially higher yields.
- Have the ability to come up with customised investment planning to match your objectives and the dynamic nature of the market.
You believe in the inefficiencies of the market and that expert managers would be able to exploit such inefficiencies.
Evolution of Active Portfolio Management
Active portfolio management is evolving with related developments in such fields as algorithmic trading, AI-driven analysis, and big data. Managers now have all the tools and data available at their fingertips to support decisions that are also fairly critical. This technological aspect is transforming the active managers’ approaches toward research and risk assessment and even toward trade execution.
Even as debate rages on the balance between active and passive management, however, it is clear there will always be room for active management—especially among investors seeking to exploit short-term opportunities, navigate volatile markets, or even implement complex strategies requiring day-to-day supervision.
The Bottom Line
Active portfolio management offers deep involvement and research in investing. Active portfolio management has the potential to outperform the wider market. It also provides the flexibility and personalization that many investors value. You can unlock a lot of the rewards of active management by sticking with an experienced manager and taking care to properly consider your investment goals.In the active and fast-changing world, where markets change overnight, and opportunities arise and disappear within a twinkling of an eye, active portfolio management is one of the strong investment tools that can be used by those who want to make the most of their portfolios.
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