All you need to know about Portfolio Management Services

Interested in portfolio management services for your wealth generation goals? Find out how they work, here.
Portfolio Management Services
3 min
28 March 2024

Portfolio management services (PMS) are a type of investment service that offer customised and personalised solutions to high-net-worth individuals (HNIs) who want to invest in various asset classes such as equity, debt, gold, real estate, etc. PMS are different from mutual funds, which are pooled investment vehicles that offer standardised and diversified portfolios to investors. PMS are tailored to suit the specific needs, goals, risk appetite, and preferences of each individual investor.

Types of portfolio management services in India

There are two main types of portfolio management services in India: active and passive. There are also two sub-types of portfolio management services: discretionary and non-discretionary.

  • Active portfolio management
    Active portfolio management is a type of PMS where the portfolio manager actively monitors the market conditions and makes frequent changes to the portfolio composition, allocation, and rebalancing. The aim of active portfolio management is to generate higher returns than the benchmark index or the market average by exploiting the market inefficiencies, trends, and opportunities. Active portfolio management involves higher risk, higher cost, and higher involvement of the portfolio manager.
  • Passive portfolio management
    Passive portfolio management is a type of PMS where the portfolio manager follows a predefined strategy and does not make frequent changes to the portfolio composition, allocation, and rebalancing. The aim of passive portfolio management is to replicate the performance of the benchmark index or the market average by investing in a fixed basket of securities that mirror the index. Passive portfolio management involves lower risk, lower cost, and lower involvement of the portfolio manager.
  • Discretionary portfolio management
    Discretionary portfolio management is a type of PMS where the portfolio manager has the full authority and discretion to make all the investment decisions on behalf of the investor. The investor does not have any say or control over the portfolio composition, allocation, and rebalancing. The portfolio manager acts as a fiduciary and is responsible for the performance and risk management of the portfolio. Discretionary portfolio management offers convenience, expertise, and trust to the investor.
  • Non-discretionary portfolio management
    Non-discretionary portfolio management is a type of PMS where the portfolio manager acts as an advisor and provides recommendations and suggestions to the investor. The investor has the final say and control over the portfolio composition, allocation, and rebalancing. The portfolio manager acts as a facilitator and is not responsible for the performance and risk management of the portfolio. Non-discretionary portfolio management offers flexibility, transparency, and involvement to the investor.

Objectives of portfolio management

  • To achieve the desired return on investment (ROI) as per the investor’s goals and expectations
  • To minimise the risk of loss or volatility of the portfolio as per the investor’s risk tolerance and appetite
  • To optimise the portfolio diversification and allocation as per the investor’s preferences and constraints
  • To align the portfolio with the investor’s time horizon, liquidity needs, and tax implications

Key elements of portfolio management

  • Portfolio analysis: This involves assessing the current portfolio composition, performance, risk, and return of the investor. It also involves identifying the investor’s profile, goals, risk appetite, preferences, and constraints.
  • Portfolio planning: This involves designing a suitable portfolio strategy, policy, and model for the investor. It also involves selecting the appropriate asset classes, securities, and weights for the portfolio.
  • Portfolio execution: This involves implementing the portfolio plan by buying and selling the securities as per the portfolio model. It also involves monitoring the portfolio performance, risk, and return on a regular basis.
  • Portfolio review: This involves evaluating the portfolio performance, risk, and return against the investor’s goals and expectations. It also involves making necessary changes to the portfolio composition, allocation, and rebalancing as per the market conditions and the investor’s feedback.

Portfolio management process

  • Step 1: Define the investor’s profile, goals, risk appetite, preferences, and constraints.
  • Step 2: Conduct a portfolio analysis and identify the current portfolio composition, performance, risk, and return.
  • Step 3: Develop a portfolio plan and select a suitable portfolio strategy, policy, and model.
  • Step 4: Execute the portfolio plan and buy and sell the securities as per the portfolio model.
  • Step 5: Monitor the portfolio performance, risk, and return on a regular basis.
  • Step 6: Review the portfolio performance, risk, and return against the investor’s goals and expectations.
  • Step 7: Revise the portfolio plan and make necessary changes to the portfolio composition, allocation, and rebalancing as per the market conditions and the investor’s feedback.

Benefits of investing in portfolio management services

  • Customisation: PMS offer customised and personalised solutions to the investors as per their specific needs, goals, risk appetite, and preferences. PMS allow the investors to choose the type, style, and theme of the portfolio as well as the portfolio manager.
  • Expertise: PMS offer professional and experienced portfolio managers who have the knowledge, skills, and resources to manage the portfolio effectively and efficiently. PMS also offer access to research, analysis, and insights from the portfolio managers and their teams.
  • Transparency: PMS offer regular and detailed reports and updates on the portfolio performance, risk, and return to the investors. PMS also offer online access and visibility to the portfolio holdings, transactions, and valuations to the investors.
  • Flexibility: PMS offer flexibility and convenience to the investors as they do not have to worry about the portfolio management and can delegate the responsibility to the portfolio manager. PMS also offer the option to switch between different portfolio managers, strategies, and models as per the investor’s satisfaction and feedback.

Conclusion

PMS offer various benefits such as customization, expertise, transparency, and flexibility to the investors. However, PMS also involve higher risk, higher cost, and higher involvement of the portfolio manager. Therefore, you should do your due diligence before investing in such services.

Frequently asked questions

Is portfolio management a good service?

Portfolio management is a service that involves managing the investments of clients according to their risk appetite, financial goals, and market conditions. Portfolio managers are professionals who have the expertise and experience to create and execute investment strategies for their clients. Portfolio management can be done through different types of services, such as discretionary or non-discretionary, active or passive, and customised or standardised.

What is the difference between mutual fund and portfolio management?

Mutual funds are one of the most popular forms of portfolio management services in India. They are pooled investment vehicles that collect money from investors and invest it in a diversified portfolio of securities, such as stocks, bonds, money market instruments, etc. Mutual funds offer several benefits to investors, such as professional management, liquidity, diversification, convenience, and affordability.

Portfolio management service (PMS) is a more flexible and customised form of portfolio management than mutual funds. PMS allows investors to have more control over their investments and tailor them according to their specific needs and preferences. PMS also offers higher returns potential than mutual funds by investing in niche or alternative assets that may not be available in mutual funds.

Are PMS risky?

PMS is not risk-free but it involves higher risk than mutual funds because it offers higher returns potential but also higher volatility and uncertainty. PMS requires more research skills and analytical abilities from the portfolio manager than mutual funds because it involves investing in niche or alternative assets that may not be well understood by most investors.

Is PMS better than mutual funds?

PMS may be better than mutual funds if you have:

  • A high net worth
  • A long-term investment horizon
  • A high risk appetite
  • A preference for customised or alternative investments
  • A need for professional guidance
Which is better - AIF or PMS?

Alternative investment funds (AIF) are a type of PMS that invests in unconventional or non-traditional assets, such as private equity, venture capital, hedge funds, real estate, commodities, etc. AIFs aim to generate alpha over the relevant market index by exploiting market inefficiencies or opportunities. AIFs are suitable for high-net-worth investors who have a high risk tolerance and a long-term horizon.
There is no conclusive data to say whether AIF is better than PMS. Professional guidance from a financial advisor and careful research can help you decide which direction you wish to move in.

What is a portfolio manager?

A portfolio manager is a person who provides portfolio management services to clients. A portfolio manager can be an individual or a body corporate that has obtained a valid certificate of registration from the Securities and Exchange Board of India (SEBI). A portfolio manager must meet certain eligibility criteria and follow certain regulations while providing portfolio management services.

What fees can a portfolio manager charge from their clients for the services rendered by them?

The fees charged by a portfolio manager depend on the type of service they provide and the agreement they have with their clients. The fees can be fixed or variable depending on the performance of the portfolio or the client’s satisfaction. The fees can also include other charges such as entry fee, exit fee, transaction cost fee, etc.

Who can invest in PMS?

Individuals and non-individuals such as HUFs, partnerships firms, sole proprietorship firms and body corporates can all invest in PMS.

Who is a prime PMS investor?

A prime PMS investor is an investor who has a high net worth, a long-term investment horizon, a high risk appetite, and a preference for customised or alternative investments.

What are the modes of investments in PMS?

There are two main modes of investments in PMS: lumpsum and systematic investment plan (SIP). Lumpsum means investing the entire amount at once, while SIP means investing a fixed amount at regular intervals.

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