Project -2: Portfolio Investment & Management
(by MS. KG Lakshmi, PG Student, IIPM, Mumbai)

Module: 1 - Portfolio Management and Examples of Portfolio Managers
(Page: 1 of 4)

[Module Objective: The first three modules of Part -1 broadly brought out basic principles that should govern investment decisions along with a descriptive account of the structure and functional system of the capital market. The present module now introduces the advanced concept of portfolio investment and its efficient management in the post-investment stage. The subtleties of PMS functions are vividly depicted through field examples of operating PMS service providers viz. of mutual funds and of investments by FIIs through portfolio managers. Portfolio managers are registered SEBI Intermediaries providing PMS to Foreign Institutional Investors, while mutual funds through Asset Management Companies bring the benefit of PMS to the doors of the small investor.]

Portfolio Investment is a specialised process of Investment in the securities market. An ordinary investor invests on stray occasions in the stock market to provide an outlet and park his limited savings in a remunerative channel on medium/long term basis. This is termed as personal investment. A portfolio manager on the other hand not only invests huge funds to obtain a collection of diverse securities, but also proceeds further to systematically manage on an ongoing basis the collection of securities in his custody in tune with market variations to optimize his returns in the process. He carries out regular follow-up trading operations, selling securities on hand and/or buying new items of securities based on the sentiments and movement of the stock market. In fact he makes sizeable profits through these supplementary follow-up operations. He chooses to buy securities when the market is bearish (sellers market) and sell or offload those securities when it turns bullish (buyer's market). This enables him to secure considerable trading profits or results in the value addition to is holdings.

As per definition of SEBI Portfolio means "a collection of securities owned by an investor. It represents the total holdings of securities belonging to any person". Obviously portfolio management refers to the management or administration of a portfolio of securities to protect and enhance the value of the underlying investment. SEBI has directed that portfolio management as a service by a financial intermediary is to be carried out only by corporate entities. Portfolio management by a corporate body can be either for management of its own pool of securities created out funds collected from diverse sources or it can be offered as a financial service to other investors, who choose to avail the expertise and skill of this company to carry out portfolio investment/management on their behalf. Insurance companies, mutual funds, pension and provident funds etc. carry out operations of portfolio management for investing their own funds in remunerative channels. These companies are also referred as investment companies or institutional investors. In fact they are portfolio managers in respect of the back-end of their business activities. After initially pooling these funds from smaller investors, they choose to invest them in a portfolio of securities intended as a lucrative deployment option.

PMS is a portfolio management advisory service provided by corporate financial intermediaries. PMS not only enables investors to promote and protect their investments, but also helps to generate higher returns. The service is extended to high net-worth individual and corporates with an investible surplus of above Rs 50 lakh who find it increasingly difficult to keep a track on investments or unable to preview as to which way the market (stocks and bonds) will move. Writing in Rediff Online News, the columnists Rakesh P Sharma & Janaki Krishnan describe the profile of PMS service as under:

"Cash-rich individuals and companies seeking high returns are flocking to what has become the hottest business in town: portfolio management services. Promoted by home-grown hedge funds, the assets under management of portfolio management services have catapulted four-fold in the last one year, to around Rs 2,000 crore (Rs 20 billion). Earlier, high net worth individuals and companies parked their funds with either mutual funds or trustworthy brokers for deployment in the market. The latter guaranteed a minimum return on their investment. But the trend is being institutionalised with a range of sops. Hedge funds are now offering profit-sharing agreements rather than the plain vanilla guaranteed, higher-than-market returns. And the star cast includes big industry players -- Enam Asset Management, PruICICI Asset Management, J M Morgan Stanley Retail -- to name a few.

"One of the largest players in the portfolio management services segment is PruICICI Asset Management. With a corpus of over Rs 500 crore (Rs 5 billion), its portfolio management services offer returns in the region of 100 per cent per annum, according to PruICICI Managing Director Shailendra Bhandari. PruICICI Deputy Managing Director Pankaj Razdan said their assets had grown at a compound annual rate of 40-50 per cent. "They've shot up in the last seven months of the equity boom," Razdan said. "There has been a heady growth in the current year," added Jiten Doshi, director, Enam Asset Management Company. Motilal Oswal Securities Managing Director Ramdeo Agarawal expects the corpus under portfolio management services to grow four-fold within a year, to Rs 100 crore (Rs 1 billion)."

PMS devotes sufficient time in reshuffling the investments on hand in line with the changing dynamics. It prevents holding of dormant or stocks of depreciating-value. It is a known fact that managing investments these days whether it be stocks or bonds have become very complex and requires full-time attention. Moreover, modern financial markets are characterised by increased volatility and strong global linkages. This, in turn, results in constantly changing risk-reward relationships. PMS provides the skill and expertise to steer through these complex, volatile and dynamic times. These organizations employ professionals and with their help set up in-house research cells bringing expertise to forecast market movements in general and the trends of particular Scrips.

RBI/SEBI have allowed Non Resident Indians and Persons of Indian Origin to invest in the Indian securities market. This can be treated under the category of personal investment. RBI/SEBI have also permitted approved foreign institutional investors (FIIs) as per regulations applicable to them to carry out portfolio investments in the securities market, engaging the service of domestic Portfolio Managers (corporate bodies) registered with SEBI.

When portfolio management is rendered as a service by a company to other investors it acts as a financial intermediary and is subject to regulatory control of SEBI. SEBI has defined such portfolio managers as under-

"Portfolio Manager" means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be".

SEBI distinguishes between an ordinary portfolio manager and a "discretionary portfolio manager". As per definition of SEBI a discretionary portfolio manager is-

"A portfolio manager who exercises or may, under a contract relating to portfolio management, exercise any degree of discretion as to the investments or management of the portfolio of securities or the funds of the client, as the case may be."

The portfolio managers as above have to be corporate bodies and have to be compulsory registered with SEBI. SEBI has formulated "the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993" defining the obligations and responsibilities as also the code of conduct to be observed by them in the discharge of their functions.

SEBI has prescribed by way of minimum requirements of such portfolio managers among other conditions, the following essential qualifications-

• The applicant to be a body corporate;

• The applicant has the necessary infrastructure like adequate office space, equipments and the manpower to effectively discharge the activities of a portfolio manager;

• The principal officer of the applicant has the professional qualifications in finance, law, accountancy or business management from an institution recognised by the Government;

• The applicant has in its employment minimum of two persons who, between them, have at least five years experience as portfolio manager or stock broker or investment manager or in the areas related to fund management;

• The applicant fulfills the capital adequacy requirements. The capital adequacy requirement shall not be less than the net-worth of fifty lacs rupees.

The regulatory obligations and code of conduct prescribed on Portfolio Managers by SEBI is covered in more detail in Annexure: 1

While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high net-worth investors, while in the case of mutual funds the target investors include the retail investors. Further, in case of PMS the investments of each investor are managed separately, while in the case of MFs the funds collected under a scheme are pooled and the returns are distributed in the same proportion, in which the investments are made by the investors/ unit holders. Moreover, the investments of the PMS are managed taking the risk profile of individuals into account. In mutual fund, the risk is pooled depending on the objective of a scheme.

"PMS is a better product compared to mutual funds. According to Sharad Shukla, head of investment advisory service at IL&FS Investsmart, "Mutual funds are mass products addressing the needs of large (number of) investors, while PMS is a more specialised product understanding the needs of the (single) investor." Another big disadvantage of a mutual fund is that there is a big entry or exit load. Moreover, even if you do not like a particular sector in the portfolio, you have to continue to remain invested. In a PMS, the fund manager will create a tailor-made portfolio or construct a portfolio taking your risk profile into account. Adds Shahzad Madon, vice-president at Prudential ICICI AMC, "Everything potentially which is not a mutual fund is seen as a PMS." However, the biggest disadvantage a PMS has over a mutual fund is that investment in MFs enjoys tax benefits. In addition, under PMS an individual has to plan his tax liability."
[Source: Janaki Krishnan, & Rakesh P Sharma - Columnist of Rediff Online News]