Wealth Management

Faculty: Mr. Aneesh Day

Division C, MBA 2018-20

TOPIC – PORTFOLIO MANAGEMENT SERVICES

NAME PRN ROLL NO
Himanshu Dutta 18020441111 16
Ikshita Tevatia 18020441113 17
Kajal 18020441125 18
Kajal Singh 18020441126 19
Kalappurakkal Sisira Ajaykumar 18020441127 20
Kevin D Nott 18020441135 21

Page 1 of 29
INTRODUCTION

Stock market operations are peculiar in nature and most of the Investors feel insecure
in managing their investment on the stock market because it is difficult for an individual
to identify companies which have growth
prospects for investment. Further due to volatile
nature of the markets, it requires constant
reshuffling of portfolios to capitalize on the
growth opportunities. Even after identifying the
growth oriented companies and their securities,
the trading practices are also complicated,
making it a difficult task for investors to trade in
all the exchange and follow up on post trading
formalities.

Investors choose to hold groups of securities rather than single security that offer the
greater expected returns. They believe that a combination of securities held together
will give a beneficial result if they are grouped in a manner to secure higher
return after taking into consideration the risk element. That is why professional
investment advice through portfolio management service can help the investors to
make an intelligent and informed choice between alternative investments
opportunities without the worry of post trading hassles

Portfolio Management Service is a process of investment analysis and portfolio

management. It's an investment product usually availed by the investors who have
high net-worth. It's more of an investment portfolio monitoring for those who can't do
it for themselves. The reason this service is special is that it gives the subscriber a
complete freedom from the hassles and complexities that are associated with equity
investment. Namely, research and analysis of the stock, keeping track of all the
business and political activities which can potentially have an impact on your
investment. That's too much of work for a working professional. In PMS, you virtually
have to do nothing. Your entire portfolio is managed by investment professionals.
These professionals have a thorough understanding of your investment goals and they
draw the strategy accordingly. The portfolio manager does all the research of the
stocks and takes decisions about the allocation of funds. He/she keeps track of all the
activities and keeps the investors informed about developments in the portfolio.

Portfolio Management Services account is an investment portfolio in Stocks, Debt and

fixed income products managed by a professional money manager, that can
potentially be tailored to meet specific investment objectives. When you invest in PMS,
you own individual securities unlike a mutual fund investor, who owns units of the
entire fund. You have the freedom and flexibility to tailor your portfolio to address
personal preferences and financial goals. Although portfolio managers may oversee
hundreds of portfolios, your account may be unique. As per SEBI guidelines, only

Page 2 of 29
those entities who are registered with SEBI for providing PMS services can offer PMS
to clients. There is no separate certification required for selling any PMS product. So
this is case where misspelling can happen. As per the SEBI guidelines, the minimum
investment required to open a PMS account is Rs. x`. However, different providers
have different minimum balance requirements for different products. For E.g. Birla
AMC PMS is having min amount requirement of Rs. 25 lacs for a product. Similarly,
HSBC AMC is having minimum requirement of 50 lacs for their PMS and Reliance is
having min requirement of Rs. 1 Crore. In India Portfolio Management Services are
also provided by equity broking firms & wealth management services.

Portfolio management service is one of the merchant banking activities recognized b

ySecurities and Exchange Board of India (SEBI). The service can be rendered either
by merchant bankers or portfolio managers or discretionary portfolio manager as
define in clause (e) and (f)of Rule 2 of Securities and Exchange Board of India
(Portfolio Managers) Rules, 1993 and their functioning are guided by the SEBI.
According to the definitions as contained in the above clauses, a portfolio manager
means any person who is pursuant to contract or arrangement with a client, advises
or directs or undertakes on behalf of the client (whether as a discretionary portfolio
manager or otherwise) the management or administration of a portfolio of securities or
the funds of the client, as the case may be. A merchant banker acting as a Portfolio
Manager shall also be bound by the rules and regulations as applicable to the portfolio
manager. Realizing the importance of portfolio management services, the SEBI has
laid down certain guidelines for the proper and professional conduct of portfolio
management services. As per guidelines only recognized merchant bankers
registered with SEBI are authorized to offer these services. Portfolio management or
investment helps investors in effective and efficient management of their investment
to achieve this goal. The rapid growth of capital markets in India has opened up new
investment avenues for investors.

SCOPE OF PORTFOLIO MANAGEMENT:

Portfolio management is an art of putting money in fairly safe, quite profitable and
reasonably in liquid form. An investor’s attempt to find the best combination of risk and
return is the first and usually the foremost goal. In choosing among different
investment opportunities the following aspects risk management should be
considered:

 The selection of a level or risk and return that reflects the investor’s tolerance
for risk and desire for return, i.e. personal preferences.
 The management of investment alternatives to expand the set of opportunities
available at the investors acceptable risk level

Page 3 of 29
The very risk-averse investor might choose to invest in mutual funds. The more risk-
tolerant investor might choose shares, if they offer higher returns. Portfolio
management in India is still in its infancy. An investor has to choose a portfolio
according to his preferences. The first preference normally goes to the necessities and
comforts like purchasing a house or domestic appliances. His second preference goes
to some contractual obligations such as life insurance or provident funds. The third
preference goes to make a provision for savings required for making day to day
payments. The next preference goes to short term investments such as UTI units and
post office deposits which provide easy liquidity. The last choice goes to investment in
company shares and debentures. There are number of choices and decisions to be
taken on the basis of the attributes of risk, return and tax benefits from these shares
and debentures. The final decision is taken on the basis of alternatives, attributes and
investor preferences or most investors it is not possible to choose between managing
one’s own portfolio. They can hire a professional manager to do it. The professional
managers provide a variety of services including diversification, active portfolio
management, liquid securities and performance of duties associated with keeping
track of investor’s money.

NEED FOR PORTFOLIO MANAGEMENT:

Portfolio management is a process encompassing many activities of investment in

assets and securities. It is a dynamic and flexible concept and involves regular and
systematic analysis, judgment and action. The objective of this service is to help the
unknown and investors with the expertise of professionals in investment portfolio
management. It involves construction of a portfolio based upon the investor’s
objectives, constraints, preferences for risk and returns and tax liability. The portfolio
is reviewed and adjusted from time to time in tune with the market conditions. The
evaluation of portfolio is to be done in terms of targets set for risk and returns. The
changes in the portfolio are to be effected to meet the changing condition. Portfolio
construction refers to the allocation of surplus funds in hand among a variety of
financial assets open for investment. Portfolio theory concerns itself with the principles
governing such allocation. The modern view of investment is oriented more go towards
the assembly of proper combination of individual securities to form investment
portfolio. A combination of securities held together will give a beneficial result if they
grouped in a manner to secure higher returns after taking into consideration the risk
elements. The modern theory is the view that by diversification risk can be reduced.
Diversification can be made by the investor either by having a large number of shares
of companies in different regions, in different industries or those producing different

types of product lines. Modern theory believes in the perspective of combination of

securities under constraints of risk and returns.

Page 4 of 29
PORTFOLIO MANAGERS

Portfolio manager means any person who enters into a contract or arrangement with
a client. Pursuant to such arrangement he advises the client or undertakes on behalf
of such client management or administration of portfolio of securities or invests or
manages the client’s funds. A discretionary portfolio manager means a portfolio
manager who exercises or may under a contract relating to portfolio management,
exercise any degree of discretion in respect of the investment or management of
portfolio of the portfolio securities or the funds of the client, as the case may be. He
shall independently or individually manage the funds of each client in accordance with
the needs of the client in a manner which does not resemble the mutual fund. A non-
discretionary portfolio manager shall manage the funds in accordance with the
directions of the client. A portfolio manager by virtue of his knowledge, background
and experience is expected to study the various avenues available for profitable
investment and advise his client to enable the latter to maximize the return on his
investment and at the same time safeguard the funds invested.

WHO CAN BE A PORTFOLIO MANAGER?

Only those who are registered and pay the required license fee are eligible to operate
as portfolio managers. An applicant for this purpose should have necessary
infrastructure with professionally qualified persons and with a minimum of two persons
with experience in this business and a minimum net worth of Rs. 50lakh’s. The
certificate once granted is valid for three years. Fees payable for registration are Rs
2.5lakh’s every for two years and Rs.1lakh’s for the third year. From the fourth year
onwards, renewal fees per annum are Rs 75000. These are subjected to change by
the S.E.B.I The S.E.B.I. has imposed a number of obligations and a code of conduct
on them. The portfolio manager should have a high standard of integrity, honesty and
should not have been convicted of any economic offence or moral turpitude. He should
not resort to rigging up of prices, insider trading or creating false markets, etc. their
books of accounts are subject to inspection to inspection and audit by S.E.B.I... The
observance of the code of conduct and guidelines given by the S.E.B.I. are subject to
inspection and penalties for violation are imposed. The manager has to submit
periodical returns and documents as may be required by the SEBI from time-to- time.

FUNCTIONS OF PORTFOLIO MANAGERS:

 Advisory role: Advice new investments, review the existing ones, identification
of objectives, recommending high yield securities etc.
 Conducting market and economic service: This is essential for
recommending good yielding securities they have to study the current fiscal
policy, budget proposal; individual policies etc. further portfolio manager should
take in to account the credit policy, industrial growth, foreign exchange possible
change in corporate law’s etc.

Page 5 of 29
  Financial analysis: He should evaluate the financial statement of company in
order to understand, their net worth future earnings, prospectus and strength.
 Study of stock market: He should observe the trends at various stock
exchange and analysis scripts so that he is able to identify the right securities
for investment
 Study of industry: He should study the industry to know its future prospects,
technical changes etc., required for investment proposal he should also see the
problems of the industry.
 Decide the type of portfolio: Keeping in mind the objectives of portfolio a
portfolio manager has to decide whether the portfolio should comprise equity
preference shares, debentures, convertibles, non-convertibles or partly
convertibles, money market, securities etc. or a mix of more than one type of
proper mix ensures higher safety, yield and liquidity coupled with balanced risk
techniques of portfolio management. A portfolio manager in the Indian context
has been Brokers (Big brokers) who on the basis of their experience, market
trends, Insider trader, helps the limited knowledge persons. The one’s who use
to manage the funds of portfolio, now being managed by the portfolio of
Merchant Bank’s, professional’s like MBA’s CA’s and many financial institutions
have entered the market in a big way to manage portfolio for their clients.
According to S.E.B.I. rules it is mandatory for portfolio managers to get them
self’s registered. Registered merchant bankers can act’s as portfolio managers.
Investor’s must look forward, for qualification and performance and ability and
research base of the portfolio managers.

NEED AND ROLE OF PORTFOLIO MANAGER:

With the development of Indian Securities market and with appreciation in market price
of equity share of profit making companies, investment in the securities of such
companies has become quite attractive. At the same time, the stock market becoming
volatile on account of various facts, a layman is puzzled as to how to make his
investments without losing the same. He has felt the need of an expert guidance in
this respect. Similarly, non-resident Indians are eager to make their investments in
Indian companies. They have also to comply with the conditions specified by the
RESERVE BANK OF INDIA under various schemes for investment by the non-
residents. The portfolio manager with his background and expertise meets the needs
of such investors by rendering service in helping them to invest their fund/s profitably.

Page 6 of 29
PORTFOLIO MANAGER’S OBLIGATION:

The portfolio manager has number of obligations towards his clients, some of them
are:

 He shall transact in securities within the limit placed by the client himself with
regard to dealing in securities under the provisions of Reserve Bank of India
Act, 1934.
 He shall not derive any direct or indirect benefit out of the client’s funds or
securities.
 He shall not pledge or give on loan securities held on behalf of his client to a
third person without obtaining a written permission from such clients.
 While dealing with his client’s funds, he shall not indulge in speculative
transactions.
 He may hold the securities in the portfolio account in his own name on behalf
of his client’s only if the contract so provides. In such a case, his records and
his report to his clients should clearly indicate that such securities are held
by him on behalf of his client.
 He shall deploy the money received from his client for an investment purpose
as soon as possible for that purpose.
 He shall pay the money due and payable to a client forthwith.
 He shall not place his interest above those of his clients.
 He shall not disclose to any person or any confidential information about his
client, which has come to his knowledge

He shall endeavour to:

 Ensure that the investors are provided with true and adequate information wit
houtmaking any misguiding or exaggerated claims.
 Ensure that the investors are made aware of the attendant risks before any
investment decision is made by them.
 Render the best possible advice to his clients relating to his needs and
the environment and his own professional skills.
 Ensure that all professional dealings are affected in a prompt, efficient and cost
effective manner.

OBJECTIVES OF PORTFOLIO MANAGEMENT:

The major objectives of portfolio management are summarized as below: -

Page 7 of 29
• Security/Safety of Principal: Security not only involves keeping the principal sum
intact but also keeping intact its purchasing power intact.

• Stability of Income: So as to facilitate planning more accurately and systematically

the reinvestment consumption of income

• Capital Growth: This can be attained by reinvesting in growth securities or through

purchase of growth securities.

• Marketability: i.e. is the case with which a security can be bought or sold. This is
essential for providing flexibility to investment portfolio.

• Liquidity i.e. Nearness to Money: It is desirable to investor so as to take advantage

of attractive opportunities upcoming in the market

• Diversification: The basic objective of building a portfolio is to reduce risk of loss of

capital and / or income by investing in various types of securities and over a wide
range of industries.

• Favourable Tax Status: The effective yield an investor gets form his investment
depends on tax to which it is subject. By minimizing the tax burden, yield can be
effectively improved

ASSEST ALLOCATION:

The different asset class definitions are widely debated, but four common divisions are
stocks, bonds, real-estate and commodities. The exercise of allocating funds among
these assets (and among individual securities within each asset class) is what
investment management firms are paid for. Asset classes exhibit different market
dynamics, and different interaction effects; thus, the allocation of monies among asset
classes will have a significant effect on the performance of the fund. Some research
suggests that allocation among asset classes has more predictive power than the
choice of individual holdings in determining portfolio return. Arguably, the skill of a
successful investment manager resides in constructing the asset allocation, and
separately the individual holdings, so as to outperform certain benchmarks (e.g., the
peer group of competing funds, bond and stock indices). In order to achieve long term
success, individual investors should concentrate on the allocation of their money
among stocks, bonds and cash. It means how much to invest in stocks? How much to
invest in bonds? And how much to keep in cash reserves? Thus, the asset allocation
decision is the most important determinant of investment performance. The basic long
term objective of any investor should be to maximize his real overall return on initial
investment after investment. To achieve this objective, the investor should look where
the best bargains lie. Asset allocation means different things to different people. The
portfolio manager has to complete the following stages before making asset allocation

Page 8 of 29
SECURITY SELECTION: This means identifying groups of securities in each asset
class and decides the optimal portfolio. The following are the different asset classes:

 Equity shares-new issues

 Equity shares-old issues
 Preference Shares
 Debenture
 PSU Bonds
 Government securities
 Company fixed deposits

Portfolio management is handling the fund on behalf of the company or institution in

order to determine the suitable combination of different assets so that the total risk can
be reduced to the minimum while the return can be achieved to the maximum extent.
This is a tricky job which needs efficiency of high calibre. Therefore, the portfolio
manager has to keep in mind the following factors while making asset allocation and
design an efficient portfolio.

 Liquidity or marketability
 Safety of investment
 Tax Saving
 Maximization of return
 Minimization of return
 Capital appreciation or gain
 Funds Requirements

BASIS OF SELECTION OF EQUITY PORTFOLIO:

A portfolio is a collection of securities. It is essential that every security be viewed in

a portfolio context. It is logical that the expected return of a portfolio should depend on
the expected return of each of the security contained in it. Moreover, the amounts
invested in each security should also be important. There are two approaches to the
selection of equity portfolio. One is technical analysis and the other is fundamental
analysis. Technical analysis assumes that the price of a stock depends on supply and
demand in the capital market. All financial and market information of given security is
already reflected in the market price. Charts are drawn to identify price movements
of a given security over a period of time. These charts enable us to predict the future
movement of the security. The fundamental analysis includes the study of ratio
analysis, past and present track record of the company, quality of management,
government policies etc… an efficient portfolio manager can obviously give more
weight to fundamental analysis than technical analysis.

Page 9 of 29
DIVERSIFICATION

Investing funds in a single security is advisable only if the security’s performance is

rewarding. To reduce risk of a portfolio investors, resort to diversification.
Diversification means shifting form one security to another security. The maximum
benefits of risk reduction can be achieved by just having of 10 to 15 carefully selected
securities. portfolio risk can be divided into two groups- diversible risk and non-
diversible risk. Diversible risk arises from company’s specific factors. Hence, such risk
can be diversified by including stocks of other companies in the portfolio. Non-
diversible risk arises from the influence of economy wide factors which affect returns
of all companies; investors cannot avoid the risk arising from them. Often investors
tend to buy or sell securities on casual tips, prevailing mood in the market, sudden
impulse, or to follow others. An investor should investigate the following factors about
the stock to be included in his portfolio:

 Earnings per share

 Growth potential
 Dividend and bonus records
 Business, financial and market risks
 Behaviour of price-earnings ratio
 High and low prices of the stock
 Trend of share prices over the few months or weeks.

RISK – RETURN ANALYSIS

The expected returns from individual securities carry some degree of risk. Risk on th
e portfolio is different from the risk on individual securities. The risk is reflected in the
variability of the returns from zero to infinity. Risk of the individual assets or a portfolio
is measured by the variance of its return. The expected return depends on the
probability of the returns and their weighted contribution to the risk of the portfolio.
These are two measures of risk in this context one is the absolute deviation and other
standard deviation. Most investors invest in a portfolio of assets, because as to spread
risk by not putting all eggs in one basket. Hence, what really matters to them is not the
risk and return of stocks in isolation, but the risk and return of the portfolio as a whole.
Risk is mainly reduced by Diversification.

All investment has some risk. Investment in shares of companies has its own risk or
uncertainty; these risks arise out of variability of yields and uncertainty of appreciatio
n or depreciation of share prices, losses of liquidity etc. The risk over time can be
represented by the variance of the returns while the return overtime is capital
appreciation plus pay out, divided by the purchase price of the share.

Normally, the higher the risk that the investor takes, the higher is the return. There is,
however, a risk less returns on capital of about 12% which is the bank, rate charged

Page 10 of 29
 by the R.B. for long term, yielded on government securities at around 13% to 14%.
This risk less return refers to lack of variability of return and no uncertainty in the
repayment or capital. But other risks such as loss of liquidity due to parting with money
etc., may however remain, but are rewarded by the total return on the capital. Risk-
return is subject to variation and the objectives of the portfolio manager are to reduce
that variability and thus reduce the risk by choosing an appropriate portfolio.
Traditional approach advocates that one security holds the better, it is according to the
modern approach diversification should not be quantity that should be related to the
quality of scripts which leads to quality of portfolio. Experience has shown that
beyond the certain securities by adding more securities expensive.

RETURNS ON PORTFOLIO

Each security in a portfolio contributes return in the proportion of its investments

insecurity. Thus the portfolio expected return is the weighted average of the expected
return, from each of the
securities, with weights
representing the proportions
share of the security in the total
investment. Why does an
investor have so many
securities in his portfolio? If the
security Actives the maximum
return, why not he invests in that
security all his funds and thus
maximize return? The answer to
this questions lie in the investor’s perception of risk attached to investments, his
objectives of income, safety, appreciation, liquidity and hedge against loss of value of
money etc. this pattern of investment in different asset categories, types of investment,
etc. would all be described under the caption of diversification, which aims at the
reduction or even elimination of non-systematic risks and achieve the specific
objectives of investors.

THE PORTFOLIO MANAGEMENT PROCESS

 THE PLANNING STEP

 Identifying and Specifying the Investor’s Objectives and Constraints
The first task in investment planning is to identify and specify the investor’s objectives and
constraints. Investment objectives are desired investment outcomes. In investments,
objectives pertain to return and risk. Constraints are limitations on the investor’s ability to
take full or partial advantage of particular investments. For example, an investor may face

Page 11 of 29
constraints related to the concentration of holdings as a result of government regulation,
or restrictions in a governing legal document. Constraints are either internal, such as a
client’s specific liquidity needs, time horizon, and unique circumstances, or external, such
as tax issues and legal and regulatory requirements.

 Creating the Investment Policy Statement

Once a client has specified a set of objectives and constraints, the manager’s next task is
to formulate the Investment Policy Statement (IPS). The IPS serves as the governing
document for all investment decision-making. In addition to objectives and constraints, the
IPS may also cover a variety of other issues. For example, the IPS generally details
reporting requirements, rebalancing guidelines, frequency and format of investment
communication, manager fees, investment strategy, and the desired investment style or
styles of investment managers.
A typical IPS includes the following elements:
 a brief client description;
 the purpose of establishing policies and guidelines;
 the duties and investment responsibilities of parties involved, particularly those relating to
fiduciary duties, communication, operational efficiency, and accountability. Parties involved
include the client, any investment committee, the investment manager, and the bank
custodian;
 the statement of investment goals, objectives, and constraints;
 the schedule for review of investment performance as well as the IPS itself;
 performance measures and benchmarks to be used in performance evaluation;
 any considerations to be taken into account in developing the strategic asset allocation;
 investment strategies and investment styles; and
 guidelines for rebalancing the portfolio based on feedback.

The IPS forms the basis for the strategic asset allocation, which reflects the interaction of
objectives and constraints with the investor’s long-run capital market expectations. When
experienced professionals include the policy allocation as part of the IPS, they are implicitly
forming capital market expectations and also examining the interaction of objectives and
constraints with long-run capital market expectations. In practice, one may see IPSs that
include strategic asset allocations, but we will maintain a distinction between the two types.

Page 12 of 29
The planning process involves the concrete elaboration of an investment strategy—that is,
the manager’s approach to investment analysis and security selection. A clearly formulated
investment strategy organizes and clarifies the basis for investment decisions. It also
guides those decisions toward achieving investment objectives. In the broadest sense,
investment strategies are passive, active, or semiactive.
 In a passive investment approach, portfolio composition does not react to changes in
capital market expectations (passive means not reacting). For example, a portfolio indexed
to the MSCI-Europe Index, an index representing European equity markets, might add or
drop a holding in response to a change in the index composition but not in response to
changes in capital market expectations concerning the security’s investment value.
Indexing, a com- mon passive approach to investing, refers to holding a portfolio of
securities designed to replicate the returns on a specified index of securities. A second
type of passive investing is a strict buy-and-hold strategy, such as a fixed, but non-indexed,
portfolio of bonds to be held to maturity.
 In contrast, with an active investment approach, a portfolio manager will respond to
changing capital market expectations. Active management of a portfolio means that its
holdings differ from the portfolio’s benchmark or comparison portfolio in an attempt to
produce positive excess risk-adjusted returns, also known as positive alpha. Securities
held in different-from-benchmark weights reflect expectations of the portfolio manager that
differ from consensus expectations. If the portfolio manager’s differential expectations are
also on average correct, active portfolio management may add value.
 A third category, the semi active, risk-controlled active, or enhanced index approach,
seeks positive alpha while keeping tight control over risk relative to the portfolio’s
benchmark. As an example, an index-tilt strategy seeks to track closely the risk of a
securities index while adding a targeted amount of incremental value by tilting portfolio
weightings in some direction that the manager expects to be profitable.

 Forming Capital Market Expectations

The manager’s third task in the planning process is to form capital market expectations.
Long-run forecasts of risk and return characteristics for various asset classes form the
basis for choosing portfolios that maximize expected return for given levels of risk, or
minimize risk for given levels of expected return.

Page 13 of 29
  Creating the Strategic Asset Allocation
The fourth and final task in the planning process is determining the strategic asset
allocation. Here the manager combines the IPS and capital market expectations to
determine target asset class weights; maximum and minimum permissible asset class
weights are often also specified as a risk-control mechanism. The investor may seek both
single-period and multi period perspectives in the return and risk characteristics of asset
allocations under consideration. A single-period perspective has the advantage of
simplicity. A multi period perspective can address the liquidity and tax considerations
that arise from rebalancing portfolios over time, as well as serial correlation (long- and
short-term dependencies) in returns, but is costlier to implement.

 THE EXECUTION STEP

In the execution step, the manager integrates investment strategies with capital market
expectations to select the specific assets for the portfolio (the portfolio
selection/composition decision). Portfolio managers initiate portfolio decisions based on
analysts’ inputs, and trading desks then implement these decisions (portfolio
implementation decision). Subsequently, the portfolio is revised as investor circumstances
or capital market expectations change; thus the execution step interacts constantly with
the feedback step.

In making the portfolio selection/composition decision, portfolio managers may use the
techniques of portfolio optimization. Portfolio optimization—quantitative tools for
combining assets efficiently to achieve a set of return and risk objectives—plays a key role
in the integration of strategies with expectations.
At times, a portfolio’s actual asset allocation may purposefully and temporarily differ from
the strategic asset allocation. For example, the asset allocation might change to reflect
an investor’s current circumstances that are different from normal. e temporary allocation
may remain in place until circumstances return to those described in the IPS and reflected
in the strategic asset allocation. If the changed circumstances become permanent, the
manager must update the investor’s IPS and the temporary asset allocation plan will
effectively become the new strategic asset allocation. A strategy known as tactical asset
allocation also results in differences from the strategic asset allocation. Tactical asset
allocation responds to changes in short- term capital market expectations rather than to
investor circumstances.
Page 14 of 29
The portfolio implementation decision is as important as the portfolio selection/ composition
decision. Poorly managed executions result in transaction costs that reduce performance.
Transaction costs include all costs of trading, including explicit trans- action costs, implicit
transaction costs, and missed trade opportunity costs. Explicit transaction costs include
commissions paid to brokers, fees paid to exchanges, and taxes. Implicit transaction costs
include bid–ask spreads and market price impacts of large trades. Missed trade opportunity
costs can arise due to price changes that prevent trades from being filled.
In sum, in the execution step, plans are turned into reality—with all the attendant real-world
challenges.

 THE FEEDBACK STEP

In any business endeavor, feedback and control are essential elements in reaching a goal.
In portfolio management, this step has two components: monitoring and rebalancing, and
performance evaluation.

 Monitoring and Rebalancing

Monitoring and rebalancing involves the use of feedback to manage ongoing exposures to
available investment opportunities so that the client’s current objectives and constraints
continue to be satisfied. Two types of factors are monitored: investor-related factors such
as the investor’s circumstances, and economic and market input factors.
One impetus for portfolio revision is a change in investment objectives or constraints
because of changes in investor circumstances. Portfolio managers need a process in place
to stay informed of changes in clients’ circumstances. e termination of a pension plan or
death of a spouse may trigger an abrupt change in a client’s time horizon and tax concerns,
and the IPS should list the occurrence of such changes as a basis for appropriate portfolio
revision.
More predictably, changes in economic and market input factors give rise to the regular
need for portfolio revision. Again, portfolio managers need to systematically review the risk
attributes of assets as well as economic and capital market factors. A change in
expectations may trigger portfolio revision. When asset price changes occur, however,
revisions can be required even without changes in expectations. Actual timing and
magnitude of rebalancing may be triggered by review periods or by specific rules governing
the management of the portfolio and deviation from the tolerances or ranges specified in
Page 15 of 29
the strategic asset allocation, or the timing and magnitude may be at the discretion of the
manager. For example, suppose the policy allocation calls for an initial portfolio with a 70
percent weighting to stocks and a 30 percent weighting to bonds. Suppose the value of the
stock holdings then grows by 40 percent, while the value of the bond holdings grows by 10
percent. e new weighting is roughly 75 percent in stocks and 25 percent in bonds.
To bring the portfolio back into compliance with investment policy, it must be rebalanced
back to the long-term policy weights. In any event, the rebalancing decision is a crucial one
that must take into account many factors, such as transaction costs and taxes (for taxable
investors). Disciplined rebalancing will have a major impact on the attainment of investment
objectives. Rebalancing takes us back to the issues of execution, as is appropriate in a
feedback process.

 Performance Evaluation
Investment performance must periodically be evaluated by the investor to assess progress
toward the achievement of investment objectives as well as to assess port- folio
management skill.
The assessment of portfolio management skill has three components. Performance
measurement involves the calculation of the portfolio’s rate of return. Performance
attribution examines why the portfolio performed as it did and involves determining the
sources of a portfolio’s performance. Performance appraisal is the evaluation of whether
or not the manager is doing a good job based on how the portfolio did relative to a
benchmark (a comparison portfolio).

Often, we can examine a portfolio’s performance, in terms of absolute returns, through

three sources: decisions regarding the strategic asset allocation, market timing (returns
attributable to shorter-term tactical deviations from the strategic asset allocation), and
security selection (skill in selecting individual securities within an asset class). However,
portfolio management is frequently conducted with reference to a benchmark, or for some
entities, with reference to a stream of projected liabilities or a specified target rate of return.
As a result, relative portfolio performance evaluation, in addition to absolute performance
measurement, is often of key importance.
With respect to relative performance we may ask questions such as, “Relative to the
investment manager’s benchmark, what economic sectors were underweighted or
overweighed?” or “What was the manager’s rationale for these decisions and how
Page 16 of 29
successful were they?” Portfolio evaluation may also be conducted with respect to specific
risk models, such as multifactor models, which attempt to explain asset returns in terms of
exposures to a set of risk factors.
Concurrent with evaluation of the manager is the ongoing review of the benchmark to
establish its continuing suitability. For some benchmarks, this review would include a
thorough understanding of how economic sectors and subsectors are determined in the
benchmark, the classification of securities within them, and how frequently the
classifications change. For any benchmark, one would review whether the benchmark
continues to be a fair measuring stick given the manager’s mandate.
As with other parts of the portfolio management process, performance evaluation and
performance presentation are critical.

PROCESS OF PORTFOLIO MANAGEMENT

Page 17 of 29
TYPES OF PORTFOLIO MANAGEMENT SERVICES

Portfolio Management Services (PMS) are SEBI registered professional services for
investment management and funds administration to create wealth for the client. The
minimum threshold for such services is Rs 25 lakh.

Following are the two types of Portfolio Management Services:

Discretionary versus non-discretionary portfolio management depends on the

preference of the client. They might have the required time to understand all strategies
and work with the investment manager to manage the investments. There can be
various reasons for the client’s involvement vs. no involvement in the portfolio
management under the discretionary account. Discretionary and Non-Discretionary
Portfolio Management Services are explained below:

Page 18 of 29
DISCRETIONARY PMS

 Meaning: In a discretionary PMS, the portfolio manager manages the funds of

the client in accordance with the needs of the client. It does not involve the client
actively and the investment manager takes all the decision on his behalf.
 Working: Under Discretionary portfolio, the trader can actually buy and sell the
securities directly without the client’s consent for each trade. The consent is
taken in the beginning in the form of a Power of Attorney. However, the trader
would still be taking decisions in accordance with the agreed mandate of the
client their investment goals.
 Type of Clients: Usually, the services under the discretionary investment type
relate to high net-worth individuals (HNWI), institutional investors. These can
be funds of companies or pension funds who have a minimum requirement of
capital starting at $250,000.
 Process & Investments: Just like in any other investment process, the clients’
risk profile analysis is done along with financial goals. However, under
discretionary portfolio, the length and breadth of the kind of assets which are
invested in can be very diverse. The assets can vary from ETFs, bonds, stocks,
financial derivatives, crypto-currency and even art and artwork.
 Complexity: Discretionary portfolio services demonstrate different kinds of
strategies and expert analysis depending on the client requirements. Different
clients might want to follow different strategies. A discretionary portfolio service
would group the clients’ money together for a specific strategy and trade their
assets altogether. The trading would be strategy wise but not client wise. A pool
of money is created for different clients and the client accounts are segregated
for record keeping purposes. Weightage is assigned to the pool as per each
client’s investment.
 Trading Costs: The discretionary manner of trading is also cost-effective and
a win-win situation as the transaction cost reduces across clients. Clients
indirectly get a good price for purchases of securities as well as higher profits
in terms of the market making capacity of the broker.
 Commissions: Investments in the regular investment model have a major flaw
of the portfolio managers churning the portfolio to create greater commissions.
This is avoided in a discretionary investment model as business investment
manager can bundle all the client’s money together and calculate a
management fee on this entire asset under administration. This gives a good
incentive to the portfolio managers as well when compared to a non-
discretionary portfolio management. Different strategies are utilized by the
client by shifting the segregated money from month strategy to another.
 Time-Saving: Discretionary PMS is time saving as compared to Non-
Discretionary PMS.

Page 19 of 29
BENEFITS OF DISCRETIONARY PMS

Following are the benefits of Discretionary PMS:

 The client abstains himself from making day-to-today decisions and also his
involvement in understanding the strategy or trade on a regular basis. He
can rely completely on the traders and the companies’ expertise and
experience.

 It also allows grouping of the trade from an investment managers’ point of

view which can give a greater bargaining power to the trading company in
terms of brokerage.

 The basis of most of the discretionary PMSs is trust, experience,

understanding and due diligence carried out by the client.

 Discretionary services also provide the benefit of nominee administration

where the portfolio management company can carry out the transaction
without sending clients transfer forms for any signature right when the trade
needs to happen.

 The portfolio manager sends the contract notes and the valuation report to
the client on a quarterly or half-yearly basis along with the economic and
market profitability and commentary of the transaction

NON-DISCRETIONARY PMS

 Meaning: Under Non-Discretionary PMS, the portfolio manager only suggests

the investment ideas. The choice as well as timings of the investment decisions
rest solely with the investor. However, the execution of the trade is done by the
portfolio manager. A non-discretionary investment account involves the client
at every step of portfolio management.
 Client Involvement: Under non-discretionary PMS, the client remains involved
in every trade decision making.
 Working: Under this PMS, the broker or the investment manager only acts as
a broker following the client’s instructions for execution of trades. They are also
advisors but the final call is of the client.
 Type of Client: The services under the Non-discretionary investment type does
not relate to high net-worth individuals (HNWI), institutional investors.
 Complexity: In a non-discretionary portfolio account, the client himself owns
the portfolio and there is no need for pooling.

Page 20 of 29
  Trading Cost: In a non-discretionary trade, since there is no bundling of trades,
one client’s trades create a new transaction cost each time he buys or sells
from the portfolio.
 Commissions: Investments in the regular investment model have a major flaw
of the portfolio managers churning the portfolio to create greater commissions
and hence, in Non-Discretionary PMS the commission is comparatively higher
than Discretionary PMS.
 Time-Saving: In a non-discretionary portfolio, the broker might recommend the
available purchase and selling ideas to the client but he or she will never do
any transaction without the consent of the client. This will waste a lot of time
and consequently lose the opportunity.

BENEFITS OF NON-DISCRETIONARY PMS

Following are the benefits of Non-Discretionary PMS:

 The client has greater control over his own portfolio and the chance to question
the decision of the investment manager along with the paid expertise.
 One can also understand that one can see in different market cycles. There is
a monthly or real-time confirmation of trades and portfolio position.

DECIDING BETWEEN A DISCRETIONARY AND NON- DISCRETIONARY

PORTFOLIO MANAGEMENT SERVICES

This can be an important decision for a high net-worth individual willing to invest more
than $1 million for managing his assets. Many factors swing in favour of both the
services.

 It is important to consider risk profile, appetite and willingness to invest

required time for managing your own portfolio.

 The expense of management fee under discretionary PMS can vary from
2 to 2.5% at the minimum and can go up to 3 to 4% with very well-known
services. Thus, ensuring that the investment manager is giving a high
profit to compensate for such expensive management fee is important.

Page 21 of 29
  An alternative to discretionary PMS is a direct investment into a mutual
fund which is the most basic investment vehicle.

PORTFOLIO MANAGEMENT SERVICES (PMS) CHARGES

A PMS charges following fees. The charges are decided at the time of investment and
are vetted by the investor.

Entry Load - PMS schemes may have an entry load of 3%. It is charged at the time
of buying the PMS only.

Management Charges - Every Portfolio Management Services scheme charges

Fund Management charges. Fund Management Charges may vary from 1% to 3%
depending upon the PMS provider. It is charged on a quarterly basis to the PMS
account.

Profit Sharing - Some PMS schemes also have profit sharing arrangements (in
addition to the fixed fees), wherein the provider charges a certain amount of fees/profit
over the stipulated return generated in the fund. For Eg PMS X has fixed charges of
2% plus a charge of 20% of fees for return generated above 15% in the year. In this
case if the return generated in the year by the scheme is 25%, the fees charged by
the PMS will be 2% + {(25%-15%)*20%}.

The Fees charged is different for every Portfolio Management Services provider and
for every scheme. It is advisable for the investor to check the charges of the scheme.

Apart from the charges mentioned above, the PMS also charges the investors on
following counts as all the investments are done in the name of the investor:

 Custodian Fee
 Demat Account opening charges
 Audit charges
 Transaction brokerage

Fixed Fee: It is the flat fee which is charged by the PMS provider to the investors on
a monthly, quarterly or yearly basis. This is not a percentage based fee. This fee is
decided before availing the PMS by the investors. There is some PMS provider who
decide this fee on the basis of the portfolio to be managed or assets or corpus to be
handled.

Exit Load: It is a fee which is charged by the PMS provider if you redeem the
investments before the minimum investment period defined while availing the service.
Apart from the fees above, you may also incur brokerage charges each time a security
is bought or sold.
With all the above discussion we can summarise the basic conditions of PMS. PMS is
an ideal investment tool for High Net Worth Individuals (HNI). The reason is the PMS

Page 22 of 29
service is regulated by the stern conditions of SEBI. One of the fundamental condition
is that to subscribe to PMS the investor has to bring at least 5 lakh- 25 lakhs capital or
has to have holdings. Generally, only HNIs have such amount sitting idle in their
accounts. Thus, instead of keeping the money in fixed return instruments like fixed
deposits then opt for PMS which can give far better returns to their money. Motilal
Oswal, Share Khan, SMC Global are at the top of the list of portfolio management
services providers in India.

BUSINESS INCOME
Profit on the same can be considered as business income. (i.e. slab wise).

The most recent ruling has been given by the Delhi Court stating that the income is to
be taxed based on the investment objective.

Wealth maximization: In this scenario, the investment is made with the sole motive of
multiplying the wealth on the investor. Hence, any income arising from this case is
taxable under the head Capital Gains as per Income Tax Law.

Profit maximization: Here, investment is made to sell it at a point of time later on. It
is done to encash the profits arising from capital appreciation. The income is taxed as
Capital Gains.
Profit can be considered as Capital gains. [STCG (15%) or LTCG(Tax-free)].

It depends on clients Chartered Accountant or the assessing officer how he treats this
Income.

The PMS provider sends an audited statement at the end of the FY giving details of
STCG and LTCG, it is on the client and his CA to decide to treat it as capital gain or
business income.

TAXATION FOR PORTFOLIO MANAGEMENT SERVICES (PMS)

Any income from Portfolio Management Services account is a business income. Unlike
MF, PMS is not required to remain 65%+ invested in equity to get equity taxation
benefit. Each Portfolio Management Services account is in the name of additional
investor and so the tax treatment is done on an individual investor level.

Profit on the same can be considered as business income. (i.e. slab wise). Profit can
be considered as Capital gains. [STCG (15%) or LTCG(Tax-free)]. It depends on
clients Chartered Accountant or the assessing officer how he treats this Income. The
PMS provider sends an audited statement at the end of the FY giving details of STCG
and LTCG, it is on the client and his CA to decide to treat it as capital gain or business
income

PMS OF INDIA LIST

 Porinju Veliyath Equity Intelligence PMS

Page 23 of 29
  Motilal Oswal Next Trillion Dollar Opportunity PMS (NTDO)
 Kotak PMS
 Birla Sunlife PMS
 ASK India Select PMS

PORINJU VELIYATH EQUITY INTELLIGENCE PMS

 This is the most powerful, leading and the largest PMS service in India. It was
incorporated in the year 2002 founded by Porinju Veliyath.
 The minimum investment you would need to buy this PMS is Rs 50 lakh. As per
the past 5 years’ performance, it has been analysed that the PMS has released
the returns at the rate of 35% and in the last 1 year 47%. Isn’t it great!
 There is also a piece of good news about this PMS is that there is no lock-in-
period for your investment. It entertains the flexibility to their investors.it means
that you can withdraw your money anytime.
 There is no entry load and no exit load too.
 Porinju Veliyath Equity Intelligence PMS charges 2% per annum for its
management fees, 10% per annum of the returns for additional performance on
it.
 NRIs also can invest in this PMS of India.
 Motilal Oswal Next Trillion Dollar Opportunity PMS (NTDO)
 PMS (NTDO)
 Next Trillion Dollar is a PMS provider and Motilal Oswal is an AMC which is
providing this PMS service also with the name of NTDO.
 It generally deals with small and mid-cap stocks, so it is good for short or
medium term investors.
 The minimum requirement to invest in this PMS scheme ranges is 25 lakhs and
these can be invested into any of the 25 stocks.
 As per the past 5 year’s performance, it has been analysed that the PMS has
released the returns at the rate of 32% and in the last 1 year 19%.
 NRIs can invest in this top pms in India. After Porinju, Motilal has been
considered as the second best PMS provider in India.

BIRLA SUNLIFE PMS

 Birla Sunlife PMS is a brand service provider of Aditya Birla, which has an AMC
also. The Birla Sunlife PMS was established in the year 1994, providing its
services in a whole range of investment products. They generally target those
businesses which are priced less but can be yielding higher returns.
 It charges variable fees or minimum investment for various category of
portfolios. They are mentioned as under-
 Core-Equity Portfolio - Minimum Rs 50 lakh of investment with a time horizon
of 1 to 3 years.

Page 24 of 29
  Customized Debt Portfolio - 25 Crores or as per SEBI regulations for a tenure
of 3 months to 3 years.
 Select Sector Portfolio - Rs 25 Crores or as per SEBI regulations for a tenure
of 3 months to 3 years.

KOTAK AMC PMS

 It is one another best PMS in India which is renowned. Kotak PMS is
discretionary which invest in 10-25 stocks with various investment approaches
to reap the higher returns.
 Kotak PMS Fees & Charges
 Kotak PMS charges a fixed management fee of 2.5% per annum payable
quarterly.
 This PMS won’t charge any performance fees which is key positive for you.
However, it charges exit loads at 3%,2% and 1% for exiting within 1 year,2
years and 3 years respectively.
 Also, it is being disclosed on the portal that there may be some additional
charges for brokerage (0.1%), stamp duty, audit fees etc.

ICICI PRUDENTIAL PORTFOLIO MANAGEMENT SERVICES

 ICICI Prudential Portfolio Management Services(PMS) enjoys a rich parentage
of two large organisations ICICI Bank Ltd which is India’s largest private sector
bank in addition to being one of the most trusted brands in financial services
and Prudential Plc UK, an international financial services company, with
significant operations in Asia, US and UK.
 Product Offerings
 Core Portfolio
 Large Cap Portfolio
 Flexi Cap Portfolio
 Value Portfolio
 Contra Portfolio
 Thematic Portfolio
 Infrastructure Portfolio
 Export Portfolio
 Wellness Portfolio
 PIPE Portfolio
 Absolute Return Portfolio
 Enterprising India Portfolio

Page 25 of 29
ASK INDIA SELECT PMS
 This PMS not only deals with the national citizens but also international people.
To manage such a wide customer base all over the globe, there is an obvious
need for a rand expertise ream, and so the ASK India has. It focuses on
maximizing wealth in addition to taking care for reducing risks.
 The investors can invest in any capital market like in mid-cap, short-cap, large-
cap, multi-cap, value and growth and international assets.
 Annually it charges 2% of the portfolio value.
 There is a fixed fee of 1.5% of the portfolio and plus 20% of gains to be paid to
them over and above 10% of profits. This is the performance-linked fees.

PORTFOLIO MANAGEMENT SERVICES V/S MUTUAL FUNDS:

MUTUAL FUND:

It is a type of financial vehicle made up of a pool of money collected from many

investors to invest in securities such as stocks, bonds, money market instruments, and
other assets. Mutual funds are operated by professional money managers, who
allocate the fund's assets and attempt to produce capital gains or income for the fund's
investors. A mutual fund's portfolio is structured and maintained to match the
investment objectives stated in its prospectus.

 A mutual fund is a type of investment vehicle consisting of a portfolio of stocks,

bonds or other securities.
 Mutual funds give small or individual investors access to diversified,
professionally managed portfolios at a low price.
 Mutual funds are divided into several kinds of categories, representing the kinds
of securities they invest in, their investment objectives, and the type of returns
they seek.

Page 26 of 29
  Mutual funds charge annual fees (called expense ratios) and, in some cases,
commissions, which can affect

“Money is only a tool. It

will take you wherever
you wish, but it will not
replace you as the
driver.” - Ayn Rand

their overall returns.

 The overwhelming majority of money in employer-sponsored retirement plans
goes into mutual funds.

HOW IS PORTFOLIO MANAGEMENT SERVICES DIFFERENT FROM MUTUAL
FUNDS:?

o If you are an investor in equity mutual funds, you get units, which represent stocks. In
portfolio management, you (investor) hold stocks in your demat account. You own the
stocks in your demat account, but the power of attorney, rests with the fund manager.
o You can invest a few hundreds or thousands of rupees, in a mutual fund. You would
have to bring in lakhs of rupees, to be invested in portfolio management services.
o When you invest in mutual funds, you have expenses such as fund manager charges
and even an exit load (charges when you exit the mutual fund). This amount is not
very high. Portfolio management services, charge an initial fee and also have a profit
sharing agreement. This is a high cost.
o Portfolio management services are offered to HNI’s and the rich. Almost any citizen
can invest in mutual funds.
o Portfolio management services offer investment services, tailored to meet your
financial goals. You might want to invest a lot of money, in a single stock. You can do
so. In a mutual fund, the fund manager decides where your money is
invested and how much is invested.

Page 27 of 29
PORTFOLIO MANAGEMENT SERVICES (PMS) IN INDIA:

PMS services, come under the alternate investments fund, category. It is a type of
wealth management service/portfolio management process, offered to the rich and
wealthy in India. HNI’s and the rich and wealthy in India, love portfolio management
services (PMS), and use it to invest in stocks. PMS (Portfolio Management Services),
also offer investments in fixed income securities (debt), but few investors opt for this
service. PMS services are offered by brokerages and mutual funds, which have been
registered with SEBI. The portfolio management process is aided by a portfolio
software.

A number of mutual fund managers over the last 1.5-2 years have shifted to managing

PMS portfolios. Plus, with low margins in pure broking, advise through managing a
PMS can be more remunerative. The current bull market also supports PMS
strategies. Many PMS portfolios focus more on midcaps. It’s not meant for all
investors. The entry barrier is high at Rs25 lakh minimum investment. Hence, it is best
suited for HNIs. One advantage is access to portfolios that are concentrated around
specific themes.

Page 28 of 29
FEES CHARGED BY PMS SERVICES:

Portfolio Management Services (PMS), charge you an initial fee of 2-3% of your
investment. Once you get profits from your investment, there is a profit sharing
agreement. You (investor), would have to bring in at least INR 25 Lakhs, to be invested
in the portfolio management services.

HOW DOES PORTFOLIO MANAGEMENT WORK IN INDIA?

 You opt for a portfolio management service. A bank and a demat account, are
opened separately in your name. The money you bring, is invested in your
name. Shares are held in a demat account in your name.
 The income or dividend you get from your investment, is credited to your bank
account. You sign a Portfolio Management Services agreement, where you give
POA (Power of Attorney), to the portfolio manager.
 The portfolio manager gives you the performance report of your investments,
as mandated by SEBI, every 6 months.

Page 29 of 29