Introduction to Portfolio Management Services

Portfolio Management Services help individuals and institutions to put their investible surplus to meet the investment objectives with certain amount of risk. It is primarily for High Net-Worth Individuals, as SEBI has a mandatory minimum investment limit of Rs.25 Lacs. It is the choice of the investor to invest in the form of stocks or cash equivalent.

PMS can be understood as both standardized and tailored solution which match the investment objective of the investor. The market does not remain constant; consequently we have to keep making changes in our portfolio in order to match the investor objectives and improve rate of return on our investment. It also offers transparency of charges and better access to the information.

PMS Services can be of two types:

Discretionary or Non-Discretionary

When the Fund Manager has the authority to make buy/sell decision without the consent of the investor, it is called Discretionary Portfolio services. Whereas when fund manager does not have the authority to make buy/sell decision directly, it is a non-discretionary portfolio.

Approaches to Portfolio Management

Why do people invest? Returns! But does every investment yield good returns? Does every investment have the same amount of risk? No.

So what do we do? We segregate our money into various proportions and invest small amounts in different functional areas, and thus creating a Portfolio. While understanding the importance of diversification and how its aids to mitigate loss, there should be an alignment between the investor goals and the mix of assets in our portfolio, which also determines the components of risk and return. Investors predominantly tend towards investing in highly liquid assets such as Equity securities, Fixed Income Securities, Cash and Cash Equivalents.

Different approaches to a Portfolio:

Aggressive Portfolio: This approach is followed by people with high risk appetite who want more than average returns on their investments. There might be loses in the short term, hence the investor needs to have long term horizon to achieve positive gains. Usually such investments are for over a period of 5 years. They are heavily equity dominated, wherein investor might put up to 100% of his money into equity.

Moderate or Balanced Portfolio:It is suited for people who want moderate returns over a not so risky investment. They are for longer durations and maintain a balance between risk and return. These investors look for long term Capital Appreciation. In this approach money is invested in equity as well as fixed income securities such as bonds, mutual funds etc.

Conservative Portfolio: Risk-averse investors opt for conservative investments such as fixed income securities with a focus on current income and a motive to preserve capital. They put high priority on safety of their capital and are short-term oriented. Subsequently they want to safeguard their portfolio against inflation. This is dominated by Fixed Income Securities with some portion dedicated to Equity.

However creating a ‘Portfolio’ is just the beginning. We need to manage our portfolio efficiently to generate return and reduces loses. Portfolio Management is a task which requires in market depth research and understanding of financial securities.

The two primary ways to manage your portfolio are:

Active Portfolio Management: The objective of this approach is to outperform certain market benchmarks. Fund Managers do not believe that the markets are efficient and thus they target specific market indices in order to make their strategy as to get better returns than them. Since the return we expect is high, thus the risk involves is high. It requires in depth research, market forecasts, experience and expertise, where fund managers make predictions which differ from the consensus opinion. Investors usually hire individual portfolio managers or a team of them, and such investments are susceptible to changes in market trends, economical and political landscape.

Passive Portfolio Management: The task of passive portfolio management is that of similar to index fund management, as fund managers try to mimic the benchmark indices. Since they believe markets are efficient, and follow their benchmarks, as a consequence they generate returns similar to their benchmark indices. They do not intend to outperform these indices. Since they do not have much investment decisions to make.Portfolio can be structured as an Exchange Trade Fund (ETF), Mutual Fund, or a Unit Investment Trust. They are intended for longer periods and change only in certain circumstances which include change in investor preferences or changes in risk free rate of return. Instead of trading securities, they passively brand their funds. It is a safer approach as requires less monitoring, the management fee is lower than that of an Active Portfolio Management.

However, Portfolio Management constitutes of much more than investing in multiple funds to generate adequate returns- finding the right mix of assets to invest in, balancing their risk and return, monitoring and revision of your investment and Evaluations.


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