Market volatility is inevitable. The right Portfolio Management Service (PMS) does not eliminate risk, but it can control the magnitude and frequency of drawdowns and stabilise compounding. This guide explains how professional PMS managers in India build portfolios that stay resilient across cycles without promising returns.
Quick take: A robust PMS uses rule-based diversification, dynamic allocation, risk budgeting, and where permitted derivatives to reduce downside and improve risk-adjusted returns.
PMS vs Mutual Funds: Why risk control can differ
- Mandate flexibility: PMS strategies can be more concentrated and bespoke than mutual funds. This allows targeted hedging and factor tilts but also requires stronger risk discipline.
- Customisation: Investors can set investment objectives, constraints, and tax preferences. Portfolios can reflect liquidity needs or cash flow timelines.
- Transparency: Clients receive stock-level holdings and transaction statements, enabling better oversight of risk exposures.
- Regulatory guardrails: PMS are SEBI-registered and must follow disclosure, valuation, and custodian norms. Derivative use is permitted within regulations and client agreements.
New to PMS? See our explainer on investor fit and selection criteria: PMS Investors in India.
The volatility problem in numbers
- A 25% drawdown requires a 33% gain to break even. Repeated drawdowns delay compounding.
- Even if annual returns match peers, a portfolio with lower standard deviation and shallower maximum drawdown typically compounds better over time.
Goal: Reduce the path risk (the journey), not just chase point-to-point returns.
7 proven PMS levers to mitigate volatility
1) Strategic + Dynamic Asset Allocation
- Maintain a strategic core across equities, cash, and—where mandated—fixed income or arbitrage.
- Use dynamic tilts around valuation and macro indicators. Example: raise cash buffers (5–20%) when breadth deteriorates or earnings revisions turn negative.
2) Diversification by design, not hope
- Position sizing rules: cap single-stock exposure (e.g., 5–8%) and sector exposure (e.g., 20–30%).
- Market-cap mix: combine large-cap defensives with select mid/small alpha ideas to smooth beta.
- Add uncorrelated sleeves like special situations or quant factors where the mandate allows.
For a deeper look at the role of fixed income during equity stress, read: The Hidden Power of Fixed Income in a Volatile Equity Market.
3) Factor Tilts that behave well in stress
- Increase exposure to quality, profitability, and low-leverage factors in late-cycle phases.
- Reduce high-beta and momentum when dispersion spikes or earnings momentum fades.
- Back the tilts with evidence-based screens and periodic re-tests.
4) Explicit Risk Budgeting and Drawdown Controls
- Define a volatility budget (e.g., target annualised volatility ≤ a chosen threshold relative to Nifty 50).
- Set maximum drawdown bands (e.g., −12% soft stop, −18% hard review) at the portfolio level.
- Enforce stop-loss or time-based exit rules at the position level to prevent tail concentration.
5) Hedging and Overlay Management (where permitted)
- Use index futures/options to partially hedge net exposure during event risk.
- Consider pair trades or beta overlays to neutralise sector or market risk while retaining stock-specific alpha.
- Calibrate hedge ratios to the risk budget, not headlines.
Compare discretionary vs rules-based styles here: Active vs Passive PMS in India.
6) Rebalancing Discipline
- Periodic or band-based rebalancing harvests volatility, trims outsized winners, and tops up laggards with intact fundamentals.
- Reduces behavioural errors like anchoring and loss aversion.
Behavioural edge matters. See: Behavioural Finance: How Advisors Help You Avoid Mistakes.
7) Liquidity and Execution Hygiene
- Prefer names with adequate average daily turnover to avoid price impact in volatile markets.
- Stagger orders and use limit discipline to reduce slippage.
A simple framework to evaluate a PMS on volatility control
Ask for these five artefacts before you commit capital:
- Risk Policy Document: Position limits, sector caps, cash bands, hedging rules, rebalancing frequency.
- Attribution + Ex-Post Risk: Active return sources and factor exposures using standard models.
- Downside Statistics: Worst month, worst quarter, max drawdown, time to recovery.
- Risk-Adjusted Metrics: Sharpe, Sortino, Hit ratio, Upside/Downside capture vs a stated benchmark.
- Governance: Team structure, dealing and compliance controls, disaster recovery, and escalation.
For portfolio ballast ideas beyond PMS, see: Risk Management Isn’t Boring—It’s Profitable.
Illustrative scenario: drawdown control at work
- Base case: ₹1 crore equity-only portfolio, no controls. Market falls 20%. Portfolio drops to ₹80 lakh. A 25% rise is needed just to get back to par.
- With PMS risk levers: Using selective hedges and a 15% cash buffer, effective beta falls to 0.75. In the same 20% drawdown, the portfolio drops ~15% to ₹85 lakh. The recovery hurdle is lower, and capital is available to buy high-conviction names at better prices.
Numbers are illustrative. Actual outcomes vary and are not guaranteed.
Costs, taxes, and expectations
- Fees: PMS typically charge a fixed management fee and may have performance-linked fees per the agreement. Evaluate post-fee, post-tax outcomes.
- Taxation: PMS portfolios are held in the investor’s name; capital gains are realised at the transaction level and taxed accordingly. Turnover and holding periods matter.
- Expectations: No structure can remove volatility. The goal is smarter exposure and faster recovery.
Who should consider a volatility-aware PMS?
- Investors with ₹50 lakh+ deployable capital seeking customisation and transparency.
- HNIs/NRIs wanting risk-managed growth with documented governance.
- Business owners who need liquidity planning during uncertain cycles.
Exploring NRIs’ options? Start here: PMS for NRIs 2025.
How Equentis Investech can help
- Mandate clarity: We map your objectives, constraints, and risk tolerance into a custom PMS brief.
- Evidence-first process: Factor research, earnings quality checks, and risk attribution inform every decision.
- Cycle-aware playbook: Clear cash bands, hedge protocols, and rebalance rules to navigate stress.
FAQs
1) Can a PMS guarantee downside protection?
No. A PMS can use cash buffers, diversification, and hedges to reduce drawdowns, but it cannot guarantee outcomes.
2) Are derivatives allowed in PMS for hedging?
Yes, within SEBI norms and the client agreement. Many equity PMS use index futures/options or pair trades for partial hedges.
3) What cash allocation is typical in volatile markets?
Varies by mandate. Many managers operate within a 5–20% band to manage risk and fund opportunities.
4) How do I compare PMS on risk-adjusted performance?
Use Sortino, downside capture, and max drawdown, not just CAGR. Ask for rolling 1/3/5-year metrics.
5) How often will my PMS rebalance?
Depends on the strategy. Many use quarterly or band-based rebalancing to keep risk within budget.
Conclusion
Volatility is a feature of markets, not a bug. The right PMS cannot promise returns, but it can engineer a smoother path through disciplined allocation, factor tilts, hedging, and risk budgeting. If capital preservation and steady compounding matter to you, align with a manager who treats risk as a resource, not an afterthought.
Invest smarter with Equentis Investech.
