Choosing portfolio management schemes:: Business Line

There are a few important things that an investor should keep in mind while selecting a portfolio management scheme (PMS).

The first and most important factor is who is behind the PMS? Or who is going to manage the PMS? This is a question on the standing and quality of the organisation which is running the PMS. It is important that the organisation you choose is an established one and has the capacity and resources to manage the funds professionally and deliver customer expectations.

Ideally you must avoid small and unknown firms. The fund managers and their experience, not only in terms of the length of their experience but also performance delivery in their earlier assignments, may also be looked at for guidance.

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RETURNS GENERATED

Secondly, you need to look at the most important differentiating factor for a portfolio or scheme i.e. performance, often seen in terms of the returns generated. How long the scheme has been in existence and how the scheme has performed, are indicators of how the portfolio has been managed.

In addition to this, one needs to look at the risk adjusted returns also. Performance given by pure returns alone may not be a strong indicator. Besides, one of the easier ways to look at the health of the portfolio is to compare the returns on the portfolio with its benchmark. The benchmark sets the standard and the scheme should ideally deliver a performance better than the benchmark.

Third, we need to look at consistency in performance. We are not comfortable with a commendable performance today and a very bad performance tomorrow. This again does not mean the highest returns. But it should ideally be top quartile. Generally, well-managed schemes do not lose much value when the market falls. In other words they retain value. If the portfolio falls as much as the market or even much higher, then it is a matter of concern. These consistency checks can be done by looking at the performance for various individual time periods.

Fourth, the cost structures tend to vary and we need to ensure that we know the costs well in advance, at the time of entering the scheme itself.

COST STRUCTURES

It is also prudent to ask the PMS on any other costs other than the upfront or one-time cost, which are recurring in nature so that any such debits to the PMS may not be a surprise for the investor.

Finally, the investor should be aware of the theme on which the portfolio is built. PMS may be a plain vanilla one or one dedicated to a particular theme or sector.

Apart from being long of equity many schemes may be utilising derivatives to hedge the portfolio or to enhance the portfolio returns.

This has to be clearly understood and questions on whether it is suitable for you as an investor should be posed to the PMS. You may also ask questions on the risk-return profile to understand whether there is a possibility of losing money under any circumstances.

RIGHT SELECTION

It is extremely important that you make the right selection of the PMS based on the criteria detailed above, and with the help of a professional advisor. The advisor could also help you with periodic portfolio reviews. In the dynamic economic and market conditions that we are in today, such an exercise becomes all the more important.