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The recent dip in the markets has a majority of the investors confused about whether to invest or to hold money in cash anticipating further corrections. Not only are there multiple experts with multiple opinions some of them are diametrically opposite to each other. In such a situation, with all this information overload, it becomes quite difficult to filter out the noise and pay attention to the inputs that might actually be helpful. Most retail investors get out of this kind of confusion by simply investing in mutual funds using the systematic investment plan route. Though this seems simple enough, the tremendous scale of the mutual fund industry means that an ordinary investor is faced with an overwhelming amount of choices. From selecting between different types of balanced, equity, ETF, fund of funds, etc to selecting between diversified, sector-specific, index, or global funds, the odds seemed to be stacked against the average investor. It seems that the average investor would definitely require professional help to not only help select funds but also to help tailor their investments based on their risk profile.
Is there a way to get the best of both worlds, i.e. the safety of mutual funds and the returns of individual stocks? Yes there is. Introducing Portfolio Management Services or PMS in short.
PMS or Portfolio Management Service is a kind of wealth management service provided by a portfolio manager. PMS is an alternate mode of investment that is available to individuals who have upwards of Rs. 50 lacs to invest. The portfolio manager is generally a corporate body that undertakes investment on behalf of their clients. The portfolio manager can invest their clients’ money in a variety of instruments like stocks, debts, direct mutual funds, and even instruments like gold. It is quickly becoming the preferred mode of investment for wealthy investors. There are two types of services provided by PMS:
While a PMS scheme might sound like a MF, it has far more flexibility in terms of investing and strategizing. A MF, by design, is a product that requires a very small investment to begin with; one can start investing even with a capital of Rs. 500. Investors who are in this category are not generally highly informed and need to be protected against too much risk being taken by the MF houses. Hence for the safety of the investors themselves, MFs regulations have placed a lot of restrictions on the funds when investing in different securities. To comply with such regulations, MFs have to necessarily diversify amongst the number of stocks they own. They cannot allocate more than a certain percentage of their portfolio to any particular stock; hence by design, this removes the risk of concentration of capital on one / a small group of stocks. Also, since MFs have a lot of liquidity and the capability to buy shares of many small and mid-caps stocks, they are mandated to not increase their shareholding by more than 10% in any of the stocks. This ensures that MFs do not acquire companies and exert management control (something that they do not have the skills for).
A PMS on the other hand deals with a lesser amount of money and is designed for an advanced investor who understands the risks and understands the way the market works. A portfolio manager has none of the restrictions that apply to the MFs and can invest in whichever stocks that they seem fit for investing. This automatically means that PMS by design have a higher probability of generating higher returns. Indeed, as shown in this blog post by PMSbazzar, PMSes have better performance vs mutual funds over different time horizons (1 year, 3 year, 5 year, and 10 year period).
One another advantage of investing with a PMS is that they are approachable and have people to service queries of their clients. This means that anytime a client develops cold feet because of the market and needs to talk to a professional, they can directly call their portfolio manager. This is simply not possible if one is investing in mutual funds. The clients only understand the importance of such a channel when the market goes through a bear cycle or the broad market has corrected itself.
However, perhaps one of the most important advantages of investing in a PMS is that one’s portfolio can be uniquely tailored to one’s risk profile. A newly graduated single working professional will have a different risk profile than one who has just recently been married. Both in turn will have completely different risk profiles as compared to middle-aged ones having children and multiple responsibilities like home loans etc. A portfolio manager can understand all this and, based on the clients’ risk profile and financial targets, develop a portfolio to suit their current and future lifestyle. This tailoring can be repeated multiple times depending on the client’s current stage of life – This means that while the initial investments can be aggressive in nature, as one approaches different life goals like marriage, buying a house, or retirement, the nature of investment can be modified and tempered to become less aggressive and tuned more towards wealth conservation.
As with most things in life, there are some downsides with PMS also.
Firstly, as per recently revised SEBI guidelines, one needs a minimum of Rs. 50 lacs to be eligible to invest in a PMS. This was Rs. 25 lacs earlier but has been increased to safeguard the retail investor’s money. This means that not everyone can take advantage of this avenue and in many cases even if some are eligible, they will have too much of a concentrated portfolio (majority of their funds being invested via PMS).
Secondly, since there are no restrictions on portfolio concentration, depending on the experience of the fund manager and their capabilities, the fund value can drastically decrease in case of a downturn or recession. One needs to carefully look at the quality of the PMS and their investment philosophy before investing one’s hard earned money. One of the clearest indicators is if they are promising sky high returns and are not appraising you of the risks involved, especially in the short term.
Right Horizons was started with a mission to help people achieve their financial goals. We have been doing exactly that for close to two decades, starting first with investment advisory services and then branching out to offer portfolio management services and other allied services as well.
Right Horizons PMS is focused on delivering a superior risk-adjusted return through a robust Risk Management Methodology, using a Structured Investment Process and an in-depth Fundamental and Quantitative Analysis framework. We believe in secular compounding growth stories that can do well across market cycles. Over the last 18 years, our team of qualified, dedicated researchers and portfolio managers have developed an expertise in picking stocks that can do well on a risk-adjusted basis. This is demonstrated in our consistently high portfolio performance as above, during volatile market conditions. Our flagship RH super value scheme was adjudged the best performer of November 21 and has been ranked number 1 in the entire PMS universe of over 270 schemes (Source: PMSAIFWORLD). In fact, RH PMS is the only fund house that has given the best monthly returns four times in the last 12 months.
So, don’t postpone your decision to invest in the market due to lack of knowledge and join us on this multi-decadal wealth creation journey.