India today is home to many successful businessmen and high salaried corporate individuals. With increasing income levels, there is a need for lucrative investment avenues for high net worth individuals to earn good returns on their investment corpus. High-income individuals especially those with limited financial knowledge turn to portfolio managers to manage their investments more profitably.
Now, what is portfolio management?
Portfolio management involves prudently managing one’s investments, ensuring the right mix of investments which are regularly monitored and adjusted to earn a maximum return. Portfolio management services involve the application of investment strategies by expert fund managers to the investment portfolio of its client with the intent of maximizing returns within the acceptable risk level. Portfolio managers earn a commission which can be in the range of 3 to 5% of the portfolio value for undertaking these services. In India, portfolio management services are mostly opted for by HNIs as portfolio managers require a minimum investment commitment of INR 25 lakhs.
The key to portfolio management services is that the entire responsibility of investment portfolio management is handed over to the portfolio manager. The portfolio manager, generally a domain expert undertakes all the required stock research and continuously monitors the investments. The portfolio managers take investment decisions in line with the investor’s goal and keep them updated about the developments in their portfolio.
Objectives of Portfolio Management Services
The major objectives of Portfolio Management can be listed as below.
o Customization of the investment portfolio of the HNI client, which is not possible for other investment options like mutual funds
o The flexibility of choosing your own stocks as compared to mutual funds, which depends on the fund manager's discretion
o Transparency of the costs and the fees along with the charges for the portfolio management services
Need for Portfolio Management Services
After knowing about portfolio management meaning, let us have a look at why portfolio management is important in investments.
o Extensive Research & Expertise
Portfolio management services are provided by professional and expert portfolio managers. Backed with years of expertise and detailed research on the market and specific stocks, they are in a better position to optimize the mix of stocks. This level of expertise is unlikely to be available to an individual and thus it can be more beneficial.
o Continuous monitoring
Portfolio managers are entrusted with the responsibility of the investor’s portfolio and are dedicated to growing the investor’s corpus. They continuously monitor the market trends as well as its impact on the investor’s portfolio and take timely decisions to maximize returns or minimize losses. This type of dedicated monitoring is difficult to achieve at an individual level.
o Provides a customized portfolio for high net worth individuals
Portfolio managers do not have a ‘one size fits all’ approach. They consider the specific investment goals of each investor and tailor make the portfolio mix to suit the investor. Investor’s need not worry about whether their portfolio is aligned with their goals as portfolio management services take care of this aspect.
o Generation of better returns
The cumulative effect of the above factors results in portfolio management services having a greater potential to earn higher returns as compared to what an inexperienced individual investor may be able to achieve on his own.
Understanding Portfolio Management Services
We covered earlier about the portfolio management meaning. Now, the main objective of portfolio management is to design investment strategies that give maximum returns at a nominal risk level. Now, let's look at the portfolio management process.
The portfolio management process is a continuous process and not a one-time act. Let us have a look at the steps involved in the Portfolio Management Process.
o Security Analysis
This is the primary stage of the process. Here, the major task is to identify the risk factors and the returns expected from the securities. These should match up with the investor’s long term financial goals and their risk enduring capability.
o Analysis of the Portfolio
Once the risks and securities are identified, a large number of portfolios can be created. These portfolios are known as feasible portfolios.
o Portfolio Selection
Out of all those feasible portfolios that are created, the portfolio manager will select the ones which are the most suitable for the investors.
o Portfolio Revision
After portfolio selection is done, the portfolio manager and his team will keep a close eye always on the selected portfolio to make sure that no opportunity for obtaining a maximum return for the investor is missed.
o Evaluation of portfolio
Here, in this phase, the portfolio is assessed periodically to find out the return that has been obtained from the portfolio against the risk that is involved. Here, if there is a necessity for making some changes into the portfolio, it is implemented to minimize risk and optimize return.
The Key elements of Portfolio Management
Let us have a look at the key elements of portfolio management.
- One of the major key elements of investment portfolio management is customization. Those investors who are not very aggressive can add more stable investments into their portfolio. On the contrary, investors having an aggressive profile can add up volatile investments into their portfolio
- Portfolio management requires fundamental analysis. This analysis helps to identify the selection of stocks that can meet the investment goal. Fundamental analysis involves assessing the financial position of the company
- Portfolio management also involves undertaking market research and determining risk factors that have an impact on the market and the stocks in the portfolio. Being updated with changes in these risk factors and managing the portfolio to mitigate these on time is key
- Successful investment portfolio management necessitates continuous monitoring of the market and performance of the portfolio relative to the market. A pro-active approach in this regard can help make timely decisions to maximize profits in a bullish market and minimize losses in a bearish market
While these are some of the standard elements and steps involved in portfolio management process, it may vary from one company to another.
Types of Portfolio Management
Portfolio Management can be further classified into Discretionary Portfolio Management and Non-discretionary portfolio management.
In discretionary portfolio management, the portfolio manager has the complete authority to take all decisions on behalf of the client. The Portfolio Manager is responsible for taking care of the financial objectives of the client, carrying out documentation and filing tasks as well.
Non-discretionary portfolio management is somewhat different from discretionary portfolio management in terms of discretionary powers. Here, the portfolio manager can give suggestions and advice to the investor on investment strategies. However, the final decision is taken by the investor himself.
Portfolio Management brings a lot of benefits to the investors but at the same time has certain pitfalls as well. If you select to opt for portfolio management for your investments, then it is inevitable that you keep your investment goals and level of risk exposure clear with the portfolio managers. This will be the main factor influencing your returns and your investment strategy. Experts at IndiaNivesh will provide the right advice keeping your risk-taking ability and goals in mind and thus, giving you a well-balanced portfolio.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
What is Private Equity?When it comes to investing, most of the investors opt for the traditional route. They invest in bonds or stocks or purchase mutual funds. While for some others, private equity is an appealing investment option. But what is private equity fund and what is the private equity fund structure? How can one invest in it?In this article, we explain private equity fund meaning in depth to give you a better understanding of the concept. What is Private Equity Fund?Private equity is a general term which describes different kinds of funds pooling money from several investors to acquire stakes in companies. Such a private equity fund may amass millions or even billions of dollars to directly invest in companies. These companies are not publically listed on the exchange or traded. So, a private equity fund either directly invests in private companies or engages in buyouts of public companies, resulting in the delisting of public equity. Private Equity Fund StructureA private equity fund comprises of Limited Partners (LP) who own 99 per cent of the shares in a fund. They have limited liability. The remaining 1 per cent is owned by General Partners (GP) who have full liability. They are responsible for executing and operating investment. Understanding What is Private EquityPrivate equity involves investing in unlisted companies at different stages of their development. This is done with the objective of creating an added value to these companies. After some years, such companies can be sold with a significant capital gain. Simply put, private equity funds are created with the intention of raising money from several investors to deploy it progressively by acquiring companies and helping them grow more profitable.Since private equity investment directly invests into a company, it requires a large capital outlay to gain a significant level of influence over the company’s operations. This is why not every investor can afford to invest in private equity. The minimum amount of capital required varies depending on the fund and the firm. Some funds have a $2,50,000 minimum investment requirement, while others can run into millions of dollars. Therefore, most of the private equity firm industry comprises of large institutional investors such as pension funds. Or, they may be funded by a group of accredited investors. How Does Private Equity Work?Private equity firms raise money from accredited investors and institutional investors to invest in companies through the following investment strategies:• Distressed FundingThis is also known as vulture financing. In this type of private equity funding, the money is invested in troubled companies with underperforming business assets or units. The funding is aimed at making necessary changes to the operations or management for a turnaround of the company. This could mean selling their assets for a profit ranging from patents to real estate and physical machinery. Mostly, companies that have filed for bankruptcy fall in this category and require this type of funding. • Leveraged BuyoutsThis type of private equity funding is the most popular investment strategy. Here, the private equity firm buys out a company completely with the objective of improving its financial and business health. Later, the company can be sold at a profit to an interested buyer or made public by conducting an Initial Public Offer. The firm uses debt as leverage to buy out the company so it does not have to spend the purchase price at once. The money from various investors can be used to improve the company’s earnings and create a higher return. • Funds of FundsAs the name suggests, this type of funding invests in other funds, typically hedge funds and mutual funds. The aim of the FOF strategy is to achieve broad diversification and minimal risk. For an investor who cannot afford the minimum capital requirements in such funds, FOF serves as a backdoor entry. • Venture CapitalVenture capital investments focus more on investing in newer companies or startups that are on the verge of developing a new technology or industry. This type of funding can be done at different stages of a company. For example, seed financing funds a company to scale an idea from its prototype stage to the development of a product or a service. Similarly, an early stage financing can assist the entrepreneur in helping his company grow. Or, Series A financing which can enable an entrepreneur to actively compete in a market or create one. Advantages of Private EquityPrivate equity offers multiple benefits to startups, businesses and companies. It provides them access to liquidity instead of having to rely on traditional forms of financial mechanisms such as listing on public markets for funding. Another huge advantage of private equity funding is that companies can operate away from the glares of public markets. They are not required to submit quarterly reports to the outside world and can undertake a long-term approach in bettering their fortunes. Certain forms of private equity financing such as venture capital funding can be ideal for early stage companies who do not wish to take high business loans. What are Some Myths Regarding Private Equity Firms?Here are some myths surrounding private equity firms which are not true.• Private Equity Firms Strip A Company’s AssetsMany analysts believe that private equity firms are able to turnaround a company by stripping it of its best assets. In reality, private equity firms have been known to create added value to a company by expanding their geographical footprint. Or, acquiring and integrating smaller competitors, and repositioning an out-of-date concept into a trendy product. • Private Equity Firms Cut CostsPrivate equity firms do cut costs, but only the unnecessary ones with a view to reinstating the money into other functions. For example, research, marketing, sales, and more. This can help support the company expansion with a lesser capital outlay.• Investor’s Money Is Blocked For 10 YearsGrowing companies can take time. Thus, investments made into private equity funds are generally seen as long-term or illiquid. However, it is not rare that a company can be sold off after a 4 or 6 year holding period. Private funds usually have a 10-year maturity, but it is possible that all the money gets invested in the first 5 to 7 years of the fund's life. Private Equity Fund v/s Other Kinds of EquityPrivate equity is not traded on public exchanges whereas equity through stocks is publically traded. In addition, private equity firms only invest in failing companies that need a turnaround or strong performing companies that can further improve margins and efficiency. For other kinds of equity, investors can invest in all types of companies. Private equity firms are attractive investment vehicles for institutions and wealthy individuals. Private equity operations at IndiaNivesh Ltd. are aimed at creating value for our investor clients seeking growth opportunities in unlisted businesses at an early stage. You may get in touch with our team of highly-knowledgeable fund managers to know more about investing. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Section 80C of the Income Tax Act allows a deduction up to a sum of Rs. 1.5 lakhs on certain tax saving investment options. These tax-saving investment plans include Life Insurance Premium, 5-Year Tax Deposits, Public Provident Fund, National Savings Certificate, and so on. This is the key reason Section 80C is a sought-after section when we talk about tax planning. However, instead of investing in an ad hoc way, if you choose the tax-saving investment options as per your risk profile, it can prove to be more beneficial. It may even help you to achieve your financial goals in a better way.In this article, we discuss 4 best tax saving investment options offering market-linked returns that can help you create long-term wealth.1. Equity Linked Savings Schemes (ELSS) Commonly known as Tax Saving Fund, ELSS is a diversified equity mutual fund offering tax-saving benefits. This tax-saving investment option has a mandatory lock-in period of 3 years. The minimum application amount is as little as Rs. 500 and there is no upper limit to the amount you can invest. The investments can be made either in lumpsum or by SIPs (Systematic Investment Plans). SIPs are regarded as the better way of investing in ELSS as they provide the advantage of compounding and rupee cost averaging. While selecting this tax saving investment scheme, look for funds which have a consistent performance record and follow robust investment processes. If you choose the right scheme, ELSS has the potential to offer attractive inflation-adjusted returns. The investment style could be value, growth or a combination of the two based on the investment mandate of the scheme. 2. Pension Funds Pension funds offered by Mutual funds, are one of the preferred tax saving investment options in India. They are effective investment tools for retirement planning and tax planning. Most of the pension funds are hybrid in nature i.e. they invest in equity as well as debt. The returns on pension funds depend on the proportion in which the scheme invests in equity and debt. It also depends on how efficiently the scheme has been managed across the market conditions. Pension funds have a 5 year lock-in period and an exit load which can extend up to retirement. At the vesting age, you can systematically redeem the units held in the folio/account by opting for a regular pension. This is the reason most people opt for pension funds for tax saving investment options in India. 3. Unit-linked Insurance Plans (ULIPs) Typically, these tax saving investment options are insurance cum investment plans. They enable you to invest in equity and/or debt instruments. You can simply select the allocation option as offered by ULIPs. Fund options are classified as aggressive, moderate and conservative. Aggressive funds invest only in equity, moderate funds invest in a mix of equity and debt whereas conservative funds invest purely in debt instruments. ULIPs not only offer investment returns that are market-linked but also provide insurance cover which is generally 10 times the insurance premium you pay. To enable you to track the performance of the fund, this tax saving investment option declares its Net Asset Value at regular intervals. ULIPs come with a compulsory lock-in period of 5 years and also have a minimum premium paying term. The overall term of the policy differs from one product to the other. However, if you want to claim the tax benefit, the policy should remain active for a minimum of 5 years. In the case of eventualities, the fund value or the sum assured (whichever is higher) is paid to the beneficiary. An important point to consider is while ULIPs may serve as a great tax saving investment option you must handle your investment and insurance needs separately. This helps you to pick the right investment instrument for long-term wealth creation and also have optimum insurance coverage. 4. National Pension System (NPS)Erstwhile available only to the government employees, NPS is a trusted tax saving investment scheme which was introduced to the private sector in 2009. If you are between 18 years of age to 60 years and belong to the unorganised (private) sector you are eligible for NPS. The contributions towards this tax saving investment plan are voluntary. You can invest in any of the following two accounts:• Tier-I Account This is a mandatory account where the minimum investment required is Rs. 500 per contribution and Rs. 1,000 per year. The account is frozen if you fail to pay the yearly minimum contribution. In order to unfreeze this account, you must contribute the total sum of contributions missed along with a penalty of Rs. 100 per year. Under this account, premature withdrawals are not permitted before you attain the age of 60 years. However, they can be allowed only in the form of repayable advance if you have completed 15 years. In addition, such withdrawals are permitted only in case of emergency or critical illness. This is because the main aim of this account is to build a retirement corpus and buy a life annuity. This account can be operated anywhere in the country irrespective of the job location and employer. • Tier-II AccountUnlike the Tier-I account, Tier-II account is a voluntary account. You first need to have a Tier-I account to open a Tier-II account. It can be opened with a minimum contribution of Rs. 1,000. From Tier-II account, you can withdraw as and when you wish to. The withdrawals do not attract a penalty of any sorts. So, this account serves just like your savings account.There are two investment choices while investing money in NPS – Active or Auto. Under ‘Active', your money is invested in various asset classes. You can decide your asset allocation into the specific asset classes such as ECG. E stands for Equity and C denotes credit risk-bearing fixed income instruments other than government securities. G represents the central government and state government bonds.Under ‘Auto’, money automatically gets invested according to your age profile. If you do not choose an option out of the two, the default option is always ‘Auto Choice’. These are the best tax saving investment options that can be ideal for risk takers. ELSS is the most liquid option but to reap more benefits it is best to stay invested in it for at least 5 years. Pension Funds and NPS are good investment avenues for tax planning as well as retirement planning. As far as ULIPs are concerned, remember to deal with your investment and insurance needs separately. You can contact IndiaNivesh Ltd. if you need assistance with tax planning and investment guidance. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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