All you need to know about portfolio management services

Among the many investment funds available in India, mutual funds are among the most well-known. However, many of us may also have come across Portfolio Management Services (PMS) that are offered to Indian investors by leading financial institutions.

While both mutual funds and PMS are essentially investment avenues, they differ significantly in their structure, management approach, and investor suitability. In this article, we will discuss what PMS is and the differences between mutual funds and PMS.

• Table of contents

1. What are portfolio management services?
2. How do Portfolio Management Service (PMS) services work?
3. Types of portfolio management services
4. Objectives of portfolio management services
5. What are the key elements of portfolio management?
6. Benefits of portfolio management services
7. Why should you opt for portfolio management services?

What are portfolio management services?

Portfolio management services are offered by a professional portfolio manager or wealth management company. The investment strategy is tailored to meet an individual investor’s specific needs and goals. Unlike mutual funds , PMS investments are personalised, and the investment strategy is based on an individual investor’s objectives, risk tolerance, and investment horizons. Thus, PMS investment portfolios are highly customised and created entirely as per an investor’s preferences or specific goals.

Portfolio Management Services entail higher costs than mutual funds. Since PMS investment involves a personalised approach for each investor, fund managers and AMCs charge a higher expense fee.

Mutual funds have a low barrier to entry, because the funds of multiple investors are pooled together. Therefore, retail investors can enter a scheme with nominal investments of Rs. 100 or Rs. 500. This makes mutual funds accessible to a wide range of investors. In contrast, fund managers and AMCs that offer PMS investment usually impose a higher minimum entry amount The regulatory minimum limit is Rs. 50 lakhs. Hence, Portfolio Management Services can be suitable for institutions and high net worth individuals who have the capacity to shell out the higher investment amount.

Both mutual funds and PMS are mandated by SEBI to ensure timely disclosures of holdings, performance reports, and regulatory and management changes. However, PMS may offer more detailed portfolio reporting as the fund managers seek to provide a personalised service.

How do Portfolio Management Service (PMS) services work?

Unlike mutual funds, where money is pooled from multiple investors, PMS offers customized management based on each client's specific financial goals and needs. Here's an overview of how PMS works:

Client profiling and agreement: The process begins with the portfolio manager assessing the client's financial goals, risk tolerance, and investment horizon. Based on this, a personalized investment strategy is created. A formal agreement is signed, outlining terms such as investment objectives, fees, and reporting frequency.

Portfolio construction: The portfolio manager constructs a portfolio of securities (equity, debt, or a mix) tailored to the agreed strategy. The portfolio is actively managed with decisions based on market research and analysis.

Discretionary vs. non-discretionary PMS: PMS services are offered in two categories: discretionary and non-discretionary. In discretionary PMS, the manager makes investment decisions without client approval for each transaction. In non-discretionary PMS, the manager advises, but the client approves all transactions before execution.

Active portfolio management: The manager actively buys, sells, and rebalances the portfolio based on market conditions and client goals. Ongoing research is conducted to identify investment opportunities, with the aim of outperforming a specific benchmark.

Reporting and communication: Regular reports on portfolio performance, holdings, and significant transactions are provided. Portfolio managers maintain communication to update clients on market trends, strategy, and address any concerns.

Custodial services: A custodian, a separate entity from the portfolio manager, holds the securities in the client’s portfolio, ensuring security and transparency.

Fees: PMS providers charge management fees, performance fees (profit sharing), and custodian fees. These fees are clearly outlined in the agreement between the client and manager.

SEBI regulations: PMS services are regulated by SEBI, ensuring transparency and protecting investors. SEBI guidelines cover client eligibility, disclosure, and code of conduct.

Types of portfolio management services

Broadly, portfolio management services can be of the following types:

Discretionary portfolio management services

In this type, the portfolio manager has full control over investment decisions. They manage the funds and assets on behalf of the client, making decisions based on the client’s investment objectives and risk tolerance.

Non-discretionary portfolio management services

Here, the portfolio manager advises the client on investment decisions, but the final call rests with the client. The manager provides recommendations, and the client chooses whether to follow them.

Advisory portfolio management services

Similar to non-discretionary portfolio management services, the portfolio manager only provides advice and suggestions on investments. However, in this case, the client not only decides which suggestions to follow but also executes the trades of transactions themselves. The manager does not have any authority to do so.

Passive portfolio management services

This approach involves creating a portfolio that mirrors a specific index or benchmark. The goal is to achieve similar returns to the index, with minimal active management. It focuses on long-term growth with lower costs and turnover.

Active portfolio management services

Active management involves continuous monitoring and adjustment of the portfolio to try to outperform the market. The manager actively buys and sells assets to take advantage of market opportunities.

Objectives of portfolio management services

The objectives of portfolio management services (PMS) are designed to align with the financial goals and risk tolerance of individual investors. Here are four primary objectives:

Capital growth

The primary goal of many portfolio management services is to potentially achieve long-term capital appreciation. This involves investing in assets that have the potential to grow in value over time. This is particularly important for investors looking to build wealth for future needs, such as retirement or education.

Risk management

Effective portfolio management aims to mitigate risk through diversification and strategic asset allocation. By spreading investments across different asset classes or sectors, PMS seek to mitigate the impact of poor performance in any single investment. The goal is to achieve an optimised risk-return balance that aligns with the investor's risk tolerance.

Income generation

For some investors, generating a steady stream of income is a key objective. Portfolio management services can focus on creating a portfolio that can potentially provide regular income through dividends or interest payments. This may be especially relevant for retirees or those seeking additional income sources without liquidating their investments.

Liquidity management

Ensuring that the portfolio has sufficient liquidity to meet the investor’s short-term needs may be another important objective. Effective liquidity management helps in meeting unforeseen expenses and taking advantage of new investment opportunities. These objectives are tailored to match the individual needs and financial goals of each investor, ensuring a personalised approach to managing their investment portfolio.

What are the key elements of portfolio management?

Below are some of the important aspects of portfolio management:

Defining investment objectives: The first step is to clearly define specific, measurable, achievable, relevant, and time-bound (SMART) investment goals. These may include retirement planning, funding children's education, or wealth creation. Your objectives will guide your investment strategy and asset allocation.

Asset allocation: This involves distributing investments across various asset classes, such as equity, debt, and gold, based on your risk tolerance, financial goals, and investment horizon. Asset allocation is vital in determining portfolio returns and managing risk.

Security selection: After asset allocation, the next step is selecting individual securities within each asset class. This involves analyzing stocks, bonds, or other instruments to identify those that align with your goals and offer potential returns. For mutual funds, the fund manager selects securities, and your role is to choose the appropriate fund.

Diversification: Diversification spreads investments across different asset classes, sectors, and individual securities to manage risk. It reduces the impact of any single investment on the portfolio. While mutual funds offer diversification, it's also important to diversify across different types of mutual funds.

Risk management: Every investment carries some risk. Portfolio management involves assessing and managing these risks to ensure they stay within an acceptable range. This includes understanding various risks like market, credit, and liquidity risks and implementing strategies to mitigate them.

Performance evaluation: Regularly assessing the portfolio's performance is crucial. This involves tracking returns, comparing performance against benchmarks, and making adjustments when necessary.

Regular review and rebalancing: Over time, market conditions, financial circumstances, and investment objectives can change. It's important to review and rebalance your portfolio periodically. Rebalancing adjusts the asset allocation to maintain the desired risk level and align with goals. It may involve selling some investments and purchasing others.

Tax planning: Taxes can impact investment returns significantly. Portfolio management should consider tax implications and include strategies to minimize tax liability. This includes choosing tax-efficient investments and understanding the taxation of equity versus debt mutual funds.

Benefits of portfolio management services

PMS can offer several advantages to investors, potentially helping them meet their investment needs efficiently and effectively. Here are some key benefits:

Professional expertise: PMS provides access to seasoned professionals with extensive knowledge and experience in investment management.

Customised investment solutions PMS offers personalised and tailored investment strategies that align with an individual’s financial goals, risk tolerance, and investment horizons. Unlike mutual funds or other collective investment schemes, this can help account for an investor’s unique needs and preferences.

Diversification: Effective portfolio management services emphasise diversification across assets. Diversification is a key strategy to mitigate risk.

Regular monitoring and reporting: Portfolio managers monitor and review the investments regularly to ensure they with the investor’s objectives. Investors receive detailed reports and updates on the performance and composition of their portfolios, providing transparency and enabling informed decision-making. Regular monitoring allows for timely adjustments in response to market changes, optimising return potential and mitigating risk.

Flexibility and control: Investors can work closely with their portfolio managers to ensure that the investment strategy aligns with their evolving financial goals and preferences.

Why should you opt for portfolio management services?

You might opt for Portfolio Management Services (PMS) if:

• You have a high net worth and want more customization than mutual funds offer.
• You seek higher return potential than mutual funds and are willing to take on greater risk.
• You want to invest in the stock market but do not have the time or inclination to plan, monitor, and adjust your investments regularly.
• You want professional assistance with your investments.
• You aim to diversify your investments across various asset classes, such as stocks and bonds.

PMS can provide tailored investment strategies to help you manage your wealth effectively.

Conclusion

PMS and mutual funds are both suitable investment vehicles for different different investor needs. Mutual funds offer a standardised, relatively low-cost investment option that is suitable for investors who want a diversified portfolio. PMS investment, on the other hand, offers a highly personalised investment strategy tailored to an individual's specific needs and goals, albeit with higher management costs and a higher investment amount.

FAQs

How are portfolio management services different from mutual funds?

Mutual funds are more accessible, with lower entry points and standardised management, making them suitable for a broader range of investors. SIPs in mutual funds can start at just Rs. 500. Investors can use a SIP mutual fund calculator for help with planning their investments. PMS provides greater flexibility and control, while mutual funds offer simplicity and ease of access.

What is the minimum investment amount for PMS?

The minimum investment amount for PMS is Rs. 50 lakhs.

Can I invest in both PMS and mutual funds?

Yes, investors can invest in both PMS and mutual funds. In fact, many investors use a combination of both as part of a well-rounded financial plan.

How do I start my investments in PMS?

The application process will depend on the asset management company. You can look at the various companies that offer portfolio management services and select one. You can consider their past performance, investment strategy, and fund manager’s experience. You may also choose to consult a financial advisor. Once you have selected the company, you can visit their website to find out the detailed application process.

Are PMS investments risky?

Yes, a PMS investment carries all the risks associated with market-based investments. Among others, these include market risks, which can lead to volatility in the value of the assets, liquidity risk, or difficulty in converting the assets to cash, management risk (the impact of poor decision-making by the fund manager on the investment), credit risk – the risk of default by the issuer of debt securities, and interest rate risk, which is the possibility that a rise in interest rates could lead to a decline in the value of bonds and other fixed-income instruments in a portfolio. Moreover, since PMS portfolios are often more concentrated than mutual funds, they may hold a smaller number of stocks or securities. This concentration can lead to higher volatility and increased risk.

Is PMS better than mutual funds?

It's not accurate to say that PMS is "better" than mutual funds, or vice versa. They are different investment vehicles designed for different types of investors and serve different purposes. The "better" choice depends entirely on your individual financial situation, goals, and risk tolerance. PMS offers personalized management for high-net-worth individuals with a higher risk tolerance, but requires larger investments and has higher fees. Mutual funds are more accessible, with lower fees and better liquidity, but offer less customization.

What is a portfolio manager?

A portfolio manager is a financial expert who manages investments on behalf of individuals or institutions, aiming to meet financial goals while managing risk. They develop tailored strategies based on clients’ needs, execute investment decisions, monitor performance, and communicate regularly. Key skills include financial expertise, analysis, communication, risk management, and decision-making.

Who can invest in PMS?

Portfolio Management Services (PMS) are designed for investors with substantial financial resources and higher risk tolerance. Investors must meet a Rs 50 lakh minimum investment threshold, and the service is also available to institutions. PMS offers personalized management based on specific goals and risk profiles, but involves higher fees and potential lock-in periods.

Who is a prime PMS investor?

A prime PMS investor is someone who meets the financial requirements, has a higher risk tolerance, and seeks personalized investment management. They typically have a significant investable surplus exceeding Rs 50 lakh, clear long-term financial goals, and are comfortable with potential market volatility. Additionally, they are committed to due diligence and engaging with the portfolio manager.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.