Research Methodology - Portfolio Management Services

RESEARCH METHODOLOGY

Topic:

Portfolio Management services

offered by financial institutions and their

perception analysis

-

Submitted to Prof. Tejas Fadia

Pranav Mulay (221)

Harshad Bhangadia (208)

Kunal Adnani(201)

CONTENT

o OVERVIEW

o QUESTIONNAIRE

o DATA ANALYSIS

o CONCLUSION

RESEARCH OBJECTIVE

To study investor knowledge about different financial services especially Portfolio Management Services and their expectations.

OVERVIEW

Portfolio Management: The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance.

Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk. In the case of mutual and exchange-traded funds (ETFs), there are two forms of portfolio management: passive and active. Passive management simply tracks a market index, commonly referred to as indexing or index investing. Active management involves a single manager, co-managers, or a team of managers who attempt to beat the market return by actively managing a fund's portfolio through investment decisions based on research and decisions on individual holdings. Closed-end funds are generally actively managed.

Portfolio Management Services account is an investment portfolio in Stocks, Debt and fixed income products managed by a professional money manager that can potentially be tailored to meet specific investment objectives. When you invest in PMS, you own individual

securities unlike a mutual fund investor, who owns units of the entire fund. You have the freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of portfolios, your account may be unique. As per SEBI guidelines, only those entities who are registered with SEBI for providing PMS services can offer PMS to clients. There is no separate certification required for selling any PMS product. So this is case where mis-selling can happen. As per the SEBI guidelines, the minimum investment required to open a PMS account is Rs. 5 Lacs. However, different providers have different minimum balance requirements for different products. For E.g. Birla AMC PMS is having min amount requirement of Rs. 25 lacs for a product. Similarly HSBC AMC is having minimum requirement of 50 lacs for their PMS and Reliance is having min requirement of Rs. 1 Crore. In India Portfolio Management Services are also provided by equity broking firms & wealth management services.

There are broadly two types of PMS

Discretionary PMS – Where the investment is at discretion of the fund manager & client has

no intervention in the investment process.

Non-Discretionary PMS – Under this service, the portfolio manager only suggests the

investment ideas. The choice as well as the timings of the investment decisions rest solely with the investor. However the execution of the trade is done by the portfolio manager The client may give a negative list of stocks in a discretionary PMS at the time of opening his account and the Fund Manager would ensure that those stocks are not bought in his

portfolio. Majority of PMS providers in India offer Discretionary Services.

Each PMS account is unique and the valuation and portfolio of each account may differ from one another. There is no NAV for a PMS scheme; however the customer will get the

valuation of his portfolio on a daily basis from the PMS provider. Each PMS account is unique from one another. Every PMS scheme has a model portfolio and all the investments for a particular investor are done in the Portfolio Management Services on the basis of model portfolio of the scheme. However the portfolio may differ from investor to investor. This is because of

1. Entry of investors at different time

2. Redemptions/additional purchase done by investor

3. Market scenario – E.g. If the model portfolio has investment in Infosys, and the current view of the Fund Manager on Infosys is “HOLD”(and not “BUY”), a new investor may not have Infosys in his portfolio

Under PMS schemes the fund manager interaction also takes place. The frequency depends on the size of the client portfolio and the Portfolio Management Services provider. Bigger the portfolio, frequency of interaction is more. Generally, the PMS provider arranges for fund manager interaction on a quarterly/half yearly basis

How is PMS different from a Mutual Fund?

Both PMS and Mutual Funds are types of managed Funds. The difference to the investor in a Portfolio Management Services over a Mutual Fund is:

1. Concentrated Portfolio

2. Portfolio can be tailored to suit the needs of investor

3. Investors directly own the stocks, rather than the fund owning the stocks 4. Difference in taxation

Investors should check data to ensure that historically the PMS has outperformed the market both on the upside and downside. Avoid those PMS providers who have a conflict of interest as quite a few do. Make sure that the PMS provider is registered with SEBI (check on their website) – there are around 250 that are registered and some 750 that are not! Fees of a PMS can be fixed or variable. In the fixed fees model, a charge between 1.5% – 3% can be charged on the assets being managed. In the variable fees model, fees of

approximately 15% – 20% on profits generated are levied. Understating of how the fees are being levied is important as it can drain your corpus significantly. Some PMS schemes charge an entry load of 3% which is applicable only at the time of entry into the PMS. There are other charges like brokerage charges, audit charges, fund management charges among others

I strongly advocate that ordinary medium class investors do not invest in PMS. If your Rs 5 lacs get eroded and you feel like having a heart attack, PMS is not meant for you. However, even a small investor can have a huge stock portfolio. Firstly, we advocate that direct stock trading is not everyone’s cup of tea and even a long term buy and hold strategy never earned everyone riches as small investors bought at the wrong time. So better stick to mutual funds. But if you made a pact with the devil that you need to subscribe to PMS, and then ensure you can sleep well if you lost all of that money. If not, PMS is not for you. PMS according to me is meant for those who consider the loss of capital a small blip on their savings radar. They don’t get bothered much and move on in life with another PMS provider! The top portfolio management services in India might have returned decent amounts to investors but remember that there have been notorious ones as well – it only takes one big loss for a small retail investor to go down the drain on his life’s hard earned money. To conclude, small retail investors should avoid PMS while high net worth

Choosing a Portfolio Management Schemes:

There are so many Portfolio Management Schemes in the industry. So it is really very difficult to choose a good Portfolio Management Scheme provider. Here are some factors to be considered before choosing a Portfolio Management Scheme.

1) Yardstick for Performance:

One should not just go by the past performance alone for choosing the best portfolio management scheme. Making an analysis on various Portfolio Management Schemes in the industry with their past performance along with the Risk Adjusted Return return and the consistency of performance will be useful in choosing the best Portfolio Management Scheme.

2) Minimum Investment Criteria:

Investors need to avoid Portfolio Management Schemes where the minimum investment is less than 25 lacs. Even there are Portfolio Management Scheme operators who keep minimum investment for their schemes as low as 5 lacs. But these kinds of Portfolio Management Scheme operators will have more number of PMS accounts. When the quantity (the number of PMS A\cs) goes up the quality (the performance) may relatively come down.

Therefore it is better to choose a Portfolio Management Scheme where the minimum investment is 25 lacs or more. So that our PMS A\c will be directly handled and managed by the top level portfolio manager and not managed by the juniors and analysts. If you are planning to invest less than 25 lacs, then the ideal investment product for you would be mutual funds.

3) Conflict of interest:

Portfolio Management Schemes have been run by some stock broking companies as well as investment management companies. There is a conflict of interest in Portfolio Management Schemes run by share broking companies. The main business of a share broking company is to earn commission income by facilitating the share market transactions.

Portfolio Management Scheme is an additional business for them. It is not their core business. Hence there may not be enough focus on the Portfolio Management Scheme business. Also they may indulge in doing undue and unnecessary churning of the clients’ portfolio to earn more commission income. This will cause additional expenses and short term capital gain tax to the client.

The core business of investment management companies is managing the investments of their clients to earn management fees. So, with the Portfolio Management Schemes run by investment management companies, there is no conflict of interest or vested interest. Therefore it is always advisable to choose a Portfolio Management Scheme offered by investment management companies.

4) Role of Professional Financial Planners:

A Professional Financial Advisor will study and analyse the Portfolio Management Schemes run by various stock broking companies as well as investment management companies. If we approach them, they will guide us in choosing the right Portfolio Management Scheme depending upon our requirements and other factors. There are few professional financial advisors advising on portfolio management services.

Also a professional financial advisor will continuously monitor the performance of various Portfolio Management Schemes and advice the client on a regular basis on the performance of the Portfolio Management Scheme where the client has invested vis a vis the other PMS schemes in the industry. After a certain period, if necessary he may advice you to move from one Portfolio Management Scheme operator to the other.

ESOPs and Portfolio Management Scheme:

ESOPs are provided by the companies to its employees based on their service. Most of the employees are of the opinion of keeping the ESOPs as it is forever because it is their company shares. But logically it is too riskier to invest in a company to whom you work for. Because, your employment income as well as investment income will depend on the performance of a single company.

So it is not advisable to keep your investments in a company where you actually work. So it is at all times advisable to transfer your ESOPs to a Portfolio Management Scheme. They will revamp it to construct a well diversified portfolio.

Portfolio Management Scheme is an aggressive investment product and really suitable for those investors:

1. Who have a share portfolio and find it difficult to manage.

2. Who have enough exposure in Mutual funds and looking for a different and good investment option

3. Who have sizable ESOPs

WHAT ARE THE FEES IN A PMS?

Portfolio management services either have a fixed, profit-sharing or hybrid fee structure. In a fixed-fee structure, the manager charges a set fee every quarter or on the corpus. It is levied irrespective of the returns generated by a portfolio. Then, there is the profit-sharing model, where the fee paid by an investor is a percentage of profits. This is usually a large chunk, around 20-25% of profits. A hybrid model combines both, although charges are less.

WHAT ARE THE ADVANTAGES OF PMS?

PMS trade in a wide range of securities, including structured products, which is not available to a mutual fund. PMS regulations are less strict than MF regulations. A PMS is a more personalised investment solution; some investors may ask their portfolio managers to allocate a large part of corpus to non-equity products like fixed income, gold, etc.

Some Portfolio Management Services in India: 1. HDFC 2. ICICI 3. Motilaloswal 4. Karvy 5. Kotak securities 6. Birla sun life 7. Reliance 8. UTI 9. Tata

Exploratory Data

Questionnaire for sale persons in firm:

1. Why should people prefer portfolio management services over mutual funds? 2. What is the risk appetite of the people?

3. Do customers prefer discretionary or non discretionary services? 4. What are the varying amounts in which customers can invest? 5. Returns expected by customers?

6. In which sectors do customers prefer to invest? 7. Different maturity periods available?

8. What are the fees charged? 9. What is the brokerage?

10. What are the risks associated in PMS? 11. In which instruments do PMS invest?

1. Why should people prefer portfolio management services over mutual funds?

In mutual funds, your money along with many others is pooled to form a common investible corpus. Any profit/loss made during a given period will be the same for all investors.

However, if you choose a portfolio management scheme, your individual investment remains identifiable to you. Here, even the profit/loss of all the investors will be different from each other.

2. What is the risk appetite of the people? About 10%

3. Do customers prefer discretionary or non discretionary services? Customers prefer non-discretionary services with periodic reports. 4. What are the varying amounts in which customers can invest? Starting from 5-10 Lacs, there is no upper limit.

5. Returns expected by customers?

Customers generally expect a return between 15-20%. 6. In which sectors do customers prefer to invest? They prefer stock markets for their high returns. 7. Different maturity periods available?

In most of our schemes the ideal time horizon for an equity portfolio is at least 12‐18 months.

8. What are the fees charged?

The following charges will be applicable. Asset Management Fees: 2.0% pa 9. What is the brokerage?

Brokerage: 0.5% per transaction.

10. What are the risks associated in PMS?

Risks are same as investing in stock market, risk is reduced as fund managers are more competent and knowledgeable than common investors.

11. In which instruments do PMS invest?

Depends on the customer and his financial goals, we invest in equity as well as debt markets.

12. What are the tax implications of investing in PMS?

Under the Portfolio Management Scheme, each transaction scheme will be considered as an independent trade and capital gains will be applied on each depending upon whether the relevant stock was held long term or short term. Presently 15.66 % tax is chargeable for hort Term Capital gains and no tax is chargeable on Long Term Capital Gains. The STT charges will also apply.

Variables Fees Brokerage Type of service Customer satisfaction Risk appetite Investing knowledge Hypothesis

H0: Investors are well informed about financial products for investment especially Portfolio management services.

H1: Investors are unaware about financial products for investment especially Portfolio management services.

Questionnaire

 20-25

 25-30

 30-35

 35-40

 >40

What is your net annual family income?*required

 <5L

 5-10L

 10-15L

 >15L

Do you know about various investment options?

 Yes

 No

Do know about portfolio management services?

 Yes

 No

If yes check PMS services you know about

 Motilal Oswal  Karvy  ICICI  Reliance  Kotak  Other:

What is purpose of your investments?  Returns  Tax benefit  Capital appreciation  Risk reduction  Other:

What do you consider more while investing?*re quire d

 Risk

 Return

 Both

Which option you feel will give best returns?

 Gold

 Real Estate

 Fixed Deposit

 Shares

 Portfolio Management Services

 Other:

How much return you expect in one year on your investment?*required

 <10%

 10-15%

 15-20%

 >20%

What do you feel about your knowledge of capital markets on scale of 1 to 10?

1 very low 10 very high

Do you invest in equity schemes using SIP?

 Yes

 No

 Planning to do in future

Is return on investment according to your expectations?*required

 Yes

 No

Do you feel investing in Mutual funds or PMS is safer than directly trading in Stock Market?*re quire d

 Disagree

 Neutral

 Agree

Do you know difference between Mutual funds and Portfolio Management Services?

 Yes

 No

Whom do you consult while investing?*re quire d

 Self

 Professional Services

 Friends, Relatives

 Other:

What do you think will help you to increase your investing knowledge?

Results and Analysis

What is your age?

About 50% of sample were students and rest 50% were working professional in

various stages of their career it gives us idea about investor knowledge during

different stages of life.

What is your net annual family income?

20-25 21 55% 25-30 12 32% 30-35 2 5% 35-40 1 3% >40 2 5% <5L 14 37% 5-10L 19 50% 10-15L 2 5% >15L 3 8%

Do you know about various investment options?

70% of respondents were aware of different investment options rest 30% are not

even aware of even any investment options. This shows that nearly 30% people

don’t even take interest in investing their hard earned money.

Do know about portfolio management services?

If yes check PMS services you know about

Motilal Oswal 13 27% Karvy 4 8% ICICI 14 29% Reliance 6 12% Kotak 11 22% Other 1 2%

Only 60% respondents were aware of financial product called PMS. Of the

respondents who knew about them popular ones were Motilaloswal, ICICI &

Kotak

Yes 26 70%

No 11 30%

Yes 23 62%

What is purpose of your investments?

Over 90% of respondents were interested in capital gains, returns or tax benefit.

This show people investing hope to earn money in short period of time and

decrease tax liability.

What do you consider more while investing?

Only 36% consider either risk or only returns, rest investors try to judge the

returns with risks involved in them which is beneficial for investors.

Risk 7 18%

Return 7 18%

Which option you feel will give best returns?

People in India like to invest real estate thinking it will give them high returns

which shows from the survey. Next two options which people feel will them best

returns are FD and Stock market.

How much return you expect in one year on your investment?

50% of respondents took notice of the risk factor associated with high returns

hence they expect a reasonable 10-15% return on their investments about 40% of

respondents expect returns greater than 15% which entails high risk.

Gold 4 11%

Real Estate 17 46%

Fixed Deposit 5 14%

Shares 8 22%

Portfolio Management Services 3 8%

Other 0 0%

<10% 3 8%

10-15% 20 53%

15-20% 10 26%

What do you feel about your knowledge of capital markets on scale of 1 to 10?

Majority of investors feel their investment knowledge is average or less than

average while negligible investors feel they have excellent knowledge.

Do you invest in equity schemes using SIP?

Very few people currently invest in equity using SIP which is great way to invest

for long term though 40% respondents said they were planning to do it in future.

Yes 7 19%

No 16 43%

Is return on investment according to your expectations?

About 70% respondents are not happy with returns they get on their investments,

so for them Portfolio management services would a great way to get their

expected returns

Do you feel investing in Mutual funds or PMS is safer than directly trading in

Stock Market?

40% respondents agreed that their money is more in hands of an experienced

fund manager rather than trading themselves, 55% respondents were neutral on

the same. This shows that people don’t feel safe investing in volatile stock

markets and would prefer someone would it for them.

Yes 12 32%

No 26 68%

Disagree 2 5%

Neutral 21 55%

Do you know difference between Mutual funds and Portfolio Management

Services?

Awareness about portfolio management services is not upto the mark only 46%

respondents said they were aware about them.

Whom do you consult while investing?

Self 13 27%

Professional Services 9 19%

Friends, Relatives 26 54%

Other 0 0%

Financial Services have still haven’t penetrated much into our society 54% rely on

others for their investing strategies and 27% prefer to do it on their own while

only 19% seek professional help. This shows that people still don’t realise the

benefits of having effective financial planning.

Yes 17 46%

What do you think will help you to increase your investing knowledge?

 Practical exposure

 Rereading the concepts from websites and books

 Taking practical knowledge from friends.

 Proper awareness and right analysis and knowledge.

 The knowledge of investment and shares.

 Analysis of financial statements & reading financial dailies & magazines.

 Reading n getting reviews of investments

 Regular watch on market and track on investment.

 Regular update about the market studying markets

 Better understanding of investment

 Most important thing I need to be well updated about investment options.

 Knowledge gained through Internet.

 Experience is must while investing. Need to research a lot about various schemes,

CONCLUSION:

 There is no widespread awareness about different financial services and investment options.

 Majority of people like to stay away from markets or have their portfolio handled by professionals.

 People expect high returns but are not ready to take high risks hence they are mostly not satisfied by the returns they get on their investments.

 They feel their knowledge of capital markets is not upto the mark.

 They don’t feel capital markets will give them the returns they expect or not ready to take risk.

 Their main objective of investment is making more money and tax saving.

 Different factors like age, salary & risk taking ability affect their investing decisions.

 Financial services personnel should take more efforts in marketing their services and increase investor knowledge.

 This would increase investor confidence and make them feel secure investing in capital markets.

References:

1. Business Research Methods – Zikmund, Babin, Adhikari, Griffin 2. Financial Life Planning – Hemant Beniwal

3. www.moneycontrol.com

4. www.motilaloswal.com

5. www.surveymonkey.com