Portfolio Management Services (PMS) is a specialized service focused on wealth creation, with a personalized experience that reflects the financial preferences & aspirations of investors. In this comprehensive guide, we will explore the intricacies of PMS, its regulatory framework, investment strategies, and the benefits it offers to discerning investors.
Understanding Portfolio Management Services (PMS)
Portfolio Management Services, regulated by the Securities and Exchange Board of India (SEBI), provide a professional and tailored approach to managing investment portfolios for HNIs. PMS providers, acting as portfolio managers, offer expert advice, administration, and active management of securities on behalf of their clients. To ensure the quality and credibility of the services provided, SEBI mandates that PMS providers maintain a minimum net worth of Rs 5 crore.
Who Can Avail of PMS?
PMS is specifically designed for HNIs who possess a substantial net worth. Additionally, clients are required to deposit a minimum of Rs 50 lakh or securities of equivalent value into their PMS accounts.
While this minimum investment threshold means that not everyone can invest in a PMS, the regulator believes that this ensures that only investors with adequate risk appetite participate in these services. Savart does not necessarily agree with this because we believe that proper financial education at grassroots level and during onboarding to the service can ensure that even retail investors can subscribe to the wealth creation opportunities that a well-run PMS can offer.
Types of Portfolio Management Services
There are primarily two types of portfolio management services: Discretionary Portfolio Management Service (DPMS) and Non-discretionary Portfolio Management Service (NDPMS).
Discretionary Portfolio Management Service (DPMS)
Under DPMS, portfolio managers have the authority to independently manage the funds and securities of investors. This approach allows for greater flexibility in investment decisions, tailored to the specific needs and risk appetite of the clients. DPMS typically invests in securities, money market instruments, and units of mutual funds listed or traded on recognized stock exchanges.
Non-discretionary Portfolio Management Service (NDPMS)
In contrast, NDPMS operates based on the directions and preferences of the client. Portfolio managers, in this case, manage the funds in accordance with the client’s instructions. Although the level of autonomy is reduced, NDPMS still offers expert guidance and strategic investment advice to optimize returns.
PMS & Cycles
Understanding the market cycle is crucial to understand the wealth creation potential of a PMS from the time of investment and to make the most of such a service:
Phase 1: Early-Cycle
The early-cycle phase marks the bottoming out of the economy, signalling the end of a recession and the commencement of a recovery. During this phase, economic activity gains momentum, inflationary pressures remain low, and monetary policies are accommodative. It is in this phase that economically sensitive asset classes, such as stocks, tend to perform exceptionally well.
Phase 2: Mid-Cycle
As the economy exits the recovery phase, it enters the mid-cycle phase characterized by sustained and broader economic growth. Inflationary pressures gradually rise, monetary policies become tighter, and the yield curve experiences some flattening. While economically sensitive assets continue to benefit from the growing economy, their relative advantage may narrow.
Phase 3: Late-Cycle
During the late-cycle phase, the economic expansion matures, and inflationary pressures persistently rise. The yield curve may eventually become flat or even inverted. This phase often indicates a need for caution, as it precedes an economic contraction and potential recession.
Phase 4: Recession
The final phase of the cycle, a recession, represents an economic contraction. Monetary policies shift from tightening to easing, aiming to stimulate economic growth. Assets less sensitive to economic fluctuations tend to be more resilient during this phase.
Benefits of Portfolio Management Services
1. Customized Solutions
PMS provides personalized investment strategies considering the risk profile, financial goals, and preferences of each individual client. This tailored approach ensures that investments align with the client’s objectives. For example, a client has a financial goal to accumulate INR 5 crores in 3 years to construct a house and he/she ends up investing in an all small-cap portfolio. There is a great probability that the expectations of the investor and the portfolio’s objective may not match, and small businesses need enough time, patience to create wealth. While the portfolio itself might be good, it may not be the most suited for the client.
2. Professional Expertise
By availing PMS, investors gain access to the expertise of experienced portfolio managers who possess in-depth knowledge of financial markets and investment strategies. These professionals monitor and adjust portfolios, making informed decisions to optimize returns while managing risks.
Savart believes in the unbiased & logic-intuition of AI more than the limited knowledge of a human fund manager, given that creating alpha consistently in the long term is an extremely rare skill. This is the reason most fund managers fail to beat the market & also why Savart bets on fully automated research for its advisory & PMS services.
3. Active Management
PMS offers active management of investment portfolios, allowing portfolio managers to take advantage of market opportunities and swiftly respond to changing market conditions. This proactive approach ensures that investments are aligned with prevailing market trends and potential growth areas while also attempting to minimize the associated taxes through activities like tax-loss harvesting.
4. Diversification
Diversification is a crucial aspect of successful investing. PMS offers diversification across various asset classes, sectors, and geographies, minimizing the impact of market volatility and enhancing the potential for consistent returns.
5. Risk Management
Portfolio managers constantly strive to manage & mitigate risk associated with the clients’ investments through careful monitoring and strategic asset allocation.
Regulatory Framework and Changes
As the regulator of the capital markets, SEBI ensures the smooth functioning and integrity of portfolio managers. From April 1, 2023, SEBI has implemented several changes including:
1. Investor Protection
SEBI now mandates that PMS providing companies with assets under management (AUM) of Rs 1,000 crore or more must employ an automated system with minimal manual intervention. This ensures efficient funds and securities management, safeguarding the interests of investors.
2. Enhanced Disclosure
SEBI has ensured that investors are provided with greater information & insight into the portfolio allocation, order placement and settlement. The details of margins and collateral segregation among clients also need to be provided, thus promoting transparency and reducing potential conflicts of interest.
Conclusion
Portfolio Management Services present a unique opportunity to leverage the growth potential of Indian enterprises for creating wealth. Amidst the hundreds of portfolio managers offering a PMS, it is critical to choose an ethical and principled portfolio manager who can generate alpha and help achieve financial goals.
Disclaimer: The information provided in this article is for educational and informational purposes only. It should not be considered as financial or investment advice. Readers should conduct their due diligence and/or consult their qualified financial advisor or professional before making any investment decisions.