FAQ
Core functions of portfolio managers integrates financial planning, advisory and execution with an objective of creating a diversified portfolio of financial assets on your behalf to improve return and reduce risk. Portfolio managers start with a detailed financial profiling and your need analysis to customize the portfolio for every individual investor instead of selling financial products like mutual funds. It then uses its financial expertise to build and manage the portfolio as one stock shop.
Portfolio managers can invest in all financial products. It can also invest in physical assets using their financial counterparts like REIT or Gold mutual funds. Theoretically portfolio managers cover the entire range of global financial assets, Including 70 trillion of stocks and over 100 trillion of bonds. However most of the portfolio management services operating in India restrict themselves only to domestic equity which is a less than 2% of entire global financial assets. Aarohan covers a much larger universe, it is one of the few portfolio managers in the country which is not restricted only to domestic equity but also covers the entire range of domestic bonds. Also, it can invest a part of its portfolio into global assets as per RBI regulations.
Most of the portfolio managers are equity portfolio managers and follow bottoms up stocks selection methodology. It typically keeps its benchmark as popular stock indexes like nifty, Sensex or any smaller indexes. Mostly the strategy is to create a portfolio of securities targeting a higher return than these indexes however they are typically associated with higher risk and you make get a lower return based on at the time you need money. Aarohan follows asset allocation methodology with dynamic re-balancing. It first allocates your portfolio into broad asset classes like stock, bonds and cash and then allocates these broader asset classes into smaller ones till we reach individual securities. The individual securities are selected on the basis of bottoms up stock selection. It then follows a dynamic re-balancing in an attempt to catch growth phase of each asset class. Generous use of technology along with practitioners competence in assets management forms the basis of modern portfolio management practice by Aarohan.
In both cases of discretionary and non-discretionary portfolio management services, the execution is done seamlessly by portfolio managers. In the first case, the selection of securities and subsequent execution is done by the portfolio manager at his discretion. Hence, he can take some responsibility for the portfolio managed and typically charge a fee which is based on performance of the portfolio. In the second case, Investor has to explicitly approve the advice given by portfolio managers and hence typically portfolio managers do not take any responsibility for performance. They charge a fixed fee for their advice and subsequent execution after the clients explicit approval.
Portfolios under portfolio management can be customized for every single individual customer. The customer can specifically mention the customization in the beginning or at subsequent time. Also, if the financial profiling and need analysis of individual investor is done properly then they itself based the need for customization and define all the customization for the investor. However, most portfolio managers provide very limited customization and link the customers or investors to few discreet portfolios. It is like having few mutual funds and linking each investor to one of them. Aarohan has a much more granular customization based on the belief that each client is unique and needs personal attention.
There are about 200 odd portfolio managers registered under SEBI in India and only a portion of them are active. They are licensed by SEBI and are classified as NBFC. Please note that NBFC like banks are strictly monitored by SEBI and RBI respectively. Names of such companies who are registered with SEBI as portfolio managers is available on the site of SEBI. Aarohan is one such portfolio managers and you can verify its registration number on SEBI site. Please avoid any mutual fund advisors and financial product distributors who pretend to be portfolio managers unless the organisations name is registered with SEBI you should not go to the portfolio manager.
Direct investment is the cheapest way of investing. It does not have any professional fees charged by mutual funds or portfolio managers. However, lack of professional and emotional competence required for investment can be the big cost of direct investment. We have heard of many horror stories of investing by retail investors. Currently the investment competence of retail India is significantly lower than the developed market. The management fee of mutual funds is about 2 %, That is the price you pay for avoiding the common mistakes mentioned earlier. Also, the trading cost paid by the retail investor is much higher than the institution and actively traded portfolio may offset management fee charged by institutions.
Mutual funds are great tool for small investors. They are well regulated, they are safe, they have a size which makes them very safe. They also provide diversification in stated asset classes even for very small investors. They have a large distribution network and it is easy to invest and withdraw. For large investors, some of these regulations however become restriction. Restriction of cash components in equity mutual funds force you to hold on to equity during clear down turn. Asset allocation across asset classes has also regulated limits, some of them can’t invest more than certain amount in debt, some of them can’t do it for equity. Finally, mutual fund has only one portfolio for all investors and it cannot be customized for individual investors. Unfortunately, every large investor is unique.
Portfolio management services is like individualized balanced or hybrid mutual fund covering both stocks and bonds. It has all the benefits and safety and liquidity of mutual funds. But in addition, it has less regulatory restrictions. So, when both asset classes i.e. equity and debt are in downturn, they can be very high in cash component. It also doesn’t have any limits on equity weightage to take benefit of equity upturns when debt is stagnant and similarly in case of debt upturn it can be overweight in debt. The second benefit arises out of customized solutions of pms versus one size fits all approach of mutual funds. Mutual funds do not account for other assets of investors but portfolio managers too. So, there are many IT professionals with lot of stock options and in their case, being over-weight in IT is unnecessary because if information technology does well, they will do anywhere. Similarly, for right diversification in case of small and medium enterprise owners, we are under-weight in equity in the sector where they have their own business. A detailed financial profiling and planning is a must to customize portfolio for portfolio managers and in case of mutual funds the job of creating portfolios of mutual funds is left to investors while in case of portfolio management services, the portfolio creation is the responsibility of portfolio managers.
Portfolio management services is for mid to large size investors and SEBI regulates minimum investment of 25 Lakhs but you can complete this limit by transferring existing investments to your portfolio accounts and they can be either stocks or bonds, direct or through mutual funds. All that is required is the market value of all investments plus the bank balance in the investment account on the date of opening the account is greater than 25 lakhs.
Your assets are not kept anywhere else. You do not transfer money to portfolio managers like you do in case of mutual funds. Your money is kept in your bank account and your securities are kept in your d-mat account. You only give a power of attorney to the portfolio manager.
And the power of attorney you give to the portfolio manager can do very restricted things. They have to buy and sell securities on your behalf and hence the have the power of attorney to pay or receive money from or to your account arising out of buying or selling of securities. Also, they have the power of attorney to transfer money to your bank account based on specific instructions by you to withdraw money.
To ensure proper regulation, SEBI has instructed that at least 3 agencies do KYC for you. Bank for opening the bank account, broker for opening broking or d-mat account and in some cases, it may be custodian also and Aarohan or portfolio managers for opening a PMS account. All 3 KYC need to validate your identity and the best thing for identity is your Aadhar card. The only thing you may need to do is if proof of address in Aadhar card has not been updated and is currently different from the existing Aadhar card then you need a separate proof of address. And also for everyone, your tax identity which is your pan card is also a must. Also, we are ensuring that all these pan cards are linked to Aadhar.
The key differences in case of a non-resident Indians that currently Aadhar is not a must and secondly as the portfolio managers like many other professional can’t directly solicit business, you must have come to India in the last 6 months to open the account or to interact with the portfolio managers. Hence your passport should have a valid visit to India entry stamp within last 6 months of account opening date.
As you may be aware, mutual funds discourage early withdrawal of investments by putting exit load on early withdrawal. Portfolio managers also generally do this and their exist loads are little stricter than mutual funds in fact some of them run it like a closed ended funds. But please note that this is not a regulatory requirement. The new generation portfolio managers like Aarohan has no exit load or penalty of any kind for withdrawal at any point of time. It is your money, in your account, use it whenever needed.
Even after paying exit loads most portfolio managers put a large timeline for withdrawal making it non- use able during emergency. But new generation portfolio managers like Aarohan have no delay in withdrawal and hence you can meet your emergency requirements also by early withdrawal. Whatever money is there your bank account will be transferred the same day. Whatever is in the form of securities and they need to be sold and as soon as the money comes which typically comes in t+2 days, you get your money.
If your portfolio dips below 25 lakhs by withdrawal then the portfolio managers have to stop the services immediately as per SEBI regulations. Typically, the portfolio manager would sell the entire amount and transfer the entire amount of money to you but that may have tax implications. Hence new generation portfolio managers like Aarohan sells only the requisite amount and it can transfer the rest in form of securities for efficient tax management.
Portfolio managers breath of asset in which they deal differ. While SEBI allows all financial assets, almost all portfolio managers in India restrict themselves only to equity, I.e. also only domestic ignoring big chunk of bond market. New generation portfolio managers like Aarohan cover all financial assets including bonds which is globally much bigger than the stock market. They also provide global exposure as per RBI cap of $250,000 per annum. Choose the one which has a wider range of assets to invest in for effective long term return.
The institutional investors like mutual funds and portfolio managers obviously charge a management fee but they bring some cost savings in trading cost. They cut down the brokerage along with GST cost by over 5% in most cases. So if the holding period is about 1 year same as the previous case then they save about 1.5% of investment in expenses over retail investors which is almost offset the 2% charges management fee which they charge on top of that.
Management fees of equity mutual funds Is around 2%. You need to look at specific schemes for exact management fee. Part of it also goes to distributors so if you buy direct some cost comes down but the savings in trading cost mentioned in last question also offsets some of the cost and hence the real cost comes down and the big advantage is the mutual funds management fee takes away the frequent mistakes made by retail investor.
Management fees for portfolio management services have a fixed and a variable component. Typically, the fees are higher than mutual funds because it is positioned as an exclusive service to select few. They have a similar fixed fee of about 2% like mutual funds but they also have a variable fee which may be around 20% of profit. Now if the profits are low then this variable component is not crucial but if the profits are high then even the variable component can become a sizable component. The new generation portfolio managers like Aarohan are trying to bring this exclusive service to large number of investors in India and hence the services are made much more affordable by using technology. They bring down the fees to almost half of the traditional portfolio management services.
To understand the taxes related to capital gains for mutual funds we have to differentiate whether it is equity oriented mutual funds or a debt oriented mutual funds. Some of the mixed mutual funds are treated as debt or equity based on the restrictions on the higher slabs put by SEBI for those mutual funds on individual asset classes. If it is equity oriented mutual fund then if you sell it after 1 year which is a long term it is applicable tax rates are zero but if it is less than 1 year which is short term.
Rules for PMS capitals gains is same as direct investments into stocks and bonds into individual capacity. The only advantage in PMS over Mutual fund is that the definition of long term comes down to 1 year from 3 years for direct investments into bonds unlike mutual funds where it is 3 years. However, the internal sale of securities by portfolio managers is used for calculating long term and short term in portfolio management services unlike mutual funds in which the sale of the mutual fund units is used for calculating long term and short term. New generation portfolio managers like Aarohan use tax loss harvesting to reduce tax liability to near zero.
Restrict your choices to registered portfolio managers. Portfolio managers require license from regulator and are treated as NBFC. SEBI is the regulator for portfolio managers. Only around 240 portfolio momagers are registered with SEBI including some global investment banks, Leading domestic investment companies like Motilal Oswal and also new generation portfolio managers like Aarohan. However, Many mutual fund advisors and distributors claim to be portfolio managers by misusing the generic name. Before you chose the portfolio manager ask for the SEBI Registration Number and check on SEBI Official Site.
Key benefit of portfolio management services over mutual fund is that it does not follow one size fits all. But most portfolio managers have limited number of portfolio options and tie every individual investor to one of them, only partial customization. Choose the portfolio manager which makes individual portfolios for each customer. By design they will always start with detailed profiling and planning of each customer. New generation portfolio managers like Aarohan treat each customer unique and design individualized portfolios.
Most portfolio management services follow equity benchmark and invest only in equity, should be avoided. Equity is a high-risk asset class and their higher return portfolio comes with even higher risk. Portfolio management by definition is to manage risk first. At best, you can put a small proportion of your investment in such portfolios. It cannot be majority of your portfolio. For comprehensive nest egg management benchmark should be real return or return on top of inflation. Investor need to look at the final retirement where risk of inflation keeps them awake in the nights. New generation portfolio managers have kept inflation as a benchmark and some like Aarohan charge no variable fee if return is below inflation.
Portfolio management has been traditionally positioned as exclusive services for few and hence attract higher fees. Fees are higher than mutual funds which are around 2% hence the fee charged by portfolio management services has a fixed component of about 2% which is similar to mutual fund. In addition, it has a variable fee which is above 20% of the profits. Technology is impacting this industry significantly and new generation portfolio managers like Aarohan are able to cut their fees by half.
Portfolio managers have a position where they can provide lots of additional services in a very effective manner and you need to look at what are the Add-on services the portfolio managers are willing to provide. As most of the gains after retirement comes from portfolios with portfolio managers, they become the right integrator for tax filing. Portfolio managers relationship is personalized and individual client oriented unlike products like mutual funds they become the right agency for comprehensive financial planning. You may need customized pension after retirement which removes the need for keeping cash for living cost and hence look at whether the portfolio manager is willing to provide customized pension. You may need cash on emergency basis and look at where emergency closer and withdrawal is easy to do and then you want to pass on the wealth to next generation and legal services like will is another Add-on services which the portfolio managers can provide. Most of the portfolio managers and very focused and will do only investment. Please look at the portfolio managers which optionally provide you all the services mentioned above.
For direct investment, obviously there is no management fee yet there is cost associated with trading. Your d-mat account needs monthly maintenance charge, the brokerage and GST of now about 18% cost retail investors around 1 % for every buy and sell transaction. So, if your holding period is about 1 year, which means in a year you sell it, then you pay about 2 % of the investment as expenses.