Portfolio Management Services

Portfolio management Services (PMS) refer to professional advisory and investment services offered to clients; tailor made to cater to their specific financial objectives. These clients could be High Networth Individuals (HNIs) and institutions. The SEBI has mandated a minimum investment of ₹25 lakhs for PMS investment. These are usually offered by Asset Management Companies,Banks, Brokerages and Independent Investment Managers. These schemes are registered with SEBI and have to follow certain guidelines, although the guidelines are much more relaxed for PMS.

How PMS works

The PMS is typically an agreement between the investor and the portfolio manager in terms of formulating an investment strategy to achieve specific goals,asset classes in which to invest, and other details. The investor has to invest a minimum of Rs 25 lakh. This could be either in cash or stocks of the same worth. PMS offered are of two types – discretionary and non-discretionary. In discretionary approach, the manager has the power of attorney to manage the investor’s demat account, and takes all the investment decisions on his behalf. In non-discretionary approach, he merely gives portfolio recommendations and the investor decides whether to go ahead with his recommendations or not. PMS works on a profit-sharing model beyond a certain hurdle rate, and therefore the Fund Manager of PMS has a personal interest in the portfolio doing well.

Most PMS schemes offer model portfolios to clients to choose from. However, some of them also offer investments tailored to clients’ goals. For instance, if a client wishes to invest a large amount in a single stock, the PMS can do so, for the client. This is not possible in mutual funds, as they have a limitation to hold not more than 10% of its corpus in a single stock. This is a risk management strategy for MFs, but the disadvantage is that mutual funds cannot hold a large stake in any stock even if the manager considers it to be a good investment.

Benefits of PMS

Some of the reasons why high-ticket investors prefer PMS are:

  1. Personal Fund Manager: Unlike Mutual Funds, where the investment decisions of the fund manager are based on common objective applicable to all unit holders, PMS Fund managers cater to the specific and personalized need of the clients. They have the flexibility as well as the professional expertise to create a customized portfolio for the client. Also, because there is a profit sharing agreement, the Fund Manager always aims at delivering higher than normal profits to the investor.
  2. Active management and tracking: The assets on the portfolio are actively tracked and churned if required, to maintain consistent returns with controlled risk.
  3. Convenience: PMS are committed to offering to the HNI clients and big-ticket investors the one thing they value the most– hassle free investment management. The non-discretionary PMS make sure that the clients needs are well-understood and work to build and maintain a portfolio suited to them. They keep clients updated on the performance of their portfolio and take care of all administrative formalities to save the client’s valuable time.
  4. Flexible charges: PMS charges are not fixed, and can be negotiated by clients. Therefore, it is beneficial for big investors who do not get the luxury of negotiating charges with mutual funds.

 

However, many experts have challenged the superiority of PMS over Mutual Funds, and claim that Mutual Funds are a better product on many parameters. Some of the drawbacks of PMS are listed below.

 

  1. Less efficient tax structure:In PMS, it is not well defined whether the returns are taxable as ‘Business Income’ or ‘Capital Gains’. In any case, the returns will be taxed in the same manner as if the investor is investing directly. For stocks held for more than a year, long term capital gain tax @ 10% plus surcharge will be applicable. In case the portfolio manager indulges in short term trading, short term capital gains would attract tax as per the investors slab rates.While Income from Mutual Funds is exempt from tax u/s 10(23D), there is no such exemption for PMS.Mutual funds do not have to pay short term capital gains tax and churning costs.
  2. Higher charges: Above a certain hurdle rate of return, PMS schemes charge a part of the investors profit. This reduces his effective returns, and the investor has to be sure that the services offered are commensurate with the charges he is paying.
  3. Less transparent: In case of PMS schemes which are highly customized, the investor has to depend on the word of the fund manager about the actual returns generated by the portfolio. In case of a model portfolio, the performance card is available more easily. On the other hand, mutual fund portfolios and performance is highly transparent and available on their websites for everyone to see.
  4. Onerous documentation required: In case of non-discretionary PMS, a segregated demat account needs to be opened and the power of attorney needs to be registered in favour of the portfolio manager. This is a tedious process compared to investing in Mutual Funds.
  5. Less regulation: In case of Mutual Funds, SEBI has laid down operational and investment risk management rules to ensure that investment process is fiduciary in nature. In PMS, there is more freedom to the fund manager to invest in securities without any internal limits. This may increase risks and reduce investor protection.

 

One should ensure that the product, whether PMS or Mutual Fund, should be suitable to his investment profile. If one lacks the required aptitude to understand investments, then it is better to invest through mutual funds, which follow strict guidelines as mandated by SEBI. Both quantitative and qualitative aspects should be assessed to have the right funds in your portfolio, which suit your investment objective.

FAQs

  1. How is PMS different from a mutual fund?

Differences between PMS and Mutual Funds are listed below

Parameters

Mutual Fund

PMS

Minimum Investment limit

₹ 500

₹25,00,000

Demat requirement

Not required

Separate demat account required with power of attorney to the Fund Manager

Regulation

High regulation limits

No regulation limits

Charges

Expense ratio upto 2%, Fixed.

Entry load of 2-3%, management fees, performance fees. Charges may be negotiable

Flexibility

Low

High

Accountability

Low

High

No of stocks

50-60

15-20

Transparency

High

Dependent on the PMS and the type of portfolio.

 

  1. Can PMS invest in debt instruments?

PMS has the flexibility of investing in all instruments, including debt. However, it is more tax efficient to invest in debt mutual fund rather than debt PMS, as MFs are investment trusts, unlike PMS which is not a trust.

  1. Who is eligible to invest in PMS in India?

All of the following can invest in PMS

  • Resident Individuals
  • Non-resident Indians
  • Hindu Undivided Families
  • Corporate bodies
  • Trusts
  • Partnership firms

 

  1. Can PMS invest in derivative instruments?

Yes, PMS schemes can invest in derivatives like stock and commodity futures, structured products and ETFs, for the purpose of hedging. However, the total exposure of the client to derivative instruments must not exceed the client’s funds invested, i.e. funds cannot be leveraged.

 

  1. What are the risks associated with investing in PMS?

There are various risks attached to investing in PMS, similar to investing in stocks. Some of them are:

  • Concentrated risk: PMS may take exposure in any particular sector or company more than others and this can expose the portfolio to sectoral risk
  • Risk of losing capital: Just like any equity investment, PMS also has the risk of losing the invested capital if stock value depreciates or an investment strategy goes wrong.

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Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns.

Please consider your specific investment requirements, risk tolerance, investment goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs.