Portfolio Management Services Vs. Direct Investing

Investors wishing for above-average returns from their savings (for example: above the FD rates), may opt for portfolio management services, or PMS, offered by various entities registered with the market regulator. Whereas some choose to invest themselves alia direct investing.

Portfolio Management Services (PMS): It is a type of wealth management service usually offered to investors with greater flexibility and higher customization with threshold of 25 lakhs as per SEBI guidelines. PMS is more suitable for long term investors which aim to create wealth in comparison to other investment avenues focusing on the same asset class. The need to generate alpha has been the primary reason why investors are attracted to PMS. Asset under management (AUM) is increasing continuously under PMS as show below.

Direct Investment:  Investing your money in stocks market based on self-analysis or tips received from friends, relatives and well-wishers.

Parameters to look into while comparing them:

Biasness: In case of direct investment client tend to pay more attention to information that supports his opinions while ignoring the rest. In market one needs to follow an investment strategy and choose stocks supporting that. Individual Investors generally overestimate the stock price and look to book small profits. On the other hand, sometimes high conviction bets which are undervalued are not given right allocation. In PMS entry & exits for stocks along with allocation for a stock are arrived after in-depth research.

Asset Allocation: It is about deciding how much to invest in each stock. Asset allocation seeks to optimize the risk/return profile of an investor by investing in a mix of assets that have low correlation to each other. Portfolio manager takes into account the cycle of every sector & systematically allocate the asset.

Risk or Diversification: Diversification is the spreading of risk and reward within an asset class. Diversification seeks to capture the returns of all of the sectors over time but with less volatility at any one time. PMS usually hold a portfolio of 20-30 stocks so investments in these products are less risky whereas a client may buy too many stocks or less than desired number of stocks to make the portfolio too diversified or concentrated respectively.

Handling of Volatility: A client may or may not take appropriate action during highly volatile times. The fear-driven urge to sell at a loss when stock prices are falling or buying an overvalued stock in the fear of missing out plays on individual investor mind. Whereas a portfolio manager collect all the information about market & cash on the opportunity to buy stocks at relatively cheap valuation.

Risk management: The portfolio manager and the team of research analysts, keep a close eye on the market to maximize returns for the investor. It involves examining the risk factors in market, matches investors risk appetite and financial goals whereas in case of direct investment, the onus is on individual to manage positions and take risk management calls.

Portfolio Turnover Ratio (PTR):  Fund managers generally try to keep low PTR which indicates a buy and hold strategy to create wealth. It means that the fund manager is confident about his stock purchases which are bought after extensive research. A high turnover is not necessarily bad, but a consistently high turnover is not desirable because it shows that the fund manager may be chasing momentum stocks.



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