Month: November 2023

Portfolio Management Service (PMS) offers customized portfolio management for high-net-worth individuals and Non-individuals such as HUFs, partnerships firms, sole proprietorship firms and body corporate.

A skilled portfolio manager handles your portfolio, which can be crafted as per your financial goals and objectives. 

When you invest in a mutual fund, your money goes to the fund house and then into the fund. However, in PMS, the transactions take place through your demat account. Therefore, you can see all the transactions happening on your behalf. 

You may like to read- Basics of Portfolio Management Service before moving ahead.

When is the Right Time to invest via Portfolio Management Service?

1. More than 50 Lakhs of Portfolio to Manage

PMS caters to HNIs with a minimum of 50 lakhs (as per SEBI guidelines) of investment. 

After spending years with mutual fund investments, you may have gotten comfortable with the risk associated with it. Now, if you don’t mind a slight more risk for even better rewards, PMS can be your next step.

Pro Tip- Entrust a PMS house with 50 lakhs only if that amount is not more than 20% of your overall portfolio. 

2. Managing a Large Number of Stocks

Recently, especially right after COVID, we reviewed a lot of portfolios with a large number of stock holdings. 

At a certain point, losing track of all these stocks is bound to happen. Investors may not have enough time to study the performance of each company in the current market. This leads to a long tail of underperforming stocks. 

The declining performance of multiple stocks creates a significant dent in your overall portfolio return. 

Instead, you could invest in stocks that align with your risk appetite and goal by selling underperforming stocks. 

Experts at PMS House can help you manage all your stock holdings. You can convey your buy/sell preferences and the portfolio manager will re-shape your portfolio accordingly. 

3. ESOPs Holdings

Salaried individuals may have ESOP holdings over the years. 

While reviewing client portfolios, we’ve often noticed that the biggest holding in their overall portfolio belongs to ESOP. Sometimes 90% of the portfolio consists of a single ESOP.

This leads to high-concentration risk. The returns will depend on the performance of a single ESOP. Your portfolio may not beat the benchmark. 

With PMS, you can filter out the stocks you want to keep or sell. You can set your preferences and invest accordingly.

For example, if you already hold an ESOP of Infosys, you can avoid buying more stocks of the same company. That way, you can truly optimize your portfolio. 

A well-balanced and diverse PMS commonly holds 20-30 concentrated stocks. Portfolio managers will readjust your portfolio accordingly by buying/selling stocks. The right asset allocation can minimize the risk and maximize returns. 

4. Flexibility

PMS offer more flexibility compared to mutual funds. 

Mutual fund categories have to follow SEBI regulations on asset allocation. But also, there are many norms regarding the capping on the underlying stocks, bonds and cash holdings. Additionally, mutual funds do not have exposure to the unlisted stocks.

PMS can choose the asset composition as per investor’s preferences and market opportunities. You can have a concentrated portfolio of 20-30 stocks. 

If you are someone who follows Sharia law, you can avoid investing in alcohol, tobacco, gambling, gold, and silver trading, banking and financials, pork and non-vegetarian, advertising, media, and entertainment industries.

It is possible to invest beyond equity, debt, and gold. PMS can open a door towards alternative assets and sectors to invest as per your choice.

How to Select a Good Portfolio Management Service? 

Launching a PMS in India is much easier than launching a mutual fund. Therefore, there are a lot more PMSs to choose from. 

Without a wealth manager by your side, it would be difficult to narrow down your choices. A certified wealth manager/relationship manager can recommend a list of suitable PMSs. Get in touch with VNN Wealth to know more.

Once you have a bunch of options ready, here’s what to review in a PMS.

1. Evaluate the Credibility of a PMS

Make sure the PMS is registered with SEBI (Securities and Exchange Board of India). Head to their website to review their team’s experience and track record. 

Delivering successful results in various economic cycles is a sign of a good PMS.

2. Communication and Transparency

The whole point of having a custom portfolio is knowing what’s happening with it. Having an active communication right from the start is the key to assessing the PMS provider. 

Make sure you read the client testimonials on their site. Ask questions about strategies. See the response time and quality. As an informed investor, it is your duty and right to know everything. 

3. Fee Structure

PMSs either charge a fixed management fee and an exit load or a profit participation fee. Each PMS has a different fee structure. To give you an idea, the fixed management fee could be between 2 to 2.5% of the total asset value. The exit load depends on the holding period and withdrawal value and could range from 1 to 2.25%. 

The profit participation fee depends on the agreement you have with the portfolio manager. For example, the portfolio manager will share a small part of your profit if it crosses a hurdle rate of 10-12% p.a. return. 

It is crucial to understand the fee structure before you hand over your portfolio.

4. Strategies and Risk Management

As mentioned above, PMS customizes your portfolio as per your financial goals and the timeframe in which you want to achieve them.

Therefore, the investment strategy and risk management changes as per the investor’s risk appetite.

Similar to mutual funds, PMS also offers large-cap, mid-cap oriented investment options. You can build a strategy to meet your financial requirements and preferences. 

Your wealth manager will be able to guide you through the entire process. If you don’t have a wealth manager yet or want to hire a new one, VNN Wealth is just a phone call away.

Final Words

According to SEBI data, the assets under management of PMS have increased to 28.50 lakh crore by 2023, with 14% year-on-year growth. 

Many investors are actively seeking personalized investment opportunities to align with their financial goals. If planned right, PMS can offer superior returns compared to conventional investment avenues. 

If your portfolio meets the criteria mentioned in this article, you can definitely go for PMS. 

Take a complimentary portfolio analysis with VNN Wealth to know where your portfolio stands and which PMS to choose. Contact us to know more. 

Follow @vnnwealth for more insights in the world of finance. 

Asset Allocation plays a vital role in the overall performance of your portfolio.

You know how a balanced mix of spices makes a delicious biryani? Similarly, a combination of various asset classes optimizes your investment portfolio. 

Market conditions dynamically change with time. No one can predict the accurate performance of a single asset class. 

The right asset allocation can hold your portfolio together during changing markets. 

Read along to know more.

What is Asset Allocation?

Asset allocation refers to distributing/allocating your money to different asset classes. 

The allocation strategy ensures diversification. That way, the poor performance of one asset class can be recovered by another well-performing asset class. 

Different Asset Classes Include:

• Equity: Stocks or equity-oriented mutual funds invest in companies listed on the stock exchange. This asset class is riskier compared to others but has the potential to deliver superior returns in the long-term. 
• Fixed Income: Government bonds, corporate bonds, FDs, debt mutual funds, and money market instruments come under fixed-income securities. Safer than equity, this asset class can generate regular income.
• Gold: Works as a hedge against inflation, currency fluctuations, geopolitical uncertainties, and global economic ups and downs. Gold/Silver ETFs can deliver superior returns compared to physical gold/silver and are easy to manage.
• International Equity: Some selective mutual funds also offer exposure to international markets by investing in companies across the globe. 
• Real Estate: Purchasing residential buildings, commercial buildings, and lands delivers returns via property appreciation or rent. This asset class is less liquid and may take a lot of time to deliver attractive returns. Investors can alternatively explore Real Estate Investment Trusts (REITs) which do not require buying a physical property. 

Importance of Asset Allocation in Portfolio

1. Balancing Risk

Asset allocation avoids dependence on a single asset class. Refer to the image below and you’ll notice that every asset class performs differently in changing economic conditions. 

[Data Source: Bloomberg]

In the year 2021, equity delivered 26.53% returns, debt delivered 1.4% and gold was underperforming. 

But in 2022, gold picked up pace and equity, debt declined by a large margin. 

An equity-heavy portfolio would have delivered significant returns in 2021 but would have underperformed in 2022.

Which is why, allocation across multiple asset classes can together balance the returns. 

2. Ideal Returns

Multiple asset classes can significantly improve your chances of earning superior risk-adjusted returns. Explore the above table again. Each asset class goes through its ups and downs every year. 

An equity-heavy portfolio would have suffered in 2016, 2018, and 2019 when gold was delivering superior returns. However, a portfolio with a mix of equity, debt, and gold would deliver ideal returns considering the state of the economy at the time. 

You can invest in different asset classes with variable horizons to keep your portfolio moving. 

3. Adequate Liquidity

You can enter and exit mutual funds as per your preference. However, an investment horizon plays a vital role in receiving the returns you are aiming for.

Equity mutual funds usually deliver superior returns over a longer horizon. Every savvy investor would suggest you stay invested for 5-7 years or more. 

And while equity investments are catering to your long-term goals, you need something liquid to withdraw quickly. Liquid funds, short-duration debt funds can be included in your asset mix for liquidity. So that, you can redeem them during an emergency.

4. Tax Optimization

Every asset class has different taxation rules. Asset allocation strategies also focus on lowering tax implications to maximize returns. 

For example, the ELSS mutual fund is a popular tax-saving instrument offering a deduction of up to 1.5L under section 80C of the IT Act. 

Hybrid debt funds with more than 35% exposure to equity still have the old indexation benefit which pure debt funds don’t have anymore. 

Explore taxation on all categories of mutual funds here. 

5. Financial Goals Accomplishment

Your financial goals are easier and faster to achieve by asset allocation. It avoids confusion, prevents panic-selling during market volatility, and simplifies decision-making.

Factors to Consider For Effective Asset Allocation

1. Risk Profile

Your risk appetite, tolerance, and capacity assessment are crucial to plan asset allocation. 

The risk you can comfortably manage depends upon your age, family dependency, monthly income, expenses, and more.

Evaluate your risk profile for FREE with VNN Wealth to know which asset classes fit your profile.

2. Investment Horizon

Asset classes may have a lock-in period or a time-frame in which they deliver ideal returns. It is crucial to ensure the expected investment horizon before entering any asset class. 

3. Your Financial Goals

All your investments essentially cater to your financial goals. You can align your investments with goals such as buying a house, funding children’s education, planning for your retirement, etc.

Asset Allocation Strategies

1. Strategic Asset Allocation

Strategic investments maintain a core static mix of assets. For example, if an investor wants to maintain a 65:35 ratio of equity:debt, they will periodically balance the assets to the static ratio.

Let’s say you have distributed 1,00,000 into equity:debt as 65:35%, which will be 65000 in equity and 35000 in debt.

Now assume that your equity investment went up to 1,00,000 and debt went up to 40,000 bringing the total amount to 140,000. The asset ratio became 71.4% equity and 28.5% debt. 

In order to bring it back to 65:35, the equity and debt investment amount should be 91,000 and 49,000 respectively. Therefore, you’ll have to sell equity worth 9000 and allocate it to debt. 

Note- You can take advantage of market opportunities to rebalance the portfolio. For example, buying more equity when equity markets are down. 

2. Tactical Asset Allocation

Tactical asset allocation also follows a core asset mix but with opportunistic expectations. 

This strategy takes advantage of market trends and timing, to maximize returns. For example, including gold/silver in your portfolio when there’s an opportunity to earn higher returns on the precious metal investments. 

Another scenario is- a portfolio of 65-35% equity:debt can go to 80:20% if there’s the possibility of earning superior returns through equity for a short time. The allocation adapts to the market changes and can go back to the original formation when markets are steady.

3. Dynamic Asset Allocation

Dynamic Asset Allocation is more of a fund-level strategy. It changes the asset mix based on the market conditions. 

Counter-cyclical is a common dynamic allocation strategy in which- portfolio managers buy more equity when the markets are cheaper and sell it off at a higher price when markets correct. The debt allocation changes accordingly. 

Unlike the above two strategies, here you do not have to predefine the ratio of asset mix. It can go beyond rage if the opportunity presents itself. 

• Evidently, Balanced Advantage Funds follow dynamic asset allocation.  
• Multi Asset Funds offer exposure to equity, debt, gold and international stocks all in the same fund. 

You can explore various categories of mutual funds before sketching asset allocation for your portfolio.

Final Words

Now that you know the importance of asset allocation, you can choose the strategy as per your risk appetite. Many investors like to stick to the core asset mix while others explore dynamic allocation. 

A lot of investors also go with the thumb rule of age i.e. (100 – your age)% of equity allocation.

However, you must take your risk tolerance and financial goals into account. 

It’s always better to start with a set of goals and plan your investments accordingly. Connect with VNN Wealth experts for more insights on asset allocation. Rebalance your investment portfolio with us.