The world of finance can be tricky, especially for those who are not well-versed with the basics of the industry. It is easy to confuse one concept for another. For example, one may think that portfolio management and mutual funds are the same, but they’re not. These two might share some similarities, but they are vastly different concepts.
What is Portfolio Management?
Portfolio management is the art of managing someone’s investments in the form of cash, shares, bonds, or mutual funds. Portfolio managers usually use software like ServiceNow service portfolio management to help them with their processes. Portfolio management is tailor-made for one investor.
There are four types of portfolio management, namely:
- Active Portfolio Management – In active portfolio management, the portfolio managers actively buy and sell securities to make sure that their clients get maximum profits.
- Passive Portfolio Management – This is when portfolio managers deal with a fixed portfolio that was created to match the current market.
- Discretionary Portfolio Management Services – In discretionary portfolio management, an individual gives a portfolio manager complete control over their investment needs, documentation, filing, paperwork, and the like. Portfolio managers have the full right to make decisions on behalf of the individual.
- Non-Discretionary Portfolio Management Services – Unlike discretionary portfolio management, the portfolio manager can only advise their client on what is good or bad for them. In a non-discretionary portfolio management service, the client reserves the full right to make their own decisions based on the portfolio manager’s guidance.
What are Mutual Funds?
Mutual funds are funds that a collective has pooled together to give to money managers. These money managers invest the pool of money in various securities such as bonds and stocks. It is a shared investment that works like buying stock in companies. In 2017, more than $4 trillion was invested in mutual funds in America.
There are different kinds of mutual funds with different goals.
- Open-End Funds – These are mutual funds that don’t have a fixed amount, which is why they’re bought and sold on demand. Shares can be added on. With open-end funds, shares can be issued based on the net asset value or redeemed when the investors decide to sell. It is the most common kind of mutual fund.
- Close-End Funds – This kind of mutual fund involves a set number of shares traded among investors, in an exchange. Their prices change according to supply and demand. This means that funds are often at a discount to net asset value.
- Load Funds – In load funds, the investor has to pay a sales commission when they invest in the shares. This is in addition to the net asset value of the fund.
- No-Load Funds – This is when there is no commission attached to the mutual fund. These are more likely to offer high returns for their investors.
What’s the Difference?
Asking the difference between portfolio management and mutual funds is akin to asking the difference between a chef and a pie. Basically, the main difference between these two concepts is this: portfolio management is a service that professionals provide, while mutual funds are investment vehicles. Portfolio management identifies the specific needs of each client and invests accordingly. Mutual funds invest according to the mandate in the offer document.