Portfolio Management Services in India: Definition, Types, Elements and Objectives

Investment Portfolios consist of investments across stocks, fixed-income instruments, commodities, real estate and gold. Investors must select suitable investments to attain financial goals based on risk tolerance. 

However, novice investors cannot gauge their risk profile and may not have the knowledge and time to pick suitable investments to build their portfolios. People who need help constructing an investment portfolio can opt for portfolio management services. 

What are portfolio management services?

Portfolio management services or PMS offer customised investment solutions to investors to help them attain their financial goals. Portfolio management services construct investment portfolios across various investment options, and portfolio managers take care of the investment portfolio. 

Portfolio management services help investors maximise returns over time by focusing on the time horizon, risk profile and investment objectives. 

Many High-Networth Individuals (HNIs) opt for portfolio management services as tailor-made portfolios are constructed after considering investment horizon, risk tolerance, liquidity, and taxation. Moreover, entities offering PMS services must be registered with SEBI, eliminating fraud and malpractices. 

Portfolio management services are popular among HNIs, HUFs, partnership firms, NRIs, Association of Persons, Sole Proprietorships etc. Portfolio management services specify a minimum ticket size for investor portfolios. 

For instance, PMS started with a minimum ticket size of Rs 5 lakh in 1993, subsequently hiked it to Rs 25 lakh. Moreover, SEBI further hiked the PMS ticket size to Rs 50 lakh in November 2019. 

What are the types of Portfolio Management Services in India?

Active Portfolio Management:

Active Portfolio Management focuses on generating higher returns than a benchmark index like the Nifty 50 or the BSE Sensex. The portfolio manager actively manages the investment portfolio, and the research team picks the requisite securities. 

Investors who have a higher risk appetite and seek higher capital gains opt for Active Portfolio Management. The portfolio manager selects undervalued stocks and sells them at a higher price when they realise their true potential. Moreover, the portfolio manager diversifies the portfolio across investment options to mitigate investment risk. 

Passive Portfolio Management:

Passive Portfolio Management involves mimicking the performance of a market index such as the Nifty 50. The fund manager tracks and replicates the stock market index portfolio to give investors returns in line with the index it tracks. 

Passive Portfolio Management focuses on index funds which are mutual funds that mimic market index portfolios. Moreover, the Passive Portfolio Management strategy involves lower transaction costs as the portfolio manager doesn’t churn the portfolio frequently compared to Active Portfolio Management. 

Discretionary Portfolio Management:

The Discretionary Portfolio Management Services portfolio manager has complete control over the portfolio and can adopt any strategy to achieve investment objectives.  

Investment Decisions are entirely at the portfolio manager’s discretion, and the clients don’t have much of a say in investment decisions. 

Non-Discretionary Portfolio Management:

Under Non-Discretionary Portfolio Management Services, the portfolio manager gives investment ideas. However, clients decide whether to take up these investment ideas while the execution of trades rests with the portfolio manager. 

In Non-Discretionary Portfolio Management Services, the fund manager suggests investment strategies and works according to the direction given by the client. 

What are the objectives of Portfolio Management?

Capital appreciation: Many investors opt for PMS to earn higher returns from a professionally managed portfolio. The focus remains on risk-adjusted returns from investments. 

Regular income: Many people opt for PMS to get a steady income. The main objective of the portfolio manager is the protection of capital and consistent benefits from investments. 

Liquidity: Many investors opt for PMS to convert their investments into cash as soon as possible. It is vital if they need money to start a business. In such cases, the portfolio manager builds customised portfolios to cater to clients’ liquidity needs. 

Tax Planning: PMS focuses on tax planning to increase the after-tax return of investments. It helps to construct a portfolio after looking into the tax efficiency of investments. In simple terms, PMS offers the twin advantages of capital appreciation and higher after-tax returns from investments. 

What are the key elements of portfolio management?

Asset Allocation: 

The portfolio manager focuses on asset allocation, the investment strategy that balances risk and returns. It involves spreading investments across the asset classes of stocks, fixed income securities, cash, commodities and real estate. Asset Allocation makes sure that a sharp fall in one asset class does not impact the overall portfolio performance.

Diversification:

Diversification is a technique of allocating capital across a variety of investments. While asset allocation focuses on the percentage of stocks, bonds and cash in your portfolio, diversification involves spreading assets across asset classes within these buckets. Portfolio managers of PMS use the diversification strategy to enhance the portfolio’s risk-adjusted returns.

Rebalancing:

PMS Portfolio Managers focus on rebalancing the portfolio to align with investors’ financial goals and risk tolerance.

Conclusion:

Portfolio management focuses on developing investment strategies to help investors attain their financial goals based on the investment horizon and risk profile. 

Portfolio managers build customised portfolios to match clients’ requirements of capital appreciation, regular income or liquidity.