Portfolio Management Services

What is Portfolio Management Service?          

Portfolio Management Service (PMS) is a facility offered by a portfolio manager with the intent to achieve the required rate of return within the desired level of risk. An investment portfolio can be a mix of stocks, fixed income, commodities, real estate, other structured products, and cash. A portfolio manager is a licensed investment professional who specializes in analyzing the investment objectives of the investor and has a vast knowledge of the various instruments in the market. The portfolio manager is better positioned to make informed decisions for investments in securities as opposed to a layman. 

PMS is a customized service offered to High Net-worth Individuals (HNI) clients. The service is tailored as per the investor’s return requirements and the ability and willingness to assume the risk. An Investment Policy Statement (IPS) is drafted by a PMS to understand the financial position and needs of the client. The portfolio manager ensures that the return requirements coincide with the risk profile. Before executing the optimum portfolio, PMS also studies the various constraints such as time horizon, tax applicability, liquidity, and other unique considerations of the client. 

What are the types of Portfolio Management Services?

Active Portfolio Management
This form of portfolio management aims at beating the performance of a market index such as Nifty. An active portfolio manager will take different positions than that of the tracking index, actively buy and sell securities as per institutional research to create more returns than the index. However, to generate an excess return, the strategy undertakes a higher level of risk.

Passive Portfolio Management
Such a PMS strategy aims to mimic the performance of an index by investing in the same securities with similar weights. This is known as indexing or index investing. The transaction costs, resulting from securities turnover, are low as compared to active management as the portfolio churning is at a minimum. However, incurring transaction costs leads to an overall return being lower than the tracking index. The returns of the portfolio are pegged to the market returns. Therefore, the variance in returns is low.

Discretionary Portfolio Management
The portfolio manager is given complete control of the portfolio and is free to adopt any strategy which is suitable to the IPS. Such PMS demand higher involvement for decision making justifying higher fees associated with discretionary portfolio management. This is the best option for clients with limited time and knowledge of investing.

Non-discretionary Portfolio Management
The PMS will only suggest investment ideas while the investor will be responsible for choosing the recommendation and timing. This employs PMS in an advisory capacity as the final call rests with the investor instead of the portfolio manager

What features to look for in a PMS?

  1. PMSes have model portfolios that they furnish when soliciting clients. The PMS model portfolio may be assessed fora track record of company selection and overall performance against the market index.
  2. The performance of the portfolio is solely dependent on the manager’s ability to outperform the market. Therefore, a crucial aspect of selecting PMS is conducting due diligence of the portfolio manager. A portfolio manager’s educational background and experience ultimately point to the competency and expertise that they bring to the fund.
  3. The investment strategy is another parameter that can give PMS an upper hand over other schemes available in the market. It makes sense for the investor to understand the strategy before committing funds. If the strategies are complex, the viability of such strategies over the long-term should be outlined transparently.
  4. The fee arrangement of the PMS based on the performance of the manager should serve a win-win situation. The profit-sharing of returns is typically 20 percent. Fees charged for the management of the fund should not be over industry standards, which is in the range of 1 to 3 percent. A hurdle rate clause ensures profit sharing with the manager only if the performance of the fund beats the minimum required hurdle rate.
  5. Customer support and transparency are valued by investors, especially for discretionary portfolios. PMSes appraising portfolio performance frequently benefits from customer engagement and establish a long-standing agreement.

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