Ever since the evolution of the man-kind, almost the entire Human race seeks the holy-grail to create and safe-guard their wealth. Though we all agree there is no-Holy-Grail, the search doesn’t stop. We hope to take the investor community at-least as nearer-to-the-Holy-Grail as possible through this article on Portfolio Management.

Global statistics on Wealthy individuals reveal that those who made their-money-to-earn-for-them turned richer day-after-day. Hence, earning-money will not suffice to build your wealth, prudent investment is necessary.

However, the human mind-set always seeks to prioritize to-day’s desires over the future-anticipated-financial-Goal-achievement. Hence, before we understand prudent ways to invest, we should take the first step to set-our-financial-Goals. The second step is to allocate sufficient portion of our income to achieve that Goal.

Steps to get richer Day-by-Day

  1. Before we understand prudent ways to invest, we should take the first step to set our financial Goals.
  2. The second step is to allocate sufficient portion of our income to achieve that Goal.

This article presumes you have already completed those two steps and ready to get imbibed with the knowledge of intricacies of Portfolio Management.

What is Portfolio Management?

What is Portfolio Management?

Portfolio - literally means – (as per the standard dictionaries) a range of investments held by a person or organization. Broader definition reveals - Planning and managing investments of individuals, in all respects, according to their risk appetite; till their desired time-frame; is called Portfolio Management.

This includes, asset allocation, instrument/stock selection, buying, profit booking, re-balancing etc. Every individual investor is unique; hence copy-cat methodology of other’s portfolio may not work for you.

Key Terminologies You Should Know Brfore delving into Portfolio Management in Detail

Portfolio Management Key Terminologies
  • 1. Various Asset Classes:

  • Fixed Deposit, Government Bonds, Corporate Bonds, Treasury bills, Commercial Papers are asset classes which yield fixed % of return; these are called debt instruments and considered less risky.

    Equity investment through Mutual fund or PMS or AIF or direct, has more risk compared to debt instruments.

    Gold is another asset class, if invested through Gold monetization scheme there is regular fixed % of return.
    Leveraged products like derivatives are considered as High-risk asset class. Investment in PE funds (Private Equity), Venture capital funds are also considered as High-risk.

  • 2. The Risk reward:

  • Risk can be categorized under various heads like Market risk, Liquidity risk, concentration risk, credit risk, re-investment risk, inflation risk, longevity risk, Horizon risk.

    Each of the asset class has its own risk. Though there is no risk-free instrument, there are various methodologies to mitigate risk and offer better risk adjusted returns.

  • 3. The theory of spreading your eggs:

  • By spreading your investment across asset classes and within the asset classes to various franchises is a better idea to mitigate risk as well as to increase the probability of out-performance.

    For an investor with lesser capital; diversification is practically impossible, hence the Mutual fund industry evolved to pool the resources.

  • 4. Evolution of Wealth creating tools:

  • There is empirical evidence that the Equity investment out performs all other asset classes in the Long term. However, “physical-asset-focused” Investors argue Historical statistics of only-few out-of-thousands-of-listed-entities qualify to that statement.

    The million-Dollar-question is, How to identify such outperforming Equity stock?

Portfolio initial set-up with example

To understand the Portfolio Management better, we will discuss with an example.

    An individual aged 30 years, with two kids (aged 7 & 5), decides and allocates Rs. 50,000/- every month; this is the maximum amount he can save after meeting his mandatory monthly expenses. He has no separate emergency fund, no separate festival/celebration funds.

To build his portfolio, few steps are followed:

Financial needs consideration:

  1. School fees every June – Rs. 1,20,000/-
  2. Festival expenses/celebrations every year – Rs. 50,000/-
  3. Corpus for Higher education for the first child after 10 years / for the second child after 12 years.
  4. Corpus for Retirement planning after 30 years.
  5. Emergency fund – over-and-above the medical policy provided by the company.

Asset allocation:

Asset allocation of Rs. 50,000/- set aside by the individual, has to be spread according to the above five important financial needs.

  • 10,000/- per month can be deposited in a Recurring deposit, for paying the yearly school-fees.
  • 5,000/- can be held in the savings-bank account every-month as emergency fund along with 4,000/- for festival expenses.
  • 10,000/- can be invested in “systematic investment Plan” in Equity Mutual funds (further this 10,000/- may be split into 5 different themes of 2,000/- each).
  • 6,000 may be invested in national Pension scheme.
  • 10,000/- may be invested in direct Equity, in Well-Managed Companies, and the balance can be invested in Gold, either in Gold-ETF or physical Gold.

The asset of this individual, in the initial year is posted as a pie-chart.

Periodic review/rebalancing:

The above example, stipulates 10,000 in Recurring deposit to pay yearly school fees of Rs. 1, 20,000.

The recurring deposit is earning 6.75% interest currently, and thus at the end of the year Rs. 4,479/- will be the interest earned.

This amount can be invested additionally in equity for the long-term. The emergency fund may not be used, and on accumulation can be deposited in Fixed Deposit, and over the years, the excess can also be invested in equity/mutual funds.

The re-balanced portfolio after three years may appear as illustrated in the pie-chart.

The figures are only example, the actual portfolio values may vary depending on many economic factors & risk.

We have considered historical average three year returns of equity and mutual funds for this illustration.

Indian Asset Allocation VS Global Super-Rich Comparison

The Average Indians Psychology is to invest predominantly in Physical-assets like residential plots/commercial plots/flats/house etc.

Hence, an Indian asset allocation may appear as illustrated in the pie-chart after 10 years.

This is the current statistical data of the average Indian High Net-worth Individuals collected through various sources.

The Asset allocation of the Global super-rich is more in equities & related financial assets, while Indian’s asset allocation is largely in physical assets.

This is mainly due to lack-of-awareness on financial products. Indians conservative approach does not allow them to the concept of risk: reward ratios.

The Average Indians Psychology is to invest predominantly in Physical-assets like residential plots/commercial plots/flats/house etc.

Indian reticent nature makes the role of the financial advisors difficult to position the financial assets rightly. The majority of the financial products in India are SOLD rather than BOUGHT. However, the good news is that the Indian Millennial are shifting more towards financial assets.

Who benefits from Portfolio Management?

It is quite evident that those who earn more-income through their physical presence are fully engaged in their core-activity round the clock.

Most of such Professionals, Businessmen and top-Level executives, prolong their professional journey beyond their desired retirement age, just because they haven’t the sufficient corpus to cater to their living-status.

Such individuals should seek the services of professional portfolio Managers.

Though anyone with some knowledge and time can build their own portfolio, most of the times they lack the periodic review and re-balancing.

Especially, during the current times when financial markets are volatile, it is very difficult for the novice investors to aptly allocate their funds. Hence, portfolio Management can be beneficial to all the investors.

Types of Portfolio Management

  • 1. The Mutual Fund Industry:

  • A Mutual fund is a method of pooling resources from various individual investors. In order to collate like-minded individuals in each of the fund, a common investment theme and methodology is predetermined for each fund.

    The asset allocation (by percentage) is declared in advance.

    For example:

    If a fund invests in small cap companies, we can assume that the fund will gain from the expansion potential of smaller companies tuning into big companies, at the same time the process may take few years to fructify.

    Hence, if an individual’s Goal is to be achieved after 10 years, this fund can be a good fit to achieve his Goal.

    Matching your time horizon with the time-horizon of the Fund is one of the important attribute of Portfolio Management. Profits can be optimized by selecting the right time-horizon.

  • 2. Open-ended funds:

  • Investors can enter or exit open ended schemes of Mutual-fund anytime as per their wish. However, many of the funds charge exit-load of 1% if the investor exits the fund within one year of investment.

    The advantage of these types of funds is the flexibility for the investors to choose their entry/exit. The disadvantage is that, the long-term investors can get affected by the action of others exiting the fund.

    For example:

    A fund Manager may decide to buy & hold a stock for 3 years based on his analysis, when few of the investors redeem their units, the fund manager has to trim the holdings in order to fund the redemption, hence those who are staying invested get affected; on completion of 3 years the real profits from the particular stock reduces, due to lesser number of stocks remaining.

    For an investor who wishes to remain invested for a longer term, this un-intended buying/selling increases the churn and thus the additional expenses of brokerages/taxes etc.

  • 3. Close-ended funds:

  • A fixed tenure of the fund is pre-decided, also the entry into the fund is also announced for a specific number days. Once entered the investor cannot redeem the fund till the time stipulated and declared by the fund-house in advance.

    However, these types of funds offer interim dividends, which are transferred to the investor’s bank account as per the schedule. Most of the close ended funds have a tenure of 3 to 5 years.

    The advantage of the fund is that the Fund manager has the free-hand to make his decisions and wait for the fruition of the fund objectives. Due to lesser churn, the expense ratios are low.

  • 4. Equity Linked Savings scheme:

  • ELSS schemes are close-ended cum open ended funds. An investor can not withdraw for three years from the date of investment, he can avail tax benefit under section – 80-C.

    In order to encourage investors to stay invested for longer periods, Government is offering tax benefits under section 80-C, if the fund has a lock-in period of 3 years or more.

    After staying invested for three years, the fund becomes open-ended for that particular investor, and hence gives the flexibility to remain invested or exit.

  • 5. Systematic Investment Plan:

  • Mutual fund investments can be made as lump-sum one time investment or periodic investment.

    Whereas, investing a fixed amount on a fixed date every month can be done through the option Systematic Investment Plan (SIP) – through either Bank mandated electronic-clearance-service or through post-dated cheques.

    We cannot time the market. Hence, it is prudent to reduce the quantum of investment when price is higher and increase the quantum when price is lower. This method is called rupee-cost-averaging, this is automatically achieved through SIP. This is especially suited for investors with regular fixed monthly income/ salaried class. Consistent periodic investment over longer-periods through SIP had yielded extraordinary return in the past. Though the past cannot be assumed as the guarantee for the future returns, Longer-term returns anticipated in the future remain more or less same.

Systematic Transfer Plan:

While STP has the benefit of rupee cost average and recommended especially during volatile times, it may not be suitable for those with non-regular income.

Hence, the Systematic Transfer Plan (STP), can be availed. The investment made as one time lump-sum is initially parked in a Mutual fund scheme, which has lesser risk and less volatility; for example, Schemes investing in Government Bond/Private-sector Bond Treasury bill, etc. are considered less-risky.

Periodically a fixed amount is transferred to the Equity-mutual-fund scheme, this method is called STP.

Systematic Withdrawal Plan:

Investor’s can opt for systematic withdrawal plan(SWP). A fixed amount can be withdrawn periodically on a given date every month. After remaining invested for long-term, this facility can be used as a pension plan.

PMS Portfolio

External action of the Mutual-funds does not affect the PMS portfolio, as the portfolios of individuals are maintained separately in the respective accounts. The mutual fund process is for retail investors and all its investors have to follow a single strategy. Thus, fund houses find mutual fund schemes restrictive if they wish to attract high net worth individuals (HNIs). A mutual fund scheme cannot hold a concentrated portfolio as there are caps on individual holdings whereas these restrictions are not there in PMS schemes.

In the PMS strategy, a fund house has various model portfolios. So if an individual walks in and subscribes to the PMS, with his/her own existing portfolio of direct equities, the fund manager reshapes the existing portfolio and makes it as similar as possible to the sample portfolio of the PMS strategy that the investor subscribes to.

The PMS schemes have churned out 21.8% to 36.8% annual returns in the past five years, beating the benchmark Nifty by nearly 18–25 percentage points. Though the past performance cannot be the bench-mark for the future, we can safely assume higher returns are definitely possible in a time-horizon of 3 to 5 years.

Most of the PMS Manager has his skin in the game in the profit-sharing model, it helps in generating alpha. If you withdraw early, there is an exit load. They charge exit load mainly to make investors stay invested for a longer period of time so that they can gain from the equity’s potential to the fullest. This also allows investors to have tax-free capital gains.

Portfolio managers believe that higher charges are incurred only if the portfolio is churned too often. In the long run, the buy-and-hold approach will work, in case they hold the stocks for four to five years and the churn rate is only 15%, as compared to 100% in the case of mutual funds.

  • a. Discretionary PMS Portfolio:

  • A discretionary account is one that allows the PMS Manager to buy and sell securities without the client’s consent, every time. However, they still must make decisions in accordance to the clients stated investment goals, agreed upon while creating the Discretionary PMS portfolio.

  • b. Non-Discretionary PMS Portfolio:

  • A non-discretionary account is one where the client makes all the trading decisions. With these types of accounts, the PMS Manager’s job is to simply make recommendations on what to purchase or what to sell and what price etc., The PMS Manager then receives the trading decision of the investor and then execute the trades.

Alternative Investment Fund (AIF)

AIFs provide flexibility & more opportunity for the Fund-Managers to invest in instruments, where the regular Mutual funds and PMS cannot invest. There are three categories of AIF; in nut-shell, AIF is alternate with higher risk and higher return. The risk is mitigated through longer term holding and phased manner of investment. There are three classes categorized under the AIF.

Type Category - 1 Category - 2 Category - 3
Criteria of category Infra, Social, Non-banked Credit for SME Residual category of funds, invested primarily in unlisted securities Funds which are liquid / listed equities
Special incentives provided by the government Funds which may invest in derivatives
Invest in start ups or early stage ventures or social ventures Funds which employ leverage for investments
Socially or economically desirable areas
Type of funds Venture Capital Funds Private Equity Funds Long Only Equity Funds
SME Funds Debt Funds
Social Venture Funds Fund of Funds  
Infrastructure Funds Other Funds (like Real Estate funds) not classified under the other two categories Long Short Equity Funds
other parameters Close ended Close ended Open or close ended
Not allowed to leverage Not allowed to leverage Leveraging is allowed up to 2x
Specific Investment restrictions for each sub type No restrictions on asset allocation No restrictions on asset allocation
Taxation Pass through Pass through Fund Level

The most obvious plus point of AIF is its ability to take multi-directional calls on the market.

While PMS products are basically long only (they only stand to benefit when stock prices go up),

AIF’s can employ both long and short strategies, which means they can bet on an index or a stock price going down, and cash in on them if their calls go right.

In range-bound or bearish markets, AIF’s have the potential to continue generating real returns while their long only counterparts flounder.

AIF’s also enjoy the flexibility to employ a wide variety of hedging strategies, such as buying call or put options, thereby allowing fund managers to cap their maximum losses if they should choose to do so.

In the AIF structure one can use leverage, the sponsors must invest their own money, and lastly, it caters to the choice of alternative assets over and above listed securities.

Category / parameter PMS AIF
Regulation Regulated by SEBI (Portfolio Managers) Regulations 1993. Regulated by SEBI (Alternative Investment Funds) Regulations 2012.
Types Portfolio Management Services can provide two types of services: Discretionary or Non-discretionary AIF registration can be done in any of the following 3 categories depending upon their investment objectives:– Category I, Category II, Category III.
Number of investors No threshold limit is prescribed. Portfolio Manager can have any number of clients. No of investors for every scheme or fund shall not exceed one thousand.
polling of funds No pooling of investor funds is allowed. A separate portfolio is to be maintained for every client. Pooling of funds is the main essence of this kind of investment model.
Segregation of funds Under Portfolio Management Services model funds of every client is segregated and kept in different demat accounts. No segregation is required to be done.
Minimum investment Minimum investment of Rs. 25, 00,000 is required for every Investor Minimum investment of Rs. 1 Crore is required for Every Investor
Corpus required NO corpus requirement in case of Portfolio Management Services. Each scheme is required to have a corpus of Rs. 20 crores. In the case of Angel Funds, the requirement is Rs. 10 Crore.
Sponsor Contribution No such provision under PMS. Sponsor/Manager are required to have some continuing interest in AIF. In the case of Category I and II AIFs, it should be 5 Crore rupees or 2.5% of corpus whichever is less. Category III AIFs, it should be 10 Crore rupees or 5% of corpus whichever is less.
Listing They cannot be listed, As portfolios don’t represent a separate instrument. Close-ended units can be listed after the closure of such units.
Lock-in Investor can withdraw at their discretion in a manner specified under the agreement. Close-ended units can have prescribed lock-in period.
Tenure No minimum time is prescribed. Investment in the portfolio is governed by the agreement executed between the portfolio manager and the client. Minimum tenure of Category I and II AIF fund or schemes will be 3 years and can be extended for a period of 2 years.
Tax In PMS, you will pay short term/long term capital gains, depending on the churn that the fund manager has done. Do consult with a chartered accountant or tax consultant for the tax implications before investing through PMS. Tax pass-through status for Category I and Category II AIFs (excluding income from business or profession). AIFs to withhold tax on distribution/accrual of income (a) at the rate of 10% for resident investors; (b) as per rates in force (i.e. lower of tax treaty rates or domestic tax law) for non-resident investors. No tax pass-through for Category III AIFs. Tax paid at the fund level or determinate trust structure used for availing pass-through benefits. Business income taxable at the AIF level and correspondingly distribution of such income will be exempt in the hands of the investors. Unutilized losses cannot be passed on to the investors?—?AIF to carry forward and set-off such losses in subsequent years. Income received by the AIF from portfolio companies is exempt from withholding tax. No dividend distribution tax is payable by Category I and Category II AIFs when distributing income to investors.

TIPS & Tricks:

  • Wealth building through Portfolio needs professional approach. There are methods to average your cost, through rupee-cost-averaging, Value-averaging, re-balancing etc.
  • Many a times Equity investments correct by substantial %, like that happened in the year 2008. Hence, right exit strategy is to be mandatorily planned and included in the portfolio Management.
  • There are techniques like systematic-withdrawal, asset re-balancing while approaching the financial goal. Professional exit strategy can be customised to the individual investor’s preference.
  • Performance check of portfolios during the financial-down-turn periods reveals the strength of the portfolio building strategy and periodic review.
  • High churn ratio of the portfolio increases cost and also indicates wavering nature of the Fund Manager. Gradual increase of ALPHA with the bench mark indicates better portfolio built.


Portfolio Management needs to be done professionally and hence the investor needs to select the right advisory services.

The advisory service provider should be competent & capable enough to assess the risk appetite & recommend apt asset allocation, select right instruments.

Periodic review and re-balancing is required to achieve the financial Goal of the investor and provide him regular returns.

For more details, please feel free to contact us at info@pmsbazaar.com.

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