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How effective are Portfolio Management Services?

Regardless of the ultimate goal, one of the biggest decisions faced by individuals is to decide how to invest. Whether the goal is to fund retirement needs or future liabilities, the challenges they face are more or less the same. Amateur investors as well as seasoned financiers are looking to earn high returns with limited risk undertaking. To achieve these goals, many opt for Portfolio Management Services.

What are Portfolio Management Services?

Portfolio Management Services are custom-made professional services which are designed to cater the investment objectives of different investors belonging to diverse investor classes. In simpler terms, portfolio management means management of your investments by trade professionals. The solutions provided under portfolio management services cater to niche client segments.

Portfolio Management is offered by mutual funds and brokerage houses registered under Securities and Exchange Board of India (SEBI). When you opt for portfolio management services, a bank account and demat account are opened in your name. According to the portfolio management agreement, the Power of Attorney for operating these accounts are with the portfolio manager who will make the investments on your behalf. Income or dividend arising out of any investments made in your name will be credited to your bank account. Also, the shares will be held in the demand account in your name.

Types of Portfolio Management Services

Portfolio Management is the art and science of matching investment to objectives by balancing risk against performance. There are two types of portfolio management services ¬–Discretionary and Non-discretionary. Under discretionary portfolio management, the fund manager is responsible for taking investment decisions on behalf of the investor. As per SEBI instructions, the portfolio manager is required to provide performance reports to their clients every six months. In non-discretionary portfolio management the portfolio manager plays an advisory role. The portfolio manager suggests investment options while the ultimate decision is taken by the investor himself.

Key Elements of Portfolio Management

These services are generally used by high net worth investors looking to gain above-average returns by investing in various stocks.

Asset Allocation: Long-term mix of assets is one of the most important elements for effective portfolio management. Asset allocation is based on the understanding that some assets are more volatile than others. Investors can optimize the risk/return profile by investing in a mix of assets that have little or no correlation to each other. Asset allocation allows conservative investors to lean towards stable investments while allowing aggressive investors to opt for more volatile investments.

Diversification: Simply put, diversification means allocating investments among different financial instruments and industries. This approach allows spreading of risks and maximizing rewards within an asset class. There is no certainty or consistency in investments. Therefore, it is generally advisable to create a basket of investments in a bid to capture returns. Effective portfolio management includes proper diversification of investments across different security classes, economic sectors and geographical regions.

Rebalancing: In portfolio management, rebalancing is a method used to return a portfolio to its original target allocation. It involves buying or selling assets in the portfolio to maintain the original or desired level of asset allocation. Rebalancing is important to retain the asset mix which reflects the investor’s risk profile. Rebalancing allows investors to capture returns and expand growth opportunities in high potential sectors. The annual iteration is done keeping in mind the investor’s risk profile. Retirement accounts are one of the common areas in portfolio management in which investors look to rebalance. It is recommended to rebalance and diversify investments at least once a year to bring the desired level of stability to your portfolio.

Effectiveness of Portfolio Management Services

In recent years portfolio management has gained tremendous visibility across various organizations and industries. Companies have begun to offer portfolio management services as professional services. These companies employ successful portfolio managers who in turn partner with client organizations to develop long-term portfolio management strategies.

The effectiveness of these Portfolio Management Services, however, remains subjective. One of the most important factor, and perhaps the biggest challenge, is aligning the portfolios with the investment goals of the investor. Portfolio managers should get a thorough understanding of the risk profile of the investor. Establishing the investment goal and risk profile at an early stage will help the portfolio manager to allocate assets in an efficient manner.