Automated Portfolio Management Services (PMS), also known as Robo-Advisors, have gained prominence in India as a tech-savvy approach to managing investments. Robo-advisors operate primarily on digital platforms and are not limited just to Portfolio Management Services, they can also provide Investment Advisory Services as well. This online-only aspect distinguishes them from traditional advisory and management services, where you might regularly meet or speak with a human financial advisor. Some robo-advisors also take a "hybrid" approach which provide users with access to human professionals for queries or additional services.

During the 2008 financial crisis, stock markets were falling globally, most major economies were in turmoil, interest rates touched historical lows and investors pulled their money out of equities. That is when these automated portfolio management services or Robo-advisory platforms rose to prominence and capitalized on this scenario for smaller investors. Their value proposition appealed to many, and robo-advisory platforms saw strong demand which traditional investment firms also took note of, many of whom have now integrated robo-advisory solutions into their existing investment advisory and portfolio management service offerings.

While robo-advisors can be provided for investment advisory, in this article our focus will be on the automated portfolio management services where the minimum investment amount in India is Rs. 50 Lakh .

What is Automated Portfolio Management Service?

Automated Portfolio Management Service is a digital investment platform that employs algorithms and technology to construct, manage, and optimize investment portfolios. These algorithms are designed to assess an individual's financial goals, risk tolerance, and investment horizon to create and manage a diversified portfolio of assets.

Automated Portfolio Management Service is a promising alternative for many people as robo-advisory services are typically data-driven, have automated processes and limited human intervention in trading, deciding what, how, when and where to trade or invest the individual’s capital. And unlike traditional PMS, where human portfolio managers make investment decisions, automated PMS relies on data-driven strategies , portfolios built using sophisticated algorithms and in today’s day and age, use of artificial intelligence - all of which aim for stable returns across market cycles. This innovative approach aims to make investing more accessible, cost-effective, and tailored to individual needs.

Robo Advisors such as Wright Research are working towards democratizing access to automated investment advisory and automated portfolio management services. By offering intuitive, easy to use, fully digital processes, we have made investment advisory more accessible to the mass affluent and smaller investors – segments that traditional wealth management often overlooked. And for Portfolio Management Services, we have brought our data driven, AI, unbiased, quant based robo advisory service as well.

Read this article to learn more about Portfolio Management vs Wealth Management: The Key Differences

How Does Automated Portfolio Management Work?

Onboarding process of an Automated Portfolio Management Service

When you first sign up with a robo-advisor for Automated Portfolio Management Service it begins with a client questionnaire asking a series of questions about the investor’s financial goals, risk tolerance, and investment preferences.

Based on your responses, the robo-advisor’s algorithm determines an appropriate asset allocation strategy that matches your profile. Depending on the requirements, it will select from a variety of asset classes, such as stocks, bonds, real estate etc. Some automated portfolio management services may recommend specific asset classes only such as ETFs or equity only.

Paying Fees of Robo Advisors

Upon agreeing with the proposed investment strategy, you'll proceed to fund your account. Robo-advisors usually support a variety of funding methods, from electronic transfers, UPI, direct transfers etc. - be aware of the fee structure . While robo-advisors generally have lower fees than their human counterparts, they still charge a management fee, typically a percentage of the account balance. This is exclusive of any other fees that might be levied by the underlying mutual funds or ETFs.

Monitoring The Portfolio under Robo Advisors

Using sophisticated algorithms, deep machine learning models, use of Artificial Intelligence (AI) to predict market movements, team of experts analysing key trends and much more, Robo-Advisors continuously monitors market conditions and conduct regular portfolio reviews. When necessary, they will rebalance your assets to align with your stated goals. For example, if a certain asset class is performing well and begins to dominate the portfolio, the algorithm may sell some of those assets and reinvest in underperforming ones to maintain the desired strategic allocation.

Additionally, these platforms frequently offer features that were previously the domain of high-end wealth management firms. They have tools to calculate financial plans, determine retirement planning goals, suggest tax-loss harvesting, conduct comprehensive portfolio reviews etc.

Pros of Automated Portfolio Management Services

1. Accessibility and Convenience

One of the standout advantages of automated portfolio management services is their accessibility and convenience. Investors can access their portfolios and make investment decisions 24/7 from the comfort of their homes or on the go using mobile apps. This convenience is particularly appealing to individuals with busy lifestyles who may not have the time to engage in traditional investment methods that require frequent in-person meetings with financial advisors.

2. Cost-Effectiveness

Automated portfolio management services typically come with lower fees compared to traditional human-advisor-driven services. This cost-effectiveness makes them an attractive option for a broader range of investors, including those who may not have substantial assets to invest initially. Lower fees mean that a more significant portion of your investment returns stays in your pocket.

3. Diversification and Risk Management

Automated portfolio management platforms excel finding ways to diversify a portfolio given the heavy algorithms they can run to determine and pinpoint portfolio that caters to specific portfolio risk. Automation built into robo-advisors also helps identify and manage risk more effectively, limiting likelihood of losses.

Algorithms can be used to execute investments, spread them across various asset classes, such as stocks, bonds, real estate, and more. This diversification helps mitigate risk by reducing the impact of poor performance in any single asset or sector.

4. Personalization and Customization

While automated, these services are far from one-size-fits-all. They use sophisticated algorithms to tailor investment strategies to individual investor goals and risk tolerances. This level of personalization was traditionally reserved for high-net-worth individuals working with human financial advisors.

5. Data-Driven Decision Making

Robo-advisors employ data and algorithms to make investment decisions. This approach significantly reduces the emotional bias that can often lead human investors to make irrational decisions, particularly during market fluctuations. By relying on data-driven strategies, these platforms aim to deliver more consistent and objective results.

6. Transparency and Reporting

Automated portfolio management platforms provide transparent reporting on portfolio performance and holdings. Investors can easily track how their investments are faring and understand where their money is allocated. This transparency fosters trust and enables investors to make informed decisions.

7. Tax Efficiency

Some automated platforms offer tax optimization strategies, such as tax-loss harvesting. These strategies aim to minimize capital gains taxes and enhance after-tax returns, potentially boosting your overall investment performance.

8. Accessibility to Market Insights

Investors using automated portfolio management platforms can access a wealth of market insights, research reports, and investment data. This information empowers them to make informed decisions without solely relying on the expertise of a human advisor.

9. Risk Tolerance Assessment

Robo-advisors employ comprehensive risk assessment tools to determine an investor's risk tolerance accurately. This assessment ensures that the portfolio aligns with the investor's comfort level and financial objectives, reducing the likelihood of investment decisions that are out of sync with the investor's risk profile.

10. Scalability

Automated portfolio management platforms can efficiently manage portfolios of varying sizes, making them suitable for both small and large investors. Whether you're just starting to invest or have a substantial portfolio, these services can cater to your needs.

Cons of Automated Portfolio Management Services

While automated PMS offers numerous benefits, it's essential to consider its limitations:

1. Lack of Personal Touch

One of the most notable drawbacks of automated portfolio management services is the absence of a personal touch and human interaction. Some investors value the guidance, reassurance, and relationship-building that come with working closely with a human advisor. Automated services may not provide the same level of empathy and understanding.

Hybrid Robo-Advisors solve this problem by giving customer care and contact touch points to ensure the client’s queries are being addressed. For example at Wright Research, you can reach out to us for any query regarding investment advisory or portfolio management services at info@wrightresearch.in or call us/ drop us a whatsapp at +91 63601 27635.

2. Lack of Control over Portfolio

Investors using automated portfolio management services often relinquish some control over their investment decisions. While this can be advantageous for those who prefer a hands-off approach, it may not sit well with individuals who want to actively manage their portfolios and make decisions based on their intuition or beliefs.

3. Technology Risks

Robo-advisors rely heavily on technology to function efficiently. While technology has brought tremendous advancements, it also carries the risk of system failures, cyberattacks, and technical glitches. These issues can disrupt portfolio management and potentially impact investment performance. Having strong and robust technology processes, system and failsafe mechanisms in place is essential for Robo-Advisors, and a key focus of ours at Wright Research.

4. Market Sensitivity

Automated portfolio management services may not always adapt quickly to rapidly changing market conditions or unexpected events. During extreme market volatility or crises, automated algorithms may not provide the timely responses or risk management that a human advisor could offer.

Which is why we need strong risk management policies and practices that robo-advisory services can leverage – a core focus at Wright Research. Read more about our risk management practices here and what we do when markets correct .

Wrapping Up

Automated Portfolio Management Services is changing how people invest and are managing their investments not just in India but also globally - offering accessibility, cost-effectiveness, and data-driven strategies. While they provide an attractive solution for many investors, it's essential to weigh the benefits against the limitations and consider your individual investment needs and preferences.

Ultimately, the choice between automated and traditional portfolio management services should align with your financial goals, risk tolerance, and comfort level. For some, the convenience and cost savings of automated PMS make it an ideal choice, while others may prefer the personal touch and expertise of a human advisor. Regardless of the path chosen, the evolution of automated investing has undoubtedly expanded opportunities for investors in India and around the world.

Want to learn more about PMS? Here are some interesting articles related to Portfolio Management Services in India:

1. What is Portfolio Management Service - Types and Benefits

2. What is the Minimum Investment Ticket Size for Portfolio Management Services (PMS)?

3. Complete Guide to Factor Investing & the Wright Factor Fund PMS

4. Fee Structure for the Wright Portfolio Management Service
5. Path to Wealth Creation: Timeline To Initiate a PMS Account in India
6. Understanding the PMS Process: Fund Pooling and Fund Accounting
7. How to Open a PMS Account as an Investor in India?
8. Understanding Portfolio Rebalancing in PMS: A Crucial Strategy for Wealth Management
9. Risks of Investing in Portfolio Management Services (PMS): A Comprehensive Analysis

FAQs:

1. How Effective Is Automated Portfolio Management?

Automated portfolio management can be highly effective, as it relies on data-driven strategies, diversification, and continuous monitoring to optimize portfolios. According to a report by Statista, the global robo-advisory market was valued at $1.5 trillion in assets under management in 2020, indicating its effectiveness and growing popularity.

2. How Do I Get Started with Automated Portfolio Management?

To get started, choose a reputable robo-advisor or automated portfolio management platform in India, create an account, complete a risk assessment questionnaire, and fund your account. The robo-advisor will then construct and manage your portfolio based on your inputs.

3. Is there a minimum requirement for automatic portfolio management?

Yes, there is typically a minimum investment requirement for automatic portfolio management in India. Investment advisory can vary but often ranges from INR 5,000 to INR 25,000, depending on the platform or provider. For automatic PMS or PMS robo advisor that minimum amount is Rs. 50 Lakhs .

4. Is automated portfolio management suitable for all types of investors?

Automated portfolio management is suitable for a wide range of investors, from beginners with limited financial knowledge to experienced investors seeking cost-effective and efficient portfolio management. However, it may not be ideal for individuals with highly complex financial situations or those who prefer a high degree of personal interaction with advisors.

5. Is automated portfolio management service secure?

Yes, automated portfolio management services prioritize security. They use encryption, multi-factor authentication, and comply with regulatory standards to protect investors' data and assets. However, like any online service, there are always risks, so it's essential to choose a reputable provider.

6. Do I have control over my investments with automated portfolio management?

While automated portfolio management provides convenience and professional management, investors have limited control over day-to-day investment decisions. However, they retain control over their overall investment strategy and can make changes or withdraw funds as needed.