Investing in the stock market demands time. The most challenging part is to select worthy companies whose stock one may invest in that can provide a good amount of returns in the future.

Mutual funds come out as alternatives for investors seeking a professionally managed avenue for equity exposure. They present a basket of well-researched stocks and other assets that is curated by highly professional managers, called portfolio managers. In this article, we shall delve into who are portfolio managers and what their role is, and how they help investors capture opportunities from the market.

This article covers:

Who is a portfolio manager?

A portfolio manager is a skilled and qualified individual who is adept at making the right investment decisions to maximize wealth for their clientele. The calls of a portfolio manager are deep-rooted in research and an in-depth understanding of the investment product as well as market economics that affect the returns from the financial product.

Portfolio managers generally service clients with a large investible corpus, and so are mostly either dealing with high net worth individuals, or working with firms and helping manage the portfolio of institutional clients.

What does a portfolio manager do?

When wealthy individuals require financial planning assistance, they may connect with a portfolio manager that can be an individual or an institution. A portfolio manager helps investors – individuals, trusts and firms – form a plan to capture high returns from investments even as they strategize to  protect their wealth for  the future.  

To help achieve the financial goals of their clients, portfolio managers may perform the following steps:

Assess client’s financial goal

Portfolio managers begin with understanding the financial objective of the client. For instance, if an investor wants fixed and steady returns, then the manager may include debt instruments in the investor’s portfolio. Alternatively, if an investor has a high-risk appetite, and is ready to take a risk on the capital invested, the manager may introduce the client to hedge funds or other high risk equity investments.

Implement strategic asset allocation

Strategic asset allocation includes setting different weightage for different asset classes in the portfolio. For instance, 30% of the funds allocation to debt instruments and 70% to the equity market. Managers do this to manage the risk and reward ratio as per the client’s risk appetite.

Managers regularly change investment strategies

In the financial markets, nothing is certain. There are times when the metal sector is rallying, while sometimes the IT sector starts rallying. Therefore, to meet the client’s requirements, managers need to rebalance the portfolio periodically.

Manage the risk

The portfolio manager has to take care of several risks while allocating the funds, the most popular ones being security selection risk and investment style risk. Security selection risk, as the name suggests, refers to the chance of a wrong pick. Usually, portfolio managers keep indexes as their benchmark and then try to aim for benchmark-beating returns.

Investment style risk refers to choosing a particular strategy such as growth investing. Should the market turn the tide, the portfolio may be at risk.

Reports that clients can expect from their portfolio managers

Clients can expect a performance report from portfolio manageRs While the floor is open for the client and the portfolio manager to figure out what works best for both, ideally, the timeline of reporting should not exceed six months. And also, clients can ask for reports as and when required. 

The performance report includes: 

  • The value of the portfolio as per the current market price. Also, the performance report should consist of a description of the security and type of asset class. 
  • The performance report should contain details of every transaction. That is, there should be all purchase and sale transactions, including the date of the transaction and taxes and charges levied. 
  • The performance report contains interest received on the invested capital amount. 
  • All the expenses incurred by the fund manager or the asset management company are in the performance report. 
  • There is a separate section on the risks related to the investment portfolio mentioned in the performance report. The investor should be familiar with all types of risks related to the portfolio. 

Some portfolio managers make the detailed performance reports available on their websites. Clients, with a unique number, can log in to the website and download it. However, if not, the client has all the rights to obtain the performance report from the manager.

SEBI regulations for portfolio managers

In India, regulations on portfolio management services were introduced in 1993. The Securities Exchange Board Of India (SEBI) keeps reforming them from time to time to safeguard the interests of investors and to enhance the security. Some of the regulations are: 

  • The market watchdog, SEBI, does not authorize any portfolio management company to offer the services without a comprehensive agreement between the client and the company. Both parties have to sign an agreement stating all the details of the relationship between the investor and the portfolio manager. 
  • SEBI has set a limit of Rs 50 lakh as a minimum investment amount by clients in Portfolio Management Service or PMS.
  • The portfolio manager should be mandatorily registered with the SEBI.  
  • As per SEBI, the portfolio manager has to periodically send a detailed performance report.   
  • An investor needs to sign the full disclosure form for disclosing the source of income and the mode of payment. 
  • An investor needs to pay the portfolio manager fee in regular intervals and not upfront. 
  • If any discrepancy arises, the investor can approach an investor relations officer. The disclosure document comprises the investor relations officer’s contact details. 
  • Portfolio managers can not ask for an upfront payment for the services and the agreement between investors and the company should consist of all charges. 
  • There shouldn’t be any third party involved between the investor and portfolio manager. The agreement should be mutually agreed upon between two parties only. 
  • The portfolio manager should report to the investor on a regular basis. 
  • The base net worth requirement of portfolio managers has been raised to Rs 5 cr
  • Similarly, asset management companies should not invest more than 25% of the portfolio in unlisted shares or assets. 

Also, the investor needs to have a demat account to avail services of the portfolio manager.

Types of portfolio managers

Generally, there are two types of portfolio managers: Discretionary and Non-discretionary portfolio managers. 

Discretionary portfolio manager is a kind of a trustee of the wealth of the client. They manage the funds independently. They do not need to consult the client every time before making any investment and instead can invest on behalf of the client in a variety of securities as per the client’s requirement.

Non-discretionary portfolio manager works based on a consultative investment approach, unlike a discretionary manager. The portfolio manager only suggests investment schemes. The investor chooses the scheme and term as per their requirement, then the investment decision gets finalized.

Discritionary portfolio manager independently manager the client's wealth whereas Non-discretionary ones only suggest schemes to their clients. Click To Tweet

You have done your homework through this post before approaching a portfolio manager. Take the decision wisely. Choosing a financial manager is a crucial part of your investing journey. There must be confidence in the portfolio manager’s competence, and integrity. Moreover, analyzing the past performance of the manager helps to secure great returns.

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