Mumbai: Did you know portfolio management service (PMS) is the product that falls on the higher end of the curve? Due to characteristics such as a large required ticket-size, concentrated portfolio and high risk, it suits investors with prior market knowledge. In other words, PMS allows you to hold individual stocks while passing the baton of fund and portfolio management to an expert.
“PMS are investment solutions offered with products in equities, fixed income, debt and structured products that is managed by a professional manager," said Hemang Kapasi, portfolio manager– equity, Sanctum Wealth Management. Your portfolio can be tailored to suit your financial needs and goals. “In PMS, you own individual securities whereas in mutual funds, clients own units of the fund," said Kapasi.
The minimum investment amount is Rs25 lakh. When you opt for a PMS scheme, a bank account and demat account will be opened. However, the power of attorney of operating those accounts will be with your portfolio manager. There are two types of PMS – discretionary and non-discretionary. “In the discretionary option, your portfolio manager is at liberty to make investment decisions and does not need to consult you for every transaction," said Ashish Shanker, head-investment advisory, Motilal Oswal Private Wealth Management. The discretionary variant is more prevalent in the market.
“In non-discretionary PMS, your fund manager is bound to make investment decisions only after discussing with you for each transaction," said Chitra Iyer, chief executive officer, My Financial Advisor.
Your portfolio manager can only suggest the investment ideas but the control lies with you. “Even under discretionary portfolio, you can share a negative list of securities. The portfolio manager excludes the securities in the negative list while constructing the portfolio," said Himanshu Upadhyay, PMS portfolio manager, DHFL Pramerica Asset Managers Private Ltd. The arrangement in PMS is a one-on-one interaction between the portfolio manager and the investor. “You may not find published data about the portfolio performance as your PMS portfolio will be your personal portfolio and others will not know what your portfolio manager bought for you," said Iyer.
Your portfolio manager will do the background work of keeping a track of securities, their performance and keep you informed about the developments in the portfolio. “This kind of a categorisation (discretionary or non-discretionary) depends on you and your portfolio manager. Apart from this, there can be other categorisations based on market cap, investment horizon and themes," said Kapasi. In terms of nature of investment, PMS is more concentrated. There are certain norms required to be completed with Sebi for setting up the PMS but it is not regulatory by any governing body. There are three components of fees in PMS. “There is an upfront or setup fee paid during initial investment, management fee which is a fixed fee paid for managing the portfolio and performance fees which is paid when you receive a share in profits generated," said Kapasi. Many portfolio managers also charge exit load at the time of investment exit. The average range of the fee is similar to mutual funds, which is capped at 2.25% by the regulator. However, your fee can be customised. Your tax liability as a PMS investor would remain the same as if you were accessing the capital market directly. Comparing returns historically for PMS becomes difficult as there is no homogeneity in computing those returns and the portfolio structure, said Shanker.
Is it for you?
“PMS investments are advisable in case of investment themes that are not available through the mutual fund route. Also if you have specific mandate due to your beliefs, it is possible to create tailor made solutions through PMS," said Upadhyay.
He said it is a good tool to diversify your exposure beyond the opportunities offered by mutual funds. “It is suitable for high net worth and institutional investors with a suitably large investment portfolio seeking to invest in opportunities that are not available through a MF portfolio," he added.
The entry limit of ₹25 lakh is higher for retail investors. “Pertaining to the minimum ticket size of ₹25 lakh, it will be difficult for retail investors to maintain it considering other investment options in the market allow you to invest as low as ₹1,000 or even lower than that," said Iyer.
One of the major risks of the product is that the portfolios are concentrated. “Your portfolio manager may invest 15 -20% in a single stock," said Shanker. This becomes a risk for PMS as the portfolios are too concentrated.
“For example, the allocation of mid cap and small cap is higher in PMS and so is the risk as compared to large-cap oriented funds," said Kapasi. Another risk comes in the form of low regulation and governance. It is not suited for retail investors. However, HNIs can consider using PMS strategies.