Portfolio Management Service: A Smart Investment Choice or Not?

Category: Finance

Investment is traditionally defined as the "commitment of money to receive more money later". An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth. What is Portfolio Management? Portfolio management is the art and science of selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of a client, a company, or an institution. Portfolio management services or PMS offer customised investment solutions to investors to help them attain their financial goals. Portfolio management services construct investment portfolios across various investment options, and portfolio managers take care of the investment portfolio. Portfolio management services help investors maximise returns over time by focusing on the time horizon, risk profile and investment objectives. Many High-Networth Individuals (HNIs) opt for portfolio management services as tailor-made portfolios are constructed after considering investment horizon, risk tolerance, liquidity, and taxation. Moreover, entities offering PMS services must be registered with SEBI, eliminating fraud and malpractices. Types of portfolio management services? Active Portfolio Management: The main objective of the portfolio manager is to maximize returns. By distributing your investments across different asset classes, markets, and companies, the portfolio manager uses the Active Portfolio Management approach to try and lower the risk of your investments. This causes a larger turnover as compared to the passive style. Passive Portfolio Management: This method focuses on fixed profiles that are in line with the current market trend. In this case, portfolio managers prefer to invest in index funds which grow passively over time with minimal intervention. They have a low turnover but offer reasonably good long-term returns. Discretionary Portfolio Management The portfolio manager is given total control over the holdings and is free to use any approach that works for the IPS. Such PMS require greater participation in decision-making, which justifies higher fees for discretionary portfolio management. For clients with little time and financial knowledge, this is the best choice. Non-Discretionary Portfolio Management The investor will be in charge of selecting the advice and timing while the PMS will just make suggestions for investments. Since the investor, not the portfolio manager, makes the final decision, this uses PMS in an advisory position. Benefits of PMS: Professional Management: PMS provides access to expert portfolio managers who have extensive experience in managing investments and who have a deep understanding of the market. Customization: PMS provides personalized investment solutions that are tailored to the needs and goals of individual investors, which can lead to better returns and reduced risk. Diversification: PMS provides access to a wide range of investment options, including stocks, bonds, mutual funds, and alternative investments, which can help investors diversify their portfolios and reduce risk.