Types Of PMS
Although different companies offer different types of portfolio management services, there are some standard categories or types of PMS. They are as follows:
(a) Discretionary portfolio management services
Under this, the portfolio manager has the full discretion to decide not only what to buy and what to sell but also when to buy and when to sell which means PMS has huge flexibility in terms of not investing when they feel that the markets are not performing well or it is not an appropriate time to do so. One should look for the philosophy and style of investing as well as other details of the portfolio manager before choosing this service. What gels with your ideas, you should go with that person. The alpha-generating capacity lies with the portfolio manager with the stocks that he or she is picking.
(b) Non- Discretionary portfolio management services
Under this, the consent has to be taken from the investor by the portfolio manager before investing. But, the assets are always under the control of the portfolio manager.
(c) Advisory portfolio management services
This service is largely used by family offices. The advisory services are basically about the portfolio manager giving non binding advice to the investor. The investor then could decide as per their profile and risk appetite whether they would like to go ahead with the investments or not. Under advisory services, the assets also are not under the control of the portfolio manager. The portfolio manager’s responsibility only lies up to the point of advising. Whether to accept that advice or not is completely the discretion of the investor.
Overall, portfolio management services as an industry have grown quite well in the last few years.
Diagramatic presentation of data taken from SEBI as on October 31, 2020
The chart above shows that discretionary PMS attracts maximum clients. One reason might be that the clients want professionally managed portfolios with a greater return hence they approach portfolio management service providers.
The above pie-chart points out to the fact that most discretionary PMS invest in plain debt.
Under Non-discretionary PMS, we see a variety of mixes. It is because different investors invest as per their understanding of the market. Hence, varied opinions.
Active vs. Passive Management
Management of portfolio occurs in two ways:
Active Investment Management-
The goal is to overcome the return of the benchmark index and come up with better returns for the investor. A specific index like Nifty or Sensex is taken as a benchmark, and the investment managers build active choices on the investment to outgo this market.
Passive Investment Management-
This style involves a passive form of making decisions as well as investment tracking. The target of passive investment management is to match the performance of a particular index. The index can be Nifty 50 or Sensex, and the investment managers increase or decrease the weightage of investments as per the index it follows.
While the active management form has a higher income potential, it also carries a greater risk quotient. Although the passive form of investment management comes with a lower risk quotient, it has lower management fees.