What are Portfolio Management Services and Their Benefits?

PMS is a professional investment service where skilled portfolio managers and capital market professionals manage your investment portfolio in equity stocks, debt, structured products, fixed income instruments, etc., with a research team assisting them in their job to optimize the investment at risk-adjusted levels. Often PMS as a service can also be extended only to manage an equity portfolio. The service is particularly aimed at HNIs and UHNIs.

What is Portfolio Management Services?

PMS is a methodical strategy to increase profits while lowering the risk associated with your assets. You may use it to make informed judgments that are backed by thorough research and verifiable facts without having to do any work. You are also more equipped to handle market difficulties. There are different types of PMS prevalent in the industry.

Types of Portfolio Management Services

1. Based on the management of the funds:

• Active portfolio management: The main objective of portfolio management is to achieve maximum returns. By distributing your assets across multiple asset classes or stocks that are uncorrelated or negatively correlated, the asset manager uses the Active Portfolio Management approach to try and lower the risk. An active portfolio manager consistently monitors to ensure that the portfolio remains aligned with market opportunities. This causes a larger turnover as compared to the passive method. It also enables the portfolio to tap into opportunities that may have been otherwise missed due to passive management. However, it is important to note that active portfolio management often entails a moderate to high-risk profile.

• Passive portfolio management: This approach concentrates, as the name suggests, on fixed portfolio distributions that align well with the prevailing market trend and are also equipped enough to weather turbulent times in the market. In this instance, investment managers choose to invest in index funds since they increase over tenure passively and with no management. The intervention of the investment manager or fund manager is minimal in this type of fund management. This is often considered a relatively conservative approach to portfolio management. The turnover rate is low in the case of passively managed funds. However, over the long haul, they do provide attractive returns.

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2. Based on the control of the investor:

• Discretionary Portfolio Management: Under this type, the investment manager has complete control over the portfolio. He is entrusted with the management of a particular portfolio. The manager chooses a suitable strategy based on your objectives, risk tolerance, and tenure and executes them without having to consult the investor. However, the portfolio manager always works in accordance with the portfolio's mandate or per the portfolio's objectives. The best interest of the investors is preserved under this type of management. It particularly works well when the portfolio manager requires to take immediate action on the portfolio based on the market direction.

• Non-Discretionary Portfolio Management: Under this method, the investor has complete control over his portfolio. The portfolio manager’s role is similar to that of an advisor. In this method, the portfolio managers advise you on investing, but the final decision is yours. Based on your approval, the portfolio managers will take the appropriate action on your behalf. This could potentially cost time and effort, especially in equity markets, when often, you may have to execute tactical transactions to mitigate risk.

Objectives of Portfolio Management

• Risk Mitigation and Diversification: One of the primary objectives of portfolio management is to spread risk across a variety of assets. This reduces the impact of poor performance in one area and helps to ensure more stable returns over time.

• Optimizing Returns: Portfolio management aims to maximize returns given a specific level of risk tolerance. It involves a careful balance between conservative and aggressive investments to achieve the highest possible return on investment.

• Capital Preservation: While seeking returns is important, preserving capital is equally vital. Portfolio managers should strive to protect the initial investment, especially for clients with a lower risk appetite.

• Liquidity Management: Ensuring that the portfolio maintains sufficient liquidity to meet short-term financial needs or take advantage of emerging investment opportunities is a crucial objective.

• Tax Efficiency: Portfolio management often involves strategies to minimize tax liabilities, such as tax-loss harvesting, to enhance after-tax returns for investors.

• Long-Term Growth: Many investors seek long-term growth in their portfolios, aiming to build wealth for retirement or other significant financial goals. Portfolio management objectives should align with these goals.

• Alignment with Investor Goals: Effective portfolio management considers the specific financial goals and risk tolerance of each investor. Customization is key to aligning the portfolio with individual objectives.

• Cost Management: Reducing investment costs, such as fees and expenses, is an objective that can significantly impact overall returns. Efficiently managing these costs can enhance investor outcomes.

• Regular Monitoring and Adjustments: Portfolios should be continually monitored to ensure they remain aligned with the investor's objectives. Adjustments should be made as market conditions and personal circumstances change.

• Ethical and Sustainable Investing: For some investors, aligning their investments with ethical or sustainable principles is a key objective. Portfolio managers may need to integrate environmental, social, and governance (ESG) considerations into their strategies.

Benefits of PMS

1. Investment is managed by a highly qualified and experienced fund manager:

Utilizing a good PMS or a portfolio management service has manifold benefits, of which the primary one is to realize that your money is being handled by capable people. They know how to handle money in various market situations and in volatile markets. Thus, your portfolio would be managed effectively, and their efforts will be focused on gradually increasing your profit margin.

2. Tailor-made plans which align with your goals and risk profile:

Your financial goals and risk profile are assessed, and the investing strategies that the portfolio managers work out are aligned with your risk profile and your goals. This is starkly different from the mutual fund experience, where the fund is managed on a large scale subject to the mandate in the scheme information document. There is no effort to customize the portfolio in accordance with the needs of the investors. However, in the case of PMS, there is a lot of effort to screen the investor and understand his / her requirement and invest in accordance with their goals and preferences.  They continue to adjust the plan in light of your age, risk tolerance, budget, and income.

3. Efficient risk management strategies:

The primary intent of a portfolio manager is to increase returns while decreasing the risk for your investment. They concentrate on spreading out the risk so that you won't lose money when market trends alter. They endeavor to bring in the best opportunities in the market that complement your portfolio. The effort is also to foresee extreme risks in the market and realign the portfolio to ensure that the portfolio does not lose much value during such a downturn.

4. Periodic review and monitoring of portfolio:

A portfolio manager will closely monitor each asset's performance and the regular returns produced. Your investment is changed to achieve your financial goals based on prevalent market trends to ensure that you stay aligned with the objective of optimized returns at risk-adjusted levels.

Finding the right PMS for you

Here are some pointers on how to choose the right PMS for you:

1. Past track record of the company:

Look at the past track record in terms of the performance of their funds. Further, you can also reach out to other clients for testimonials to ensure that you commit your funds to a company that provides best-in-class service. Also, look for a company with a proven track record of weathering extreme conditions in the market. It is important to note that many PMS houses could not weather 2008-type crises and had to shut down their business. You would not want to be associated with such a company.

2. Evaluate the experience and expertise of the portfolio manager:

The portfolio manager should be fully informed on the market, current investing strategies, and associated dangers. It makes no sense to ask someone whose understanding of market policies is lacking. Check on the credentials and past experience of the portfolio manager before you put your money in their hands.

3. Read the fine print and understand the charges and offerings:

One cannot emphasize enough on this aspect. Often we miss reading through the fine print and remain blissfully unaware of the charges applicable to any particular service. Engaging with a company that provides the most competent service is important.

4. Alignment to your personal investment objective:

The portfolio manager should be interested in working towards your personal objectives. There should be no other ulterior motive whilst managing your funds. Always ask as many questions as possible to be in the know of where and why your money is invested in a particular scheme. Being an informed investor is very important, given the slew of options available.

Questions to ask before signing up for PMS

Here are some questions that you can ask before you sign on. They will provide a deeper understanding of the offerings. This will also help you make the most of the service being offered.

1. What type of assessment and customization would be extended to the investor?

The PMS house should endeavor to provide optimal customization. They should align with your financial goals and risk-return profile.

2. What is the overall investment philosophy of the fund manager?

The investment philosophy will provide insight into how the fund manager proposes to manage extreme conditions in the market. It also provides insight into how the investments would be vetted before investment.

3. What is the plan of continuity in the event the fund manager quits the company?

This is one of the most critical aspects to ponder. Often, the fund builds its reputation on the shoulders of the fund manager. Upon the exit of the fund manager, there are instances where the fund suffers. It is integral to understand how the PMS house would manage the transition from one fund manager to another.

4. What is the universe of asset classes and stocks that the company would consider investing in?

This would provide insight into the vastness of their offerings and whether they provide the latest offerings in the market. It also gives a sense of whether there are enough options to cater to your specific financial goals and risk profile.

5. What are the research techniques/process involved?

Many PMS houses do not have a very strong research team, nor do they have proper screening tools. It is imperative that you assess their capability in this regard to ensure that you are getting the maximum out of your investment. A seasoned research team with good tools can do wonders for your investment.

6. Past performance of their existing funds and their risk mitigation strategies

If the PMS house has been around over the long haul, then you need to understand the past performance and the risk mitigation strategies that they have implemented to weather the crises.

7. What are their pre-screening techniques and rebalancing ideologies?

Pre-screening and rebalancing techniques give you an idea of the quantum of turnover. A stringent and well-defined pre-screening strategy could help build a portfolio with a strong foundation. The rebalancing should be done in the best interest of the investor and not benefit the PMS house.

8. How do they account for the charges and taxes whilst computing the alpha of the fund?

Fees and taxes are integral to any service. Always be in the know of how much is applicable and how it will be accounted for whilst calculating the returns on the fund.

9. How is the benchmarking of performance done? What performance ratios are considered and why?

The benchmark of the fund and the performance ratios used to monitor the fund should align with the industry standard. If you do not understand them, then take time to learn about them to help you assess if they align with your interest.

10. How is liquidity managed? When do you consider liquidating a position?

Although PMS as a service should be looked at with a long-term perspective, there may be emergencies when you may need to pull out funds. You can always question them on how the liquidation would be conducted. You can also gain some insight into how they propose to liquidate the positions and the criteria for doing so.

How can we help?

Equirus PMS focuses on taking concentrated bets for the long term in high-quality publicly listed Indian companies at reasonable valuations. The portfolio managers focus on generating significant outperformance over the broader Indian indices over a 3–5 year period.

Leveraging a long track record of value creation by institutional research teams, Equirus PMS intends to focus on businesses with leadership positions in industries with long runways. They intend to be early in the business discovery, thus providing maximum earnings growth with limited churn. Their investment philosophy is founded on the synergies of value and quality.

To qualify as a potential investment in the portfolio, companies must have several qualities most relevant to long-term growth—qualities recognized and rewarded over time by investors—and should also be selling at a price below their intrinsic value. With 95% of the portfolio manager’s net worth invested in the fund, the interest of the fund manager is aligned with that of the customers. Many of these factors are key differentiators for Equirus.

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You can always reach out to our financial counselors for a detailed discussion on how our service may fit into your scheme of things.