Portfolio Management Services - What is it ?

What is Portfolio Management Services?

A portfolio management service is personalized services or contract to let the expert professional manage your finances. These services are governed by the SEBI (Portfolio Managers) Regulations, 1993. The initial focus of these services was high net worth individuals or institutions however with the growing disposable income; many high salaried people also go in for this kind of services. As per the SEBI guidelines, the minimum investment required to start a PMS account is Rs. 25 Lakhs. 

The complete of existing Portfolio managers as mentioned in SEBI website as on date is http://www.sebi.gov.in/sebiweb/home/pmd_mb.jsp?listCode=P

How does it work?

A team of professionals performs extensive market research to provide a personalized solution to achieve investment objectives. The preferences or restrictions of investment avenues can be clarified by the client at the beginning of the contract.

          A. Portfolio Manager

A Portfolio Manager is appointed by the institution or corporate body to devise an investment plan for his client. Every portfolio manager can have multiple clients but his plan can be different for every one depending on their preferences. 

A Portfolio manager can either be either of following:-

a) Discretionary Portfolio Manager – he manages the fund independently in accordance with the needs of the client and as per his best professional expertise.

b)    Non-Discretionary Portfolio Manager - he manages the funds as per the clarifications and communication of the client.

Any person/company registered with SEBI as a portfolio manager after paying a registration fee of Rs 10 lakhs valid for period of three years. The capital requirement for the individual / firm remains to have minimum net worth of Rs 2 crore. 

B.  Fees

There is no prescribed scale or range of fees/percentage that can be levied for the PMS services. However, the contract shall clarify the same in contract suggesting whether it would be a fixed amount or percentage. The fees would be charged only for managing the funds.

C. Reports

 a)   Composition and value of portfolio as on date. Details of invested securities and asset type regarding maturities, credit rating, bonus or dividend/interest earned interim and percentage of total exposure in the particular security. Also, if any liquidated positions are maintained.

b)   Details of all buy /sell transactions in case of discretionary portfolios.

c)   Details of incurred expenses in managing the funds.

d)   All the risks foreseen by the manager and possible strategy to be adopted by him in that case.

The details would be made available at least once in six months. It needs to be produced earlier on requirement of clients. The same needs to be easily available online in email/website or via postal correspondence as requested by client. 

   

          D.  Disclosure agreement 

The Disclosure agreement contains the details about the breakup of fees to be levied on client, calculation of the all components in it, investment risks attached to the portfolio, any guaranteed returns if any, duties and reports to be delivered by the manager, past performance and the audited financial statements of the particular portfolio manager for the immediately preceding three years. Also, details of penalty applicable for early exit from the fund.

SEBI does not have any predefined format of disclosure report or list of applicable dos and don’ts for the Portfolio Managers. The client has to read well the contract before signing the same.

E. Lock in Period

There is no such defined lock in period for the PMS services. Further, if the investor intends to withdraw his money before maturity of contract he could attract a penalty on his fund value.

Our verdict

PMS services are useful for managing our funds incase if the owner has no time or understanding of the capital markets. Also, unlike like a small retail investor doesn’t mind holding high risk to his investment money. He is not scared of losing his invested capital. In past, many Portfolio Manager have given positive returns, but the actual performance has not been up to the mark. Further, there is no defined guideline controlling the manager from investing in particular asset class unless mentioned in particularly by the client at the beginning. In case of capital erosion, SEBI can only interfere or provide judgment if the contract rules are breached, which is a rare possibility.

  

What is all the whole fuss about monetary policy?

What is a Monetary Policy?

It is a policy laid down by central bank of India i.e. RBI to manage the supply of money to match the demand of money to achieve price stability i.e. control inflation and economic growth. It is responsible for everything on macro level like financial markets, interest rates control, regulations on financial institutions etc.

How often does RBI announce monetary policy?

RBI announces Monetary Policy in April of every year. It is followed by three quarterly reviews. However, RBI has its own discretionary powers to announce the required measures in policy interim. The current year monetary policy announcement details are as follows - https://rbi.org.in/Scripts/Annualpolicy.aspx

How does RBI implement monetary policy?

The various instruments used by RBI to implement the monetary policy are as follows:

Open Market Operations – In the case of excess money supply, RBI uses sale of Government-securities to suck out rupee from system. Similarly, when there is a limited money supply in the economy, RBI buys Government securities from the market, thereby releasing liquidity. It is followed as and when needs arises.

Liquidity Adjustment Facility- RBI uses the Repo Rate and Reverse Repo Rate for introducing / pulling out of liquidity in line with the prevailing monetary policy stand. The repo rate (at which liquidity is introduced) and reverse repo rate (at which liquidity is pulled back) under the Liquidity Adjustment Facility (LAF) are the main weapons of the Reserve Bank’s interest rate indicating in the Indian economy. The details of current repo rate can be viewed over here – https://www.rbi.org.in/Home.aspx

Marginal Standing Facility – It can be understood as the temporary arrangement of the commercial and other co-operative banks to meet their fund requirement. They can raise these funds against their G-secs holding at a rate of 100 basis points more than the existing repo rate.

Statutory Liquidity Ratio The banks and other financial establishments in India have to keep a certain percentage of their net time and demand liabilities in the form of liquid assets such as G-secs, precious metals or any other approved securities etc. This is called as Statutory Liquidity Ratio (SLR). The current SLR rate is at 21%. Similarly, there is a CRR rate where every bank is supposed to maintain a portion of money in cash form. The current CRR rate is 4%.

Bank Rate - the rate at which RBI provides loan to other banks which includes commercial / cooperative banks, development banks etc is known as bank rate. This is usually against bills of exchange or commercial papers.

Credit Ceiling Under the credit ceiling, RBI manages the bank eligibility to the extent / limit they can get credit. It ensures that the bank is not over exposed to high risk and depositors’ money is not defaulted. It can even direct the banks to direct certain portion of their loans towards farming or other priority sector.

Who decides the policy rate?

“The Reserve Bank’s Monetary Policy Department (MPD) assists the Governor in formulating the monetary policy. Views of key stakeholders in the economy, advice of the Technical Advisory Committee (TAC), and analytical work of the Reserve Bank contribute to the process for arriving at the decision on policy repo rate. The Financial Markets Operations Department (FMOD) operationalizes the monetary policy, mainly through day-to-day liquidity management operations. The Financial Markets Committee (FMC) meets daily to review the consistency between policy rate, money market rates, and liquidity conditions.

The Governor, one Deputy Governor and one officer of the Bank would be the ex-officio members of the Committee. The other three members shall be appointed by the Central Government as per the procedure laid down in the amended RBI Act. The Committee will determine the policy interest rate required to achieve the inflation target.”- (reproduced from RBI website)

Regards

Saarthi Financial Planners 

Choose Your Own Mutual Fund

All mutual fund investments are subject to market and performance risk. Hence, while we choose any particular fund to fulfill our goal, we need to study its past performance and analyze its probable performance. Every mutual fund can be commonly judged on the following ratios to grade it quantitatively. These ratios are basically the risk measures of every fund stating the risk reward balance. 

a)   Standard deviation (SD) – As the name suggests, this particular measure is used to calculate the deviancy of any particular fund over a specific period of period based on its historical performance. Let us understand with an example:

Fund name	Kamaal	Double Kamaal
Past 1 year return (%)	15%	15%
Standard deviation (%)	12%	14%

Although both the funds above have same return in past 1 year, the fund with higher SD is considered to be move risky than the other.

b)   Sharpe ratio – this ratio is used to calculate risk adjusted return of a portfolio over and above the average risk free return of portfolio. It is useful to understand what the actual return is earned by a portfolio over the zero risk investment. Higher the Sharpe ratio better is the investment. Let us understand it with an example:

Fund name	Kamaal	Double Kamaal
Past 1 year return (%)	15%	15%
Risk free return (%)	5%	5%
Standard deviation (%)	12%	14%
Sharpe ratio	0.83	0.71

Fund with higher Sharpe ratio indicates that the fund is more likely to give profit even with higher risk taken. Negative Sharpe ratio means is not good enough for sustainable long term investment.

c)   Beta – Beta measures the change in fund return to change in benchmark index performance. It is always closer to 1. Lower than 1 indicates lower beta and higher than 1 means higher beta. Thus, if market goes up, fund with lower beta will go down and if the market goes down, fund will come up. Hence, higher the correlation of mutual funds with the underlined fund, better the reading of the Beta of fund.

d)  Alpha –It is a comparative ratio. It is used to compare the fund performance against the benchmark Index. It helps to understand if the stock has outperformed or underperformed against the Index. Further it can be used to see the best performing fund in the index. It is calculated as follows:

Past 1 year return (%) – [Risk free return + (average market return - risk free rate)* beta]

So suppose – fund performance – 15%, risk free return – 5%, beta – 0.71, average market return 18%, then alpha is around 1%. This means the fund has outperformed the expected market return by 1%.

e) R-Squared – it is studies the relation between Beta of fund and benchmark index.

Summarizing,

Standard Deviation	Lower the SD, better the mutual fund.
Sharpe Ratio	Good fund -> Low SD &  Higher Sharpe ratio Volatile fund -> High SD & Lower Sharpe ratio
Beta	Higher beta funds expected to give you profit in Bullish markets and low beta fund is preferred in a bearish market expectation.
Alpha	Higher the Alpha, better the mutual fund performance is.

Regards,

Saarthi Financial Planners

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