Portfolio management services – An emerging investment option

It’s hard to make money but its harder to preserve it. If you earn money but don’t invest it properly, inflation will erode your wealth. To preserve it, your funds should at least earn a rate of return that can beat the inflation rate. Everyone wants to maximize their returns on investment without capital erosion.

There are many different investment avenues such as fixed deposits, fixed income securities, equity, commodities, and mutual funds. Different products have different risks associated with them and different factors affecting their returns. To deal in each product you need very particular sets of skills and knowledge.

Equities and commodities as asset classes require constant monitoring. A person who has earned money may not have required the knowledge, time or inclination to manage it. If you are someone who falls into this category, PMS is good option for you.

As clients go, portfolio management services (PMS) is best suitable for those who have a large surplus to invest, as the minimum portfolio size accepted by portfolio managers range between 25 lakhs to 5 crore. It helps if clients are inclined towards equity and commodity markets as these offer great returns and prove portfolio managers with the scope to create value out of the investments. And finally, the investments should have a reasonably long time horizon to reap full benefits of PMS.

So if you don’t have much surplus and you are an equity-averse investor, you can opt for the services of a financial planner or an advisor rather than going for a PMS.

Portfolio managers first analyze your risk appetite and identify individuals goals and objectives. They will then create a basket of stock, bonds and mutual funds to fit into these personal investment goals and objectives. They provide different types of portfolios based on different strategies.

A few portfolio managers provide standardized portfolios for sums as small as 5 – 10 lakh, but for customized portfolios they take a minimum investment size of 25-50 lakh. Portfolio managers also accept your existing securities, bonds and mutual fund holdings along with cash which can be then be revamped according to your goal and preferences.

Benefits:

  • Asset allocation: The most important and crucial part of financial planning is your asset allocation. You may know the sectors you want to invest your money but you may not have an idea of how much of your surplus you should invest in each sector. PMS ensures that your asset allocations are tailor-made for you based on your investment objectives and risk appetite.
  • Professional management: your funds in PMS are managed by a professional who has the required set of skills, knowledge and experience and therefore you don’t need to worry about the ups and downs of the market. You can relax and concentrate on your other commitments as your funds are in safe hands.
  • Risk control: Portfolio managers follow some well defined investment philosophies and strategies based on intense research. They also use some highly specialized software that helps them in achieving better returns
  • Timing: As they are backed by intense research, portfolio managers can switch your portfolio if they perceive a big risk in a particular asset class and thus preserve the value of your portfolio.
  • Convenience & transparency: once you handover your money to portfolio managers you are free of all the administrative hassles such as dealing with brokers and tracking the markets, as all will be taken care of by the portfolio managers. They also provide periodic performance reports. Some portfolio managers also give you online access to your portfolio details such as performance statements, portfolio holding reports, transaction statements, capital gains/loss, providing a high level of transparency.
  • Flexibility: If you compare PMS to mutual funds investment, PMS provides greater flexibility than mutual funds as they are not tied to SEBI regulations and can freely use derivatives instruments to increase your returns, or invest in any sector according to requirements. It also provides flexibility to the investor – if an investor wants more weightage given to a particular sector, he/she can ask the portfolio manager to do that. This is not possible in case of mutual fund investments.
  • Personal relationship manager: Portfolio managers provide you a designated relationship manager who will help you understand your financial objectives and will advise you the right investment strategy and will provide you periodic updates.

Portfolio managers usually provide two types of PMS – Discretionary and non discretionary. Discretionary portfolio management clients cannot make decisions for the management on his/her portfolio.

The portfolio manager will independently take decisions according to the client’s recorded objectives. Non-discretionary portfolio management allows, the client to be actively involved in the decision-making concerning the management of the portfolio.

Lastly but most importantly, how do you pay for the PMS?
Mostly, portfolio managers charge either a fixed fee based on the value of your portfolio – around 2-2.5 %. Or they may ask for performance-linked management fee which will then include a fixed fee of 0.5-1.5% plus a share of your profit – usually 15-20% of that earned over and above the minimum rate of return. Portfolio managers allow their clients to choose between the two.

The author is a Research Analyst working at Apnaloan.com Services (P) Limited.

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