The problem of plenty is haunting individuals looking to park money in portfolio management services (PMS). It is not just the proliferation of the number of players offering these schemes that is making the selection process cumbersome. It is the variety of PMS, which are on offer, that is giving potential customers a headache.
Gone are the days when the manager would ask the customer for his or her risk appetite and invest the money accordingly. These days one would be bombarded with prefixes such as fundamental, value, quantitative, event-driven and so on. In short, if you have a corpus of . 5 lakh and upwards and looking to park your money in a PMS, you better get a grip of these prefixes before heading for a meeting with the PMS manager.
SPOILT FOR CHOICE
Brokerage houses, boutique investment advisors and even asset management companies (AMCs) offer PMS services these days to rich clientele. While some may ask for a corpus of . 5 lakh to start a PMS, most insist on a higher starting amount — typically around . 25 lakh and upwards.
And here are some of the PMS services offered by players in the market.
FUNDAMENTAL PMS:
As the name suggests, the fund manager builds a portfolio of stocks on the basis of fundamental research. The portfolio could be made up of large-cap or small-cap stocks or a mix of different market capitalisations. This is the most popular PMS product and it is further customised to investor needs. Karvy Private Wealth, for example, offers a large-cap PMS, a mixture of large and mid-cap PMS and a mid-cap PMS. The performance of these schemes is generally compared with the benchmark index. The fund managers objective is to outperform the benchmark over a period of time.
VALUE INVESTING:
It is a philosophy founded and developed by Sir Benjamin Graham and followed by the likes of Warren Buffett. It involves buying stocks quoting at a discount to their intrinsic value. It is generally long-term in nature and stocks bought have to be held for as long as 3-5 years. Brokerages like Motilal Oswal offer products based on this style of investment.
QUANTITATIVE PMS:
They build quantitative models using fundamental and economic data to build a portfolio across different asset classes like equities, gold and debt to generate absolute returns. The idea is to deliver consistently positive returns in various market environments, without the volatility you see in the equity market. The fund manager makes dynamic decisions on when to enter and exit equities, debt, and gold, based on fundamental and macroeconomic data like valuations, fund flows, supply and demand, and crisis indicators.
EVENT-DRIVEN PMS:
Here, the fund manager tries to spot stocks that are likely to turn around in a short period of time, say four to six months. So if there is a stock that has fared poorly this quarter and is expected to bounce back in the next couple of quarters, it could find a place in the portfolio. Or, if the fund manager expects a lot of orders in the infrastructure sector, companies that could benefit from them would get into the portfolio.
MUTUAL FUND PMS:
The fund manager creates a portfolio of mutual fund schemes, depending on the risk profile of the investor. For example, a portfolio of large-cap schemes will be provided to someone with moderate risk appetite. Or a combination of large-cap, mid-cap and small-cap funds could be provided for investors with a higher risk appetite. The monthly statement of the scheme won't be just the transaction statement and it goes beyond connoting the net asset value. If the PMS scheme has invested in five funds, we tell the investor his exposure to each stock by combining these five funds.
TREAD THE PATH CAREFULLY
Do the prefixes to the PMS schemes make sense to you? If no, you should do some reading and be ready with questions to clear your doubts when you meet your manager. Also, you should ask yourself: why am I opting for the PMS route? Especially, when there are several mutual funds schemes that will serve the same purpose.
Its recommend investors to go in for a PMS scheme only when there is a clear distinction on how it is different from a mutual fund scheme. Else, he recommends investors to stick with mutual funds.
Investors who want higher interaction with a fund manager or prefer concentrated portfolio bets use the PMS route. Simply put, if you want to be more involved in the decision making process of your investments, you should opt for a PMS service. Also, you can make personalised aggressive calls in a PMS. For example, even if you foresee a crash, you can sit on 100% cash in a PMS, which won't be possible in a mutual fund scheme.
Next, shift your focus to the PMS service provider. Remember, unlike mutual funds, where there is vast data available in the public domain, there are no such details about PMS providers. That is why reference from friends or relatives or existing clients of the PMS provider may play a crucial part in choosing one. Another important aspect is the fee structure. In a mutual fund, the fee structure is as defined by the regulator. But, with a PMS service provider, the fee model could be fixed or variable. The investor even can opt for a combination of fixed and variable. For example, entities like Karvy offer the variable fee model, where the investor shares 20% of his profits with the firm. Some others work on the fixed fee model and the investor has to pay an annual fee.
As for the disparate nomenclature of PMS services, try to understand the concept on which a particular scheme works. Remember, you have to choose an investment product based on your risk profile and return expectations. Make sure the fancy name and investment strategy matches your profile.
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