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What are the Portfolio Management Services?

An investment portfolio consists of a range of financial assets like stocks and bonds. So why would need a financial expert to manage the same for you? This post answers the same and a lot more.

Getting started with Portfolio Management Services

Investment portfolios usually consist of investments in a wide range of securities like stocks, bonds and cash equivalents. The mix of these depends on the investor's risk tolerance level, which affects the returns potential of the portfolio investments.

But, to establish a strong investment, can be challenging, especially if you are an amateur investor. It requires extensive knowledge regarding the market and the securities, to be able to calculate the RRR (Return Risk Ratio- a calculation of potential benefits against potential losses) accurately. This is where Portfolio Management Services or PMS comes in.

What Is Portfolio Management Services?

PMS offers tailor-made investment solutions for each investor according to their risk tolerance and financial capability and get the best return. Choices regarding the solutions are related to debt vs equity investment, the risk to return balance and quite importantly, the time horizon of the investor, i.e. how long they are willing to invest.

There are three types of portfolio management services:

There are three types of portfolio management services:

    1. Discretionary

      Investors don't have to make any financial decisions.

      All financial decisions and actions are taken by the portfolio manager.

  • Non- discretionary

    1. Investors don't have to make any financial decisions.

      All financial decisions and actions are taken by the portfolio manager.

  • Advisory

    1. Portfolio managers advise investors and help them make informed investment decisions.

      The investor executes the trade.

Once you opt for a PMS, a separate bank account and a Demat account (short for Dematerialized Account- an account that holds all the securities that you own in digital form) may be opened in your name. All investments must be made in your name, and the shares are held in your name in your Demat account. The bank account is also credited with any gains or dividend payouts from the investments.

Your portfolio manager is given a power of attorney over this bank account and Demat account. However, you can access these accounts to check the status of your investments at any time.

Unlike mutual funds where fund managers have the right to invest the fund however they want, provided they can meet the client's demand at the time of maturity, portfolio managers either offer suggestions or can be entirely responsible for the investments. Also, your portfolio manager has to give you a performance report at least every six months as per the guidelines of SEBI (Securities and Exchange Board of India).

Active vs Passive Management

Management of portfolios happens in two ways:

  • Active Investment Management:

    In this style, the primary objective is to beat the market index to generate higher returns for the investor. A specific index such as Nifty or Sensex is taken as a benchmark, and the investment managers make active decisions on the investments to outperform this market.

  • Passive Investment Management:

    This style involves a passive style of decision making and investment tracking. The objective of this style is to match the performance of a particular index. The index could be a Nifty50 or BSE Sensex, and the investment managers increase or decrease the weightage of investments as per the index it follows.

While the active management style has higher return potential, they also carry a higher risk quotient. Passive style management comes with lower return potential, but also have lower management fees.

Objectives of Portfolio Management Services:

  • Capital Growth:

    This is one of the main responsibilities of a portfolio manager. A portfolio manager always looks for the best investment opportunity that appreciates the capital of the investor.

  • Diversification of Risk:

    This is done to effectively meet the goal of the investor while maintaining a healthy risk-return ratio. Diversification can happen in three ways-

    • Debt Vs Equity:

      While equity investments are known for their high-risk and high return potential, debt instruments can lower the risk of a portfolio and add liquidity.

    • Domestic Vs International:

      A portfolio manager seeks to diversify risk by evaluating investment opportunities in domestic as well as international markets. This helps the investor diversify risk between various economies.

  • Tax Planning:

    There are various tax liabilities that an investor must adhere to while making investments. Moreover, multiple tax provisions can help investors reduce their tax liability. Professionals managing your portfolio ensure that all your investments comply with the tax implications while helping you save tax wherever possible.

  • Rebalancing Portfolio:

    This means reverting to the original mix of securities after the fluctuations or movements in the market tilt the balance towards a particular form of security, and it is usually done annually.

Benefits of Portfolio Management Services

Apart from offering high returns for low risk, some of the other benefits of PMS are:

  • Highly Customisable:

    Based on an investor's risk tolerance and expectations regarding returns, the portfolio manager can diversify the investments.

  • Performance Tracking:

    Most services have websites or apps where the investor can track the holdings in real-time. Unlike mutual funds, where the investor can know the holdings once in a month or a quarter, this gives the investor better control of investments.

  • Maintain Liquidity:

    Healthy liquidity ensures that in times of need, you can sell one or more of your assets to fulfil your immediate requirements.

  • Gain Knowledge:

    While an investment management service helps the investor reach the desired financial objective, it also helps them to improve their financial understanding. Continually updating its investors about various investment strategies and technicalities, they help the investors make an informed choice with future investments.

Opt for a Portfolio Management Service

Like any other form of investment, portfolios also carry with them the factor of risk, albeit much lower than other types of investments. The risks involved are clearly stated in the terms and conditions of any management service you would choose to avail. Make sure you go through the documents thoroughly and that you clearly understand every clause, before signing up for the same, for your safety.