Gone are the days when investors could hope to maximize their returns if they followed a rule of thumb—60% in stock and 40% in bonds. The recent rout in prices of stocks and bonds alike has shattered faith in this sensible, time-tested approach to investing. What’s more, as the world shrinks into a global village, multiple asset classes such as crypto have emerged, making investing a demanding task. Enter asset management. Here, an expert or portfolio manager will track and finetune your investments and help you sift through the maze of investment products available. Let’s delve deeper into what asset management is and its importance for investors.
Simply put, asset management refers to monitoring, maintaining, developing, and operating investment portfolios of individuals in complete alignment with their investment objectives. The individuals who manage the investment portfolios are referred to as portfolio managers, who take decisions regarding buying and selling of assets on behalf of investors.
The portfolio managers usually invest in cryptos, stocks, bonds, real estate, and other capital assets in line with your investment objectives and help you grow your portfolio value over the long term while minimizing risks.
Importance of asset management
Asset management is important on account of several factors, which are discussed in detail below.
Helps to keep track of all investment assets: Asset management allows you to effectively track how your investments are performing and what changes have been made to the portfolio to keep it aligned with the overall investment objectives.
Manage different asset classes easily: Many new asset classes have evolved over the years. Besides equity stocks listed on local stock exchanges, one can also invest in US stocks, crypto assets, mutual funds, ETFs, and bonds to build a diversified portfolio. One can easily manage different asset classes accurately and effectively through asset management.
Lowers investment cost: Effective management of portfolios through asset management can significantly reduce the asset turnover rate, providing significant cost benefits. Also, a lower portfolio turnover rate helps you focus on the performance of asset classes.
Implementation of risk management plans: Asset management will help you identify the risks associated with an asset class and devise strategies to avoid them. Also, during extreme market volatility and uncertainty, one can significantly reduce the risk of loss.
Tax management: Profits from investment in capital assets are subject to capital gains tax. An asset manager can help lower capital gains tax on investment without impacting the overall investment portfolio. This is done by adopting various tax-deferred investment strategies and streamlining buying and selling activities.
Benefits of Asset Management
An individual can reap multiple benefits by subscribing to asset management services. Some of them are listed below.
- It provides a systematic financial plan, which helps investors systematically grow their capital assets
- Eliminates financial stress as portfolio managers help in making critical investment decisions whenever the need arises
- Provides a flexible investment approach that helps investors to navigate volatile and uncertain market conditions without compromising on portfolio performance
- Takes into account new ideas, strategies, and market conditions while devising investment strategies
- Portfolio managers provide customized services considering the investors’ financials and long-term investment objectives, without sticking to any single investment strategy.
Asset Management Process
Asset management involves the following processes or steps:
- Assessing the existing investment portfolio and identifying the purpose for having them in the portfolio
- Identifying the investment objectives of the individual and ensuring that they are aligned with the investment portfolio
- Coming up with customized investment solutions and identifying new capital assets for investment
- Determining risk tolerance and appropriate asset allocation
- Implementing the investment strategy and creating the investment asset portfolio
- Monitoring the performance of the investment portfolio and fine-tuning it based on changing market trends
Types of asset management
Technically, an asset is anything that has value and hence needs to be managed. Going by this broad definition, fixed assets can range from machinery to buildings and monitoring them comes under the purview of fixed asset management. Likewise, digital asset management refers to the management of digital assets such as photographs. However, for the purpose of this article, we are limiting our discussion to the management of financial assets such as cryptos, stocks, bonds, and ETFs. Broadly speaking, there are two types of financial asset management.
Active and passive portfolio management
Active management and passive management are two investment approaches that are popular in the financial asset management space.
Active management of a portfolio includes frequent buying and selling of investment assets based on market conditions with the larger aim of outperforming the stipulated benchmark index. Managers of equity mutual funds, for instance, are active managers. It requires an in-depth knowledge of various investment opportunities and a thorough understanding of market trends. Asset managers charge a fee for managing individual or institutional portfolios.
Conversely, passive portfolio management is a rather laidback approach to investment management. The idea is to track the benchmark index and replicate its performance, not outperform it. The low portfolio churn also keeps the costs low, drawing investors in droves. For example, index mutual funds are a good example of passive investment.
To sum up, active portfolio management is suitable for investors with a high-risk appetite, while passive investing would work best for those who are risk-averse.
Four pitfalls to avoid in asset management
Asset management is a complex process, and mistakes do happen, which eventually impact the wealth creation process. Understanding these common mistakes will help you avoid them and make better and more informed decisions. Let us find out what these are.
Investing without a plan: Investing without a proper strategy often leads to losses. It is a best practice to come up with an investment framework and invest according to the plan for generating better returns over the long term.
Falling for herd behavior: It is well known that human beings tend to follow crowd behavior. In finance, it refers to the trend where people follow what others are doing in the market. It is fueled by two emotions, fear and greed. When the stakes are higher, it’s natural to get swayed by the noise in the market. However, it’s important to make rational decisions in investing and not let emotions affect your decision-making.
Not caring about investments: People often have a tendency to invest once or twice a year and forget about their investments for the next few years, thinking that they will appreciate in value. This practice severely impacts portfolio returns and often leads to losses. Track your investment assets regularly and be an active investor.
Being impatient: Being impatient is one of the most common mistakes people make in the market. There is no shortcut to success in asset management and wealth creation as it takes time to create value and generate high returns. Therefore, it is crucial to stay patient to get rewarded handsomely over the long term.
How does it work?
Truth be told, it is a combination of financial services and financial planning. It helps to ensure sustenance and allows investors to grow their wealth over the long term.
Asset management involves a comprehensive review of your individual financial situation and existing investment portfolio. Armed with an understanding of investors’ risk appetite, goals, and lifestyle, it aims to devise a targeted financial plan for managing investments and creating wealth.
More importantly, asset management also involves constant monitoring of how the investment is performing. Not just monitoring, it follows a proactive approach to limit losses in case of market turbulence and upgradation of the financial plan as and when required.
To conclude, it would be prudent to distinguish between asset management and wealth management. Though they are somewhat similar, wealth management is more holistic as it takes care of the individual’s financial well-being over the long term. On the other hand, asset management seeks to leverage an individual’s investment to maximize returns through a well-defined and targeted investment strategy.
What is asset management in simple terms?
Asset management is the practice of strategically overseeing, acquiring, maintaining, and disposing of investments to maximize growth, achieve financial goals, and optimize wealth over time.
What are the 3 main asset management types?
The main asset management types are Digital Asset Management (DAM), Fixed Asset Management, and IT Asset Management (ITAM). Each focuses on specific asset categories.
What does it asset management do?
IT Asset Management (ITAM) tracks and manages an organization’s IT assets, ensuring accurate records, preventing unnecessary purchases, ensuring compliance, and optimizing resource utilization.
What is asset management as a job?
Asset management as a job involves overseeing and maximizing the value of an organization’s assets, analyzing risks, preparing financial reports, and identifying investment opportunities.