Born in the late 1990s-early 2000s, portfolio management services, or PMS, became a favourite with investors in the bull market of 2005-2008. But soon after, it lost steam in the 2008-2009 market turmoil. Investment in PMS is still lagging the peak, although non-discretionary has picked up. According to data from the Securities and Exchange Board of India (Sebi), the assets under management (AUM) of discretionary PMS products have declined 40%, but the AUM for non-discretionary PMS products has increased 26% from December 2010 till date.


Nitin Rakesh, managing direct and chief executive officer, Motilal Oswal Asset Management Co. (AMC) agrees that the industry has shrunk, but claims their AUM has grown in three years.

Shashank Khade, executive vice-president, Kotak Securities Ltd, explained: “Non-discretionary PMS has grown in a big way thanks to banks promoting it. Discretionary, on the other hand, is limited to a few companies; as and when the bull market returns, the “pull" factor will come back and this form of investing in equity will pick up again." He adds, it could take two to three years but these are cycles not new to the product.

Given the changing dynamics of the industry and other options in the equity space, such as private equity, or PE, funds, real estate funds, structured products and mutual funds, or MFs, does it make sense to invest in PMS?

Difference between discretionary and non-discretionary PMS

Discretionary: In a discretionary product, the fund manager’s discretion in managing the portfolio is key. The investor’s account is run on the basis of a power of attorney and there is no further need to obtain the investor’s consent for intermediate transactions. However, since the stocks are in the investor’s name, they have full access.

Non-discretionary: Here the relationship manager/advisor contacts the investor for each buy/sell decision. It is essentially an equity advisory service. These products, too, are based on a model portfolio, but the investor has a say in what stocks to retain.

A number of distributors, including banks and private wealth managers, prefer non-discretionary products as these are considered more flexible. Only a handful of providers still run a substantial discretionary PMS business. Says Atul Singh, managing director and head (global wealth and investment management), India, DSP Merril Lynch Ltd, “We prefer non-discretionary PMS for our clients on account of relatively higher transparency and ease of transaction."

Advantages and caveats: If you are able to dedicate time to personal investments and look at the details frequently, non-discretionary PMS is a good product to have. If you want total professional management and focused portfolios, discretionary PMS makes more sense. Says Vishal Kapoor, general manager, wealth management, India & South Asia, Standard Chartered Bank, “All formats—whether AMC or brokerage-based PMS—have specific advantages that can work well for investors. Focused PMS providers have given some surprisingly good results recently."

Says Khade, “Managed accounts work best, where the overall portfolio is built within the discretionary format but involves the investor’s suggestions. This product works best for big-ticket sizes and where customization is possible."

Who should invest?

The minimum ticket size for PMS is 5 lakh but let’s be clear that PMS comes with risks intrinsic to equity investing and is best suited for high networth individuals (HNIs). Sebi addressed the issue of small-ticket sizes in its concept paper released a few months ago, where it suggested that the minimum investment in a PMS should be 25 lakh and not 5 lakh.

Choosing discretionary over non-discretionary would depend on your appetite for risk, need for customization and ability to manage investments closely.

Does PMS still present an advantage?

Investors are increasingly experimenting with products and rightly so. With inflation looming above 9%, one has to find ways of earning positive real returns.

To keep portfolios focused, PMS providers typically have not more than three-four products. Says Sameer Kamdar, chief executive officer, ASK Investment Managers Pvt. Ltd, “We don’t believe in having too many products, a few basic products that are focused and perform well are enough. Another reason our funds have outperformed a number of diversified equity MFs is the low turnover ratio." Basically, your philosophy should match with the fund manager’s.

How it compares with MFs: The closest competition to a PMS are equity MFs. In MFs, the product basket is much larger, giving the investor more choice and fees is comparatively lower. Experts argue that while both products are essentially long-term in nature, equity MFs are mass products and do not offer the advantage of customization and concentrated portfolios. In other words, if you want to invest in or avoid specific stocks or sectors you can’t do that with an equity MF, not only because it is a mass product but also because there are restrictions on total sector exposures for diversified funds. Says Khade, “PMS not only offers a focused portfolio but also the novelty of one-on-one interaction with the portfolio manager to understand the strategy and philosophy behind the investment better." This access is not there in an MF unless you are a large institutional investor.

MFs work well where you want to invest in line with an established scheme objective; PMS works well in considering the risk appetite of individual investors for managing tailored portfolios.

How it compares with structured notes or PE funds: In structured notes or PE funds, the risk-return profile is different from a pure equity product and to that extent the allocation to these should be kept separate. Kapoor says, “There is still merit in a focused long only equity strategy for the evolved HNI. PMS offers customized strategies which the investor can opt for and this can work well in uncertain and volatile markets, where opportunities may be more concentrated." PE funds, real estate funds and the like are better classified separately as alternate investments rather than equity; there is merit in these provided you understand and have the capability to take on risks.

Market edge: Equity investors benefit the most when they buy during corrections (stocks are cheaper) and hold. Says Jayant Pai, vice-president, Parag Parikh Financial Services Ltd, a financial planning firm, “We are looking at increasing client’s exposure to PMS at this time but convincing them to invest in equity now is not easy."

Kapoor also feels that over time as technology and awareness have improved, increasingly HNIs recognize the value in professional help, which can be got through a PMS.

PMS performance details are not publicly available, so you have to probe the provider for historical performance track record and comparison. In addition to this, keep in mind the reporting format, fees and portfolio turnover when choosing an appropriate discretionary.

If you are more inclined to take up the non-discretionary product, along with performance and fess, consider the execution capabilities of the provider. For example, inter-linking of trading, banking and demat accounts, mode of payment and so on.