What is Portfolio Management?
The financial industry today offers a gamut of investment options to the common man. There is so much information available on various products and services that, very often it leaves the common man confused as to the choice of investments. Most often an investor finds himself inadequate to perform the task of managing his own investments due to lack of knowledge, time, education, foresight and resources. This scenario gives rise to the services of an entity that provides professional portfolio management services.
Portfolio Management
An investor uses the help of professional investment counsel to advise him on his investment policy. He discusses his objectives and the counsel chalks out an investment solution to obtain those objectives. Portfolio Management is the process of designing an investment plan to meet the specified objectives of the clients and balance risk against returns.
Each portfolio scheme is different from the other and consists of an ideal portfolio. These schemes are designed on the following parameters:
- Age of the client
- Risk bearing capacity of the client
- Amount of investment
- Purpose of investment viz. marriage, education, property, retirement, etc.
An investor may belong to a particular scheme offered by the portfolio manager, but the investment will be completely different from an investor belonging to the same scheme. This is because of the timing of investment, the amount of investment in every stock and the withdrawals for requirements.
Types of Portfolio Management
There are two types of PMS services available to the investors:
1. Discretionary PMS
The portfolio manager uses his discretion and chooses investments to meet the specified objectives without any interference of the client. However, at the beginning of the contract the investor can specify his preferences of stocks and the portfolio manager has to choose investments bearing in mind the specified stocks.
2. Non-Discretionary PMS
The portfolio manager informs the clients of the investment opportunities andits, at the sole discretion of the client to choose the timing of his investment.
SEBI Guidelines for Portfolio Management Services
Who can provide PMS
PMS can be provided by a body corporate who is approved and registered with SEBI. The applicant has to pay a non-refundable application fee of Rs.1lac. He has to have a minimum net-worth of Rs.2crore. On registration he has to pay a sum of Rs.10lacs. This registration is valid for 3 years and he has to pay renewal fees of Rs.5lacs, 3 months before the expiry of registration. The SEBI provides a list of names of PMS providers whose services can be availed by an investor.
Portfolio Management Limits
SEBI lays down a minimum investment limit of Rs.5lacs to be able to avail of Portfolio Management services. However, different service providers are allowed to specify the minimum investment criteria which cannot be lower than Rs.5lacs. For eg.,HSBC AMC has a minimum requirement of Rs.50lacs, Reliance has a limit of Rs1cr., etc.
Portfolio Management Charges
- SEBI lays down that the fees charged by Portfolio Managers may be a fixed sum or a percentage of profits or a combination of both. Again, every service provider has a different fee structure.
- Most of them charge 3% at the time of buying the PMS.
- The fund management charges are between 1% to 3% which is debited on a quarterly basis.
- The service provider may debit a percentage on profits over and above the assured returns earned on a portfolio
- Custodian charges,demat charges, transaction charges and audit charges.
Documents Required for PMS
An account can be opened by
- Submitting a cheque favoring the service provider for the minimum investment limit or
- Transferring stock to the account, where the total stock market value is more than the minimum investment limit.
The application form has to be submitted with:
- Photographs
- Duly signed PMS agreement
- Duly signed Power Of Attorney
- New demat a/c opening form
- Copy of PAN card
- Copy of Proof of Identity
- Copy of Proof of Residence
Besides these requisite documents, every service provider have their own additional document requirements.
Taxation
The client is provided with a complete audited profit and loss statement for the accounting year chalking out short term and long term losses/gains by his portfolio manager. The client pays taxes on the basis of the statement. It is the prerogative of the client and his chartered accountant to treat the income as business income or capital gains. The rate of taxation is different under both heads. Most of the investors pay capital gains tax on trading income unless otherwise specified by the income tax authorities.
Difference between Portfolio Management and Mutual Fund
Portfolio Management and Mutual Fund investments are professionally managed funds. However, there are some major differences between them:
- While portfolio management is an individual investment, mutual fund is a combined investment of many individuals.
- An individual can influence the choice of stocks in PMS, but not in a mutual fund.
- Investor is a direct owner of the company stocks in PMS, while he is only a holder of units in a mutual fund that holds stocks in its name.
- While the Net Asset Value (NAV) is affected by the entry/exit of investors in a mutual fund, the NAV is affected only by the individual himself while investing/exiting stocks.
- Investment in mutual fund can be as small as Rs.5000/- while investment in PMS has to be a minimum of Rs.5lacs.
Redressal of Grievance
There are many registered portfolio managers with SEBI. The track record of the PMS can be known only by word of mouth, through client who have used their services or through their own brochure. In case of any grievance while dealing with the portfolio managers, SEBI has formed a cell to deal with them. Investors may send their complaints to:
Office of Investor Assistance and Education,
Securities and Exchange Board of India,
SEBI Bhavan
Plot No. C4-A, ‘G’ Block,
Bandra-Kurla Complex, Bandra (E),
Mumbai - 400 051
Contributed By: Aruna Sharma |
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Mrs. Sharma holds a Masters in Financial Management from University of Mumbai. She has graduated from the University of Mumbai. | |
