PMS vs Direct Equities: What works better

PMS vs Direct Equities: What works better

As an investor, you are truly spoilt for choice. You have a range of investment options to choose from, each falling along different points of the risk-return spectrum. This means that for every level of risk-return, you will have an investment option. Inarguably, for those investors who are able to take some degree of risk and have a long-term investment horizon, equities can be a great vehicle of wealth creation. On the flip side, direct equity investing is not easy for the following reasons:

  • Equity prices are volatile in the short-term. This volatility can cause fear and lead you to make emotional, and often suboptimal, investment decisions.
  • Choosing the right stocks can be very challenging. It requires a great deal of research into sector and company fundamentals, which is not easy for someone who is not an expert research analyst or does not have the time to follow market developments closely.
  • How to buy and when to buy are two questions with which most market participants struggle. Unfortunately, there is no easy answer.

Or, is there?

Portfolio Management Services (PMS) can pack the power of equities while minimising the challenges associated with directly investing in equities.

PMS is simply a service offered by professional money managers to discerning investors who want to invest in equities but also want tailored solutions that can meet their specific objectives. The way a PMS works is fairly straightforward. The PMS provider invests directly in equities based on certain themes and ideas. The securities bought by the PMS fund manager are directly credited to your demat account. In that sense, a PMS is absolutely transparent as you always know what securities are in your portfolio. Unlike the mutual fund platform, in the case of PMS, the assets of investors are not pooled into one large fund. Instead, each investors’ account is maintained independently and separately. The best part is that since each portfolio belongs to an individual, cash flows in one investor’s account have no impact on the returns of another investor’s account.

In the case of PMS, the fund manager does the research, chooses the investment security, and then makes the investment. From that perspective, PMS can either be discretionary or non-discretionary. In the case of a discretionary PMS, your funds will be entirely managed by the portfolio manager. Thus, all investment decisions ranging from stock selection and execution to rebalancing are managed by the portfolio manager. On the other hand, in the case of non-discretionary PMS, the role of the portfolio manager is more consultative in nature. The manager suggests investment ideas while the decision to execute/invest solely lies with the client. Both approaches provide a significant advantage over direct equity investing since the research legwork is done by the portfolio manager.

Investing directly in equities can be thrilling and many people want to take that leap. However, through PMS you can reap the benefits of equity investing while dealing with some of the related challenges

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