How does portfolio mgmt scheme work?

Portfolio management schemes are specialised schemes, which fall somewhere in between buying mutual funds and investing in stocks yourself. They are more personalized and tailor-made to suit your requirements. Often investors shy away from these schemes thinking that they need to put aside very large quantum of funds for these schemes and then they charge hefty fees.

Sai Tampi, Head-PMS, HSBC Investments informs that a portfolio management schemes typically will take care of a part of the clients portfolio and these would be invested either directly into the stock for fixed income instruments or into capital protected schemes.  There are two kinds of portfolio management schemes in the industry. One that is discretionary from the investor’s perspective and the other, which is non-discretionary.

Excerpts from the exclusive interview with Sai Tampi:

Q: Lets start off first by understanding really what is a portfolio management scheme?

A: Portfolio management schemes typically will take care of a part of the clients portfolio and these would be invested either directly into the stock for fixed income instruments or into capital protected schemes. You are right in saying that there is sometime a perception that these are too expensive or at times take on too much of risks. So may be if we just take a step back, there is fundamentally two kinds of portfolio management schemes in the industry. There is one that is discretionary from the investor’s perspective and then there is one, which is non-discretionary.

The discretionary portfolio management schemes is essentially a service where the client is given stock tips or research ideas and is free to buy or sell based on his own discretions. The non-discretionary space is what we operate in. In this space you would typically takeover a part of the clients assets much like a mutual fund would do and you would manage it based on certain predefined or pre-agreed criteria that has been agreed to between the portfolio manager and the client.

In terms of costs, portfolio management is certainly not on the non-discretionary space any more expensive than a mutual fund. Another aspect that I wanted to comment on is that when one is comparing a portfolio management scheme to a mutual fund, one clear difference is the level of customization that’s available and the level of handholding that you would get from your portfolio management relationship manager.                    

Q: A portfolio for an individual investor would essentially be managed individually. It is not like a mutual fund where all pools of money come together and becomes this huge big chunk and that’s then put into different stocks. Here if you have Rs 20 lakhs in one portfolio, you will be buying individual stocks in the name of the investor for that portfolio - is that correct?

A: That is correct in spirit but what I would like to clarify that again there are two-ways of managing the money. There is something, which is called a non-pool account and there is something called pool account. This is really a differentiation only from the operational aspect. The portfolio manager is in effect a pass through, so whatever stock we buy is actually been bought in the name of the investor.

So whatever money we have in our account or whatever stocks we hold in our account can actually be sort of divided down to the last share and is being bought in the name of a particular investor. So the investor portfolios are quite separate. However for the purpose of operational convenience because it doesn't make sense to be trading on 1000 different client accounts at the same time because that would simply add to the costs and make it a lot slower and probably not give you best execution.

We pool the client's money together. We place all the moneys into what we would call our portfolio management service pool account and all the trades are done at one go, however whenever a consolidated trade is being done, we know exactly what share is being bought for whom.         

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