PMS Types

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PMS is an exclusive service extended to a few clients to personalize the approach of investing in a variety of financial segments. An investor should know about PMS in detail, and thus, understanding the PMS types is just as important.

Today, we’ll discuss the PMS Types. Before we dive into the details of PMS, you must understand the definition of a portfolio. PMS is the short form for Portfolio Management Services.

Also, read Portfolio Management Services Regulations SEBI and How to Create Portfolio Like Warren Buffett?

A portfolio is a bunch of financial segments like shares, derivativescommoditiescash, ETFs, and closed-end funds. It is a general notion that a portfolio consists of financial instruments only. That’s not the case, though.

A portfolio also includes real estate, private investments, art, and other financial classes.

Having understood the definition of Portfolio, let’s move ahead to the Meaning of Portfolio Management Services.

Portfolio Management Services features are extended not only by brokers but also by a lot of well-known companies. The client base for PMS is High Networth Individuals (HNIs) and Institutions.

The companies that extend the service have to appoint fund managers to manage the client’s portfolios.

The management of portfolios is done by calculating the risks involved and reducing the Portfolio’s negatives. 

When a fund manager handles a portfolio, the aim is to reduce human errors that could harm the investor’s interests.

The latest PMS SEBI regulation is that the minimum investment in PMS is required 50 lakh for availing PMS Registration service, which was increased by SEBI from 25 lakh in November 2019. 

A fund manager might handle your investments, but you retain the right of ownership. The investments are held and carried out using your Demat account.

Also, read PMS Review

The fee or charges for the assistance are agreed upon before the Portfolio is handed over. The two parties, investor and fund manager, sign an agreement to reduce malpractices in the future.

Types of Portfolio Management Services

Portfolio management is a task that requires a great understanding of how the stock market works.

An investor chooses to hand over the work of creating and managing a portfolio in the case when he’s unequipped, either in terms of knowledge or time, for trading to generate profits. As an investor why you need a portfolio is required.

Every portfolio management strategy is based on balancing the risk against performance.

Whatever financial segment you choose to invest in, to maximize your returns in relation to your risk appetite, you’ll have to determine the investment selection strategy’s strengths and weaknesses.

The period of investment, if one chooses portfolio management, is by default long term.

There are four types of portfolio management services. They are as follows:

  • Active Portfolio Management
  • Passive Portfolio Management
  • Discretionary Portfolio Management
  • Non-Discretionary Management

They have been discussed in detail below.


Active Portfolio Management

A stock market expert manages a portfolio using active portfolio management techniques. Implementing an active strategy is aimed at generating market returns better than the market.

The fund manager has to actively evaluate the market to make decisions about buying financial segments that are undervalued and sell them when they exceed the normal.

A deep understanding of the business cycle, quantitative analysis of the stock market, and broad diversification are required for this strategy.

The two big USPs of this type is that the fund manager is allowed to tweak the plan when necessary, and it has the potential to generate returns that can beat the market.

The active strategy is highly suitable for people who are experienced in the field and have a high-risk appetite. Below is the list of a few cons of the strategy:

  • The fees of fund managers executing this strategy are insanely high.
  • The impact of human errors is significant.
  • Fit for investors willing to take a greater risk but generate higher returns too.

Your investment’s volatility rate increases many folds when the stock market’s irregularity is attached to this strategy’s unpredictability.

Thus, choose the PMS type that aligns with your interests.


Passive Portfolio Management

The passive strategy of managing a portfolio is precisely opposite to the active portfolio management. Managers that follow this strategy don’t believe in beating the market. Rather, they choose the safe side to invest.

Investors that choose the passive approach have the intent to take the minimum risk possible. They build a portfolio diversified across sectors by imitating the stock market indices like SENSEX or NIFTY.

This distributes the sources of risk and leads to minimizing losses.

The companies are chosen based on return expectations from the top companies at the time of investing. Further, the investment in passive strategy is mandatorily long-term. 

Advantages of passive investing are

  • Low cost of implementation
  • They generate consistent gains in the long-term.

Disadvantages of passive investing are

  • Only suitable for long-term investors.
  • A high concentration of security in one place.
  • Opportunity cost against the option to beat the market and earn greater profits.
  • Downside risks could lead to massive losses, and you might not be able to protect your capital.

To make you understand Active and Passive strategy more comfortably, we’ll give you a simple and straightforward example.

For instance, there is a fund manager, following an active strategy, who buys a share of an IT company like Hexaware.

Another manager, believing in passive strategy, buys shares of multiple companies under the BSE IT index.

Both of them are investing the trader’s money in the same sector but might face varying amounts of risk.

How?

The latter will reduce the risk by investing in various companies of small, mid, and large capital values. The former will be subjected to higher risk as – if the share price plummets, the investor’s capital investment might be lost in a second.


Discretionary Portfolio Management

As the word discretionary very clearly suggests, the portfolio manager/fund manager has complete control over the client’s investment decisions.

The manager decides to buy or sell on behalf of the client and uses the strategy as he deems right.

This strategy should be executed by individuals who have a deep understanding and extensive knowledge of investing in the stock market. Advantages of discretionary investing are:

  • An investment expert does the handling of the Portfolio.
  • No decision making stress for the client.
  • If you and the manager have similar buy and sell suggestions, the management process is more straightforward.

One considerable disadvantage is that of the higher fee charges.

With complete trust in the fund manager, confident clients choose to hand over all the investments to a discretionary manager. So, discretionary investing is not for you if you want to have the reins of investment in your hands.


Non-Discretionary Management

A non-discretionary portfolio manager can be called a financial advisor as the final decision lies in the client’s hands. The manager only comes up with suggestions for investing, and approval is ultimately client dependent.

The manager provides you with the pros and cons of the particular investment strategy and the corresponding financial segments but won’t execute without the client’s permission.

This strategy has the significant benefit of getting access to a financial advisor without giving up the controls on your investments.

One of the most significant downsides to this strategy is that quick shifts in the Portfolio might cost you due to your approval.


Conclusion

Portfolio management services or PMS is a service provided by the investment experts to assist the stock market traders or investors in building a great portfolio and maintaining it.

Their primary aim of these service providers is to reduce the losses by diversifying the client’s Portfolio.

There are four PMS types – Active, Passive, Discretionary, and Non-Discretionary.

Active portfolio management is for investors or traders with higher risk appetite, and the chances of receiving higher profits increase with the increase in risk-taking ability.

Passive portfolio management is a safer investing strategy. It is for investors who wish to invest for an extended period and want to reduce the risk of losing their capital.

Discretionary portfolio management is for traders and investors who trust their fund managers completely. The powers to buy, sell or hold the securities are given to the manager with no necessity to seek the investor’s approval.

Non-Discretionary Portfolio management is like seeking advice from a financial advisor for investments but retaining the power to buy, sell, or hold the financial segments.

The fund manager has to seek the investor’s approval before executing any profitable trade for the client.

We hope you understood the various types of PMS and would choose the best of the four.

Good luck!


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