Let us take a peek behind the curtain of portfolio management services (PMS) in India. This journey isn’t just about high returns; it’s about understanding the risks hidden in plain sight and making informed choices.
- When it comes to investing in PMS, one might be drawn in by a charismatic fund manager who excels in marketing. These “asset gatherers” might paint a picture of untold riches, but their actual industry experience may be limited. A lack of hands-on investment experience can turn a seemingly golden opportunity into a risky venture. As Warren Buffett puts it, “Risk comes from not knowing what you’re doing.” It’s crucial to examine your fund manager’s industry track record and capabilities before entrusting your wealth to them.
- A dormant fund with insufficient clients can also be a red flag. Lack of participation might indicate a lack of faith in the fund or the manager. It could also suggest limited liquidity, making it difficult to respond swiftly to market changes.
- High-risk strategies are another hidden danger. While risk-taking is inherent to investing, excessive risk in pursuit of short-term gains can put your capital at severe risk. Scrutinize the fund’s investment strategy, ensuring it aligns with your risk tolerance and long-term financial goals.
- One other risk, not often discussed is ‘Style Drift’. It occurs when a fund manager strays from their stated investment strategy. For instance, a fund that claims to invest in blue-chip companies starts dabbling in mid-cap or small-cap stocks, contradicting their stated investment philosophy. This can alter the risk-return dynamics of your portfolio, often unnoticed until it’s too late. To quote legendary investor Peter Lynch, “Know what you own, and know why you own it.”
- The hidden cost is another factor to consider. Apart from the management fee, some PMS charge entry fees, exit fees, or custodian fees. These costs can eat into your profits, diminishing your overall returns. Transparency about all fees involved is paramount to avoid unpleasant surprises.
- Then, there’s the ‘Key Person Risk.’ What happens if the star fund manager, the key person driving the PMS’s performance, leaves the firm? It might disrupt the fund’s strategy and impact its future returns. A team-based approach to portfolio management can mitigate this risk, underscoring the need for a robust and experienced investment team.
- Market concentration risk is another danger. If your PMS fund is heavily invested in a particular sector or a small number of stocks, it might face significant losses during a downturn in that sector or company. Diversification, as famously advocated by Ray Dalio, founder of Bridgewater Associates, can safeguard your investments: “Diversify well, and you’ll have far less risk.”
But there’s hope. These pitfalls shouldn’t deter you from considering PMS as part of your investment strategy. Instead, they highlight the importance of due diligence and the need for an experienced, trusted advisor to navigate the landscape.
This is where Jama Wealth steps in. As your trusted advisor, guides you through these murky waters. With our industry experience and a transparent approach, are committed to protecting and growing your wealth. Our tailored PMS services and investment advisory are specifically designed to ensure these hidden risks are adequately managed and your financial aspirations are met.
