Portfolio Management Services: From benefits to types; all you need to know

In an increasingly complex financial landscape, investors are constantly seeking effective ways to manage their wealth. Portfolio Management Services (PMS) have emerged as a popular investment option in India, offering tailored solutions to meet individual financial goals.

PMS allows investors to leverage professional expertise to maximise returns while minimising risks. Let's explore the meaning of PMS, its types, and benefits, providing a comprehensive understanding for prospective investors.

What are portfolio management services?

Portfolio management services refer to professional investment management services provided to clients who wish to invest in financial markets. Under PMS, a portfolio manager is assigned to manage the investor’s funds, making informed decisions on behalf of the client. The primary goal is to optimise investment returns based on the client's risk tolerance, financial objectives, and investment horizon.

Types of portfolio management services

PMS can be categorised based on the level of control and the investment strategy employed:

Discretionary Portfolio Management: In discretionary portfolio management, investors delegate decision-making authority to the fund manager. This hands-off approach allows the manager to make investment decisions aligned with the investor's objectives and risk tolerance. While this type typically incurs higher fees due to greater manager involvement, it leverages professional expertise for timely adjustments in response to market dynamics.

Non-Discretionary Portfolio Management: Non-discretionary portfolio management fosters a collaborative relationship between the investor and the fund manager. Here, the manager provides recommendations and insights, but the final investment decisions are made by the investor. This advisory role suits those who wish to remain engaged and informed throughout the decision-making process.

Active Portfolio Management: Active portfolio management focuses on continuously monitoring and adjusting the portfolio to capitalise on market trends and opportunities. Fund managers actively buy and sell assets with the goal of outperforming the market index. This strategy relies on in-depth research and analysis to make informed decisions, emphasising performance enhancement.

Passive Portfolio Management: In contrast, passive portfolio management aims to replicate the performance of a market index or specific asset class. This strategy involves minimal trading and is centred on long-term investment, utilising vehicles like Exchange-Traded Funds (ETFs) and index funds. It seeks to achieve returns similar to the tracked index while minimising transaction costs.

Robo-Advisors: Robo-advisors represent automated platforms that utilise algorithms to create and manage investment portfolios. These platforms assess the investor's financial goals and risk tolerance to develop a diversified portfolio. Known for their cost-effectiveness and accessibility, Robo-Advisors have gained popularity among tech-savvy investors.

Benefits of portfolio management services

The numerous benefits of availing portfolio management services are extensive. Here are some of the most important ones:

Asset Diversification: The primary advantage of PMS is the robust investment research and diversification they offer. Managed by skilled fund managers, PMS employs both technical and fundamental analysis to inform investment decisions, determining optimal entry and exit points. This holistic approach aligns with clients' overall financial plans and provides access to diverse investment avenues, such as real estate, commodities, structured products, debt instruments, and foreign assets.

Portfolio Customization: A standout feature of PMS is its customization. Investors can tailor their asset mix based on their risk appetite and investment objectives. Non-discretionary PMS allows clients to approve investment decisions, granting them control over their portfolios, which are kept separate and independent from others.

Regulatory Compliance: Operating under the Securities and Exchange Board of India (SEBI), PMS must meet stringent regulatory requirements. SEBI mandates a minimum investment of ₹50 lakhs for clients, while portfolio managers are required to maintain a minimum net worth of ₹5 crore, certified by chartered accountants.

Transparent Fee Structure: PMS offers flexibility in fee structures, allowing investors to choose between fixed and performance-based fees. Detailed statements outline expenses, ensuring transparency regarding costs.

Real Time Access: Many PMS utilise technology to provide investors with online access to their portfolio details, including real-time valuations, holdings, and expenses.

Dynamic Portfolio Rebalancing: PMS employs an active investment strategy, dynamically adjusting portfolios based on market conditions. This approach focuses on maximising both short- and long-term gains while maintaining overall portfolio quality.

Cost Considerations: One significant drawback of PMS is the higher cost structure. While the expense ratio for equity mutual funds typically ranges from 0.1% to 2.25%, PMS fees can vary between 0.25% to 2.5%, depending on the level of customization offered. This increased cost can substantially impact returns, particularly during challenging market conditions.

Additionally, some PMS may have performance-based fees, entitling them to higher commissions if they outperform the market, further affecting overall investor returns. Here is the chart to get better insights.



(source - pms bazaar)

Conclusion

Portfolio Management Services offer a valuable investment avenue for individuals looking to optimise their wealth while leveraging professional expertise. With tailored strategies, diversification, and professional management, PMS empowers investors to navigate the complexities of financial markets.

By understanding its types and benefits, investors can make informed decisions that align with their financial goals, ultimately paving the way for a more secure financial future in India. Whether you prefer a discretionary or non-discretionary approach, PMS can be a strategic addition to your investment portfolio.

Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited