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All services provided by banks, financial institutions and insurance companies are financial services. Financial services include – savings options, loans, demat account, letters of credit, debit card, credit cards, cheque books, demand draft, ATMs, funds transfer, safe deposits, overdraft facilities, Internet banking, mobile banking, underwriting facilities, advisory and consulting services, foreign currency services, insurance policies, etc. Financial services also include a service called portfolio management that enables management of savings and investments for individuals, businesses and government and mutual funds that allow investments in diversified mix of funds

Note on Portfolio Management

A portfolio (in finance) is a collection of funds or investments held by investors and the process of managing these funds is known as portfolio management. A portfolio can consist of equities, bonds, mutual funds and other financial instruments. Portfolio management is based on the principle of diversifying investments across different financial instruments to maximize returns and reduce risks. Portfolio management as a service is provided by portfolio managers which is a corporate body registered as a portfolio manager with SEBI to provide advice and manage or undertake investments on behalf of their clients or investors[1]. As per SEBI rules, portfolio managers are required to have a minimum net worth of Rs 2 crore and every portfolio manager is required to pay Rs 10 lakhs as registration fees to acquire registration certificate from SEBI which is valid for 3 years. The renewal fees to SEBI are Rs 5 lakh for a portfolio manager. Alternatively, investors are supposed to open a DEMAT account in their names for Portfolio Management Services (PMS) in India. For example, HSBC’s Portfolio Management Service (PMS) division offers HSBC Equity Linked Portfolio that involves investments in equities listed on NSE Nifty or a basket of equities that generates long-term absolute returns. Investments under this portfolio are made in nonconvertible debentures (corporate bonds) that are linked with equities listed on NSE Nifty. Minimum investment amount in this portfolio is Rs 20 lakhs plus fees.

There are two types of PMS – Discretionary PMS where investment in funds is at the discretion of investors and Non-Discretionary PMS, where the portfolio manager suggests investment ideas based on preferences of the investors. Investors receive the valuation of their portfolios on a regular basis from their portfolio manager that reflects the performance of their portfolio. Investors are individuals and institutional investors who aim at maximizing high returns. Example for an individual availing PMS could be someone owning 20 shares of HPCL, 30 shares of Reliance Industries and 40 shares of Infosys that represent an equity portfolio of high-returns earning industries like Oil & Refinery and Information Technology (IT). In India PMS is more predominant for institutional investors like insurance companies, SCBs, DPs, mutual funds, etc that aim at increasing returns on their assets.

Note on Mutual Funds

Mutual Funds are also managed funds like PMS. Mutual Fund is an investment vehicle that is made up of mix of funds such as stocks, bonds, money market instruments and similar assets. A fund manager will be responsible for the investing the gathered money in specific funds like stocks and bonds. The fund manager attracts investors to invest in mutual funds in which investors buy units of portions of mutual funds and becoming a shareholder or unit holder of the mutual fund. There are various schemes of mutual funds currently available that include – equity funds, debt funds and balanced funds. Equity funds are mutual funds with maximum investment in equities with maximum risk-return matrix and debt funds are mutual funds with maximum investments in bonds with low risk and minimum returns whereas balanced funds are mutual funds that invest in both equities and bonds with stable returns. Equity, bonds and balanced mutual funds can be open-end or close-end, wherein open-end funds are available for subscription throughout the year and do not have fixed maturity period. Alternatively, close-end funds have pre-specified fixed maturity period and investors can buy or sell units of the fund on the stock exchanges where they are listed[2].

The main components of mutual funds are:

  • Net Asset Value (NAV) – NAV is a mutual fund’s price per share computed on stock exchange. NAV is calculated as the total value of securities in the fund minus any liabilities divided by the number of fund shares outstanding.
  • Risk Return – Risk return implies that the potential return rises if the risk rises and vice versa. For example, if the risk return on a scheme is -1.2% for the last 1 month then it implies that the returns are less by 1.2% in last month but if the risk return was 2.5% for last 3 months then the returns are more by 2.5%. Risk return also indicates the direction of NAV.
  • Portfolio Attributes – This includes description of the proportion of investments in types of equities and bonds, representative industries/sectors of investments, etc
  • Fund features – This includes basic description of the funds whether it is open-end or close-end, whether it has investments in equity or debt or both

Example of a mutual fund

HDFC Balanced Fund – Growth is an open ended scheme with 65.95% investments in, 15.48% investments in debt and 18.57% in cash & equivalents. The NAV of this fund is 54.08 as on October 3, 2011. The scheme’s performance in the last 1 month was – 2.26% and last 1 year was -3.59% and last 3 years was 20.02%. The top 10 holdings of the scheme include SBI, Tata Motors, LIC housing Finance, GOI, Canara Bank, Tata Consultancy, Reliance Industries, Coal India and Cash. The fund has allocated 20.7% in banking sector, 8.44% in auto industry, 7.4% in IT sector, etc

In summary, mutual funds have the following characteristics:

  1. Mutual funds require minimum investment and are easily available instruments in the market. One can purchase mutual funds with a minimum amount of Rs 2000
  2. Mutual funds allow all kinds of investors to diversify risks and acquire favorable returns
  3. Investors’ risks can be spread out across mutual funds instead of buying stocks or bonds separately
  4. Mutual funds buy and sell large amount of securities at a time, thus reducing the transaction costs and helps to reduce the average costs of investments for investors