Types of Portfolio Management Services

Just as to maintain a healthy body and mind one takes a balanced diet, similarly maintaining and building a strong investment portfolio plays a vital role. Since there are different types of investment options using the right kind of service helps you in improving your investment health. To plan it in the right way one must be aware of the types of Portfolio management services. 

In this article, we are discussing the major types of portfolio management available that can help you in taking the right service depending upon your investment style.

What are the 4 Types of Portfolio Management?

As already known that portfolio includes real estate, private investments, art, and other financial classes that fall under the AIF or Alternative Investment Funds.

Due to diverse classes of investment the portfolio strategies vary but considering the broad classification, there are four major types of portfolio management services in India: 

• Active Portfolio Management
• Passive Portfolio Management
• Discretionary Portfolio Management
• Non-Discretionary Portfolio Management

Let’s now discuss each in detail below.

Active Portfolio Management

As the name suggests, it uses active portfolio management techniques to provide you a return higher than the market. Here the fund manager plays a vital role as they need to stay active with the market movement and evaluate every aspect of the market before making any financial decision.

In all, it is the fund manager who takes care of in and outflow of your fund and makes sure that the right amount is invested in the right kind of investment product.

This ultimately provides you with the benefit of generating high returns. Since active investment involves commits to provide you better returns thus it is suitable for those:

• Having a high-risk appetite.
• Looking towards high capital gains.

Looking at the other side, this type of portfolio management is associated with certain drawbacks as well. Some of those are:

• The fees of fund managers executing this strategy are insanely high.
• The impact of human errors is significant.
• Fit for investors willing to take a greater risk but generate higher returns too.

Your investment’s volatility rate increases many folds when the stock market’s irregularity is attached to this strategy’s unpredictability.

Thus, choose the types of portfolio management services that align with your interests.

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Passive Portfolio Management

Now on one hand, where active portfolio management outperforms the market, the passive investment follows the benchmark index and thus replicates the performance of those indices.

In simple terms, passive investment is the type of investment that follows the benchmark index (SENSEX or NIFTY) for choosing sectors, stocks, and diversification of portfolios. Thus, the investors are not looking to gain a high return on outperformance instead consider the indices and expect returns as per the performance of the index.

Now passive portfolio management is done in two different ways:

• Replication Basis
• Sampling

The replication basis as the name goes describes how the particular portfolio is replicated on the basis of the weightage of underlying assets. Now, this becomes challenging as it is difficult to find the best from the long list and this is where the sampling method comes into the picture, where the portfolio management is done on the basis of filtering the stocks and sectors on the basis of different approaches like risk, return etc.

This distributes the sources of risk and thus gives them the chance to earn an average return on investment. 

The advantages of passive investing are:

• Low cost of implementation
• They generate consistent gains in the long term

Disadvantages of passive investing are:

• Only suitable for long-term investors.
• A high concentration of security in one place.
• Opportunity cost against the option to beat the market and earn greater profits.
• Downside risks could lead to massive losses, and you might not be able to protect your capital.

To make you understand the Active and Passive strategy more comfortably, we’ll give you a simple and straightforward example.

For instance, there is a fund manager, following an active strategy, who buys a share of an IT company like Hexaware. Another manager, believing in passive strategy, buys shares of multiple companies under the BSE IT index.

Both of them are investing the investor’s money in the same sector but might face varying amounts of risk.

How?

The latter will reduce the risk by investing in various companies of small, mid, and large capital values. The former will be subjected to higher risk as – if the share price plummets, the investor’s capital investment might be lost in a second. 

Now let’s move to the next types of portfolio management services in India.

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Discretionary Portfolio Management

As the word discretionary very clearly suggests, the portfolio manager/fund manager has complete control over the client’s investment decisions.

The manager decides to buy or sell on behalf of the client and uses the strategy as he deems right. Here the management of the portfolio is not customized according to the client’s requirement, instead is based on the strategy that is created on the basis of groups falling under similar categories. 

This strategy should be executed by individuals who have a deep understanding and extensive knowledge of investing in the stock market.

Advantages of discretionary investing are:

• An investment expert does the handling of the Portfolio.
• No decision-making stress for the client.
• If you and the manager have similar buy and sell suggestions, the management process is more straightforward.

One considerable disadvantage is that of the higher PMS commission.

With complete trust in the fund manager, confident clients choose to hand over all the investments to a discretionary manager. So, discretionary investing is not for you if you want to have the reins of investment in your hands.

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Non-Discretionary Management

Among the types of portfolio management services, the last one is the non-discretionary portfolio manager. It can be called a financial advisor as the final decision lies in the client’s hands. The manager only comes up with suggestions for investing, and approval is ultimately client-dependent.

The manager provides you with the pros and cons of the particular PMS strategies and the corresponding financial segments but won’t execute without your permission.

Thus, this type of portfolio management entirely depends upon the clients’ hand as he is the decision-maker, the portfolio manager only works on the basis of instruction provided by the client.

This strategy has the significant benefit of getting access to a financial advisor without giving up the controls on your investments.

One of the most significant downsides to this type is PMS investment risk as the investor is the decision-maker and a quick shift in the Portfolio might cost high leading to huge losses. 

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Conclusion

Portfolio management services or PMS is a service provided by investment experts to assist the stock market traders or investors in building a great portfolio and maintaining it.

The primary aim of these service providers is to reduce the losses by diversifying the client’s Portfolio.

The above discussed four types of portfolio management services help you in choosing the one offering you managing your investment, risks, and returns accordingly and in reaping the best benefits of portfolio management services in India. 

The fund manager has to seek the investor’s approval before executing any profitable trade for the client.

 

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