Portfolio Management Services (PMS)
What Is Portfolio Management?
Portfolio management is the art and science of selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of a client, a company, or an institution.
Professional licensed portfolio managers work on behalf of clients, while individuals may choose to build and manage their own portfolios. In either case, the portfolio manager’s ultimate goal is to maximize the investments’ expected return within an appropriate level of risk exposure.
Portfolio management requires the ability to weigh strengths and weaknesses, opportunities and threats across the full spectrum of investments. The choices involve trade-offs, from debt versus equity to domestic versus international and growth versus safety.
Goal Alignment
Portfolio management involves building and overseeing a selection of investments that will meet the long-term financial goals and risk tolerance of an investor.
Active Strategy
Active portfolio management requires strategically buying and selling stocks and other assets in an effort to beat the broader market.
Passive Strategy
Passive portfolio management seeks to match the returns of the market by mimicking the makeup of a particular index or indexes.
Key Elements of Portfolio Management
The key to effective portfolio management is the long-term mix of assets, properly diversified and regularly rebalanced to stay aligned with your goals.
Asset Allocation
The long-term mix of assets generally means stocks, bonds, and “cash” such as certificates of deposit, along with alternative investments like real estate or commodities. Aggressive profiles lean toward growth stocks, while conservative profiles weight toward bonds and blue-chips.
Diversification
Since it's impossible to consistently predict winners, the prudent approach is a basket of investments providing broad exposure. Real diversification is made across various classes of securities, sectors of the economy, and geographical regions to reduce volatility.
Rebalancing
Done at regular intervals (usually annually), rebalancing returns a portfolio to its original target allocation. It generally involves selling high-priced securities and putting that money to work in lower-priced ones, capturing gains while keeping risk in check.
Understanding Portfolio Management Styles
Investors who implement an active management approach use fund managers or brokers to buy and sell stocks in an attempt to outperform a specific index, such as the S&P 500 or the Russell 1000.
An actively managed investment fund has an individual portfolio manager, co-managers, or a team of managers actively making investment decisions. Success depends on a combination of in-depth research, market forecasting, and the expertise of the management team.
Active managers pay close attention to market trends, shifts in the economy, changes to the political landscape, and news that affects companies. This data is used to time the purchase or sale of investments. Active managers claim these processes boost the potential for returns higher than simply mimicking an index.
Trying to beat the market inevitably involves additional market risk. Indexing eliminates this particular risk, as there is no possibility of human error in terms of stock selection.
Passive portfolio management, also referred to as index fund management, aims to duplicate the return of a particular market index or benchmark. Managers buy the same stocks listed on the index, using the same weighting.
A passive strategy portfolio can be structured as an ETF, a mutual fund, or a unit investment trust. Index funds are branded as passively managed because the manager's job is to replicate the index rather than select the assets.
Because index funds trade less frequently, they incur lower expense ratios and are more tax-efficient than actively managed funds. The management fees assessed on passive portfolios are typically far lower than active strategies.
Passive management is a set-it-and-forget-it long-term strategy. Often referred to as indexing or index investing, it aims to duplicate the return of a particular market index or benchmark and may involve investing in one or more exchange-traded (ETF) index funds.
Active management involves attempting to beat the performance of an index by actively buying and selling individual stocks and other assets. Closed-end funds are generally actively managed.
How is PMS different from a Mutual Fund?
| Specification | PMS | Mutual Fund |
|---|---|---|
| Objective | Portfolio Management Services provide tailor-made professional services to meet the investment objectives of various investors. | Mutual Fund schemes are structured to meet the fund's stated investment objective. |
| Ownership | Investors will directly own the portfolio stocks in their DP. | Mutual Fund Trustees own the stocks of the fund, and investors are allocated Units. |
| Minimum Investment | As per SEBI regulation, minimum thresholds for investing in PMS is Rs 50 Lakhs by way of stock or cash (or combination). | Mutual Fund investment thresholds as low as Rs. 500. |
| Customization | Customization is possible to meet special or specific requirements of investors. | No customization possible in mutual funds. |
| Portfolio Construction | Majority of PMS portfolios are focused portfolios constructed within 15 to 25 stocks. | Majority of MF portfolios are diversified portfolios with more than 50 stocks. |
| Portfolio Stock Weightage | PMS fund managers have the flexibility to allocate any weightage to single stocks. | Mutual Funds restrict maximum allocation cap to a single stock of not more than 10%. |
| Ideal Investor | The Investment solutions provided by PMS cater to a niche segment of clients. | Mutual Funds being structured for a wide mass of retail investors. |
Who is the ideal investor for PMS?
The investment solutions provided by PMS cater to a niche segment of clients. Minimum investment for PMS is 50 lakhs as per SEBI regulation. These clients can be either Individuals or Institutional entities who require a dedicated investment management service.
The PMS platform is ideal for investors who seek to invest in asset classes like equity with professional management, and require investment advice for long-term wealth creation.