What is a portfolio? What’s portfolio management?

PORTFOLIO

Simply put-

If you own more than one asset as investment, you have an investment portfolio.For example you may have 30% of your wealth invested in equities, 30% in debt funds, 20% in gold and the balance in cash- that’s a portfolio of investments.

In the context of shares, you have a portfolio of shares, when you own and manage a group of different shares.for example if you own stocks of Infosys , HLL , Cipla, Tata motors and DLF – what you have is a portfolio of equity investments in diversified sectors.

  • All investments carry risk.  You cannot put all your  money in one asset class . For example , you have 1 million with you and you decide to put the whole money into equities. What would be your fate if the stock crashes?  or if you have invested in fixed income deposits that gives you 8% interest for a long term . The  average inflation rate stays at 8% . Do you think you’ve made a penny ?
  • So, putting all your money in one basket in not a good idea because it exposes you to great risks. The solution to reduce risk is to do the opposite- put all your money in different baskets- so that even if one fails , you get a return from other which may compensate the loss in other. The more you diversify, the less risky your portfolio becomes. This is one of the basic principles in investments.
  • So, the main characteristic of a serious investment portfolio is diversity. It should show a spread of investments to minimize risk.

WHO IS A PORTFOLIO MANAGER?

A portfolio manager is that person who, with his skill and expertise, looks after your investments and manages them for you. PM’s (Portfolio managers) make decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance.

  • Are they known by any other names?

Yes. They are also called money managers, investment advisors, financial advisors, financial consultants, investment consultants, financial planers etc.. after all, what’s in a name? What matters is what something is, not what it is called. However, there are two types of portfolio managers- discretionary PM and non-discretionary PM.

What’s the difference?

The discretionary PM individually and independently manages the funds of each client in accordance with the needs of the client. So they make the buy-sell decisions without referring to the account owner (client) for every transaction. The manager, however, must operate within the agreed upon limits to achieve the client’s stated investment objectives. Non discretionary PM manages the fund in accordance with the directions of the client.

  • Is there an agreement between you and PM?

Yes. The portfolio manager, before taking up an assignment of management of funds on behalf of the client, enters into an agreement in writing with the client clearly defining the relationship and setting out their mutual rights, obligations and liabilities relating to the management of funds containing details as specified in schedule IV of the SEBI (portfolio managers) Regulations, 1993.

IS THERE A MINIMUM INVESTMENT?

Yes. The PM is required to accept fund or securities having a minimum worth of 5 lakhs rupees from the client while opening the account for the purpose of rendering portfolio management services to the client.

  • How much can a PM charge from you?

The SEBI (portfolio managers) regulations, 1993, have not prescribed any scale of fee to be charged by the portfolio manager to his clients. However, the regulations provide that they can charge a fee as per the agreement wit the client for rendering their services. The fee so charged may be a fixed amount or a return based fee or a combination of both. The PM shall take specific permission from the client for charging such fees.

    Can a PM invest in derivatives (futures and options) for his client?

Yes. However, leveraging of portfolio is not permitted in respect of investment in derivatives. The total exposure of the client’s portfolio derivatives should not exceed his portfolio funds placed with the PM.

  • What are the disclosure requirements of PM to their clients?

The PM provides to the client the disclosure document at least 2 days prior to entering into an agreement with the client. The disclosure document contains the quantum and manner of payment of fees payable by the client for each activity for which service is rendered by the PM directly or indirectly, portfolio risks, complete disclosures in respect of transactions with related parties as per the standards issued by the ICAI in this regard, the performance of the PM and the audited financial statements for the last 3 years.

  • Is premature withdrawal of Funds/securities by an investor allowed?

The funds or securities can be withdrawn or taken back by the client before the maturity of the contract. However, the terms of the premature withdrawal would be as per the agreement between the client and the portfolio manager.

  • Can a Portfolio Manager impose a lock-in on the investor?

Portfolio managers cannot impose a lock-in on the investment of their clients. However, a portfolio manager can charge exit fees from the client for early exit, as laid down in the agreement.

CAN A PM OFFER GUARANTEED RETURNS?

Portfolio manager cannot offer/ promise indicative or guaranteed returns to clients.

  • Where can an investor look out for information on portfolio managers?

Investors can log on to the website of SEBI www.sebi.gov.in for information on SEBI regulations and circulars pertaining to portfolio managers. Addresses of the registered portfolio managers are also available on the website.

  • How can the investors redress their complaints?

Investors would find in the Disclosure Document the name, address and telephone number of the investor relation officer of the portfolio manager who attends to the investor queries and complaints. The grievance redressal and dispute mechanism is also mentioned in the Disclosure Document. Investors can approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned portfolio manager and follows up with them.

Investors may send their complaints to: Office of Investor Assistance and Education, Securities and Exchange Board of India,
SEBI Bhavan Plot No. C4-A, ‘G’ Block, Bandra-Kurla Complex, Bandra (E), Mumbai – 400 05

That completes portfolio and portfolio managers. Our next lesson will detail about the qualities that you should look for in a PM and how to go about selecting a PM.

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2 Responses to “What is a portfolio? What’s portfolio management?”

HG Sharma

April 12, 2012 at 9:00 am

The PMS provider,assures that they will attempt to consistanly outperform the Bench Mark ,will safe gaurd against market down fall etc. etc. But in reality they fail miserably. My query is,

Can an Investor, not ask a service provider to give ,a few referals who have benifited with their performance. In the absense of such info it looks very one is suffering in silence . The service provider refuses to give this info saying SEBI restrains them to divulge it. Are they justified in saying so?

J Victor

April 12, 2012 at 10:48 pm

Portfolio managers are supposed to maintain secrecy of investments of their clients. There is a secrecy clause in most of the portfolio agreements. However, with the permission of the client, it can give referrals. There’s nothing wrong in that.

The offers / promises of the PMS that they will safeguard your investments are not legally valid. SEBI does not approve such promises.

An investor has to invest in the services based on the terms and conditions laid out in the disclosure document and the agreement between the portfolio manager and the investor.

The performance of a discretionary portfolio manager can be disclosed in the disclosure document given to you prior to signing the documents. However, The SEBI neither approves or disapproves the disclosure document nor guarantees the accuracy of data contained therein.

Finally, A PMS cannot offer/ promise guarantee of capital invested or returns to clients.

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