Things to know before taking a portfolio management services route 

These regulations laid down detailed rules on audit, the appointment of a custodian, the role of portfolio managers, and the like. The minimum investment was hiked to ₹50 lakh per client and PMSs were mandated to furnish periodic reports. Following the Sebi guidelines, PMSs had to report their performance data net of all fees and expenses. And this had to be done on a consolidated basis after aggregating the performance of all the client portfolios (and not a select few) for each strategy. While PMS investors can rest easy on the regulatory front now, here are a few things to note before you go down the PMS route.

Reporting of returns

PMSs have to submit monthly performance reports to Sebi. These can be found under ‘monthly report of portfolio manager’ under the ‘statistics’ section of ‘reports and statistics’ on the Sebi website. Here, you can also see the AUM break-up (equity, debt, and others) and 1-month and 1-year returns. Websites of PMS aggregators such as PMSBazaar and PMS AIF World that provide data across schemes (sourced from PMSs)can make comparisons easier.

 

PMSs also provide scheme-wise performance data on their websites. Here, while the larger PMSs explicitly state that the displayed returns are net of all fees and expenses, some smaller ones do not clearly say so. Also, each PMS provides performance records for different time periods. Not all of them disclose their complete scheme portfolios. This information is, however, shared with investment advisors who have tied up with a particular PMS.

While the standardization in reporting of returns and greater disclosure to Sebi and to PMS clients have brought in much-needed transparency, new investors may still not find it easy to navigate the PMS space. “Customers need to do some research or take the advice of an investment advisor before going for a PMS," says Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

The right strategy

“PMS is a domain where one should invest in the midcap or the sector-agnostic (flexi-cap like strategy) space. Large-cap strategies don’t make much sense," says, Randev. While a few large-cap PMS schemes that are very long-term in nature have done well, most have followed the same course as mutual funds (MFs). Strategies of running high-conviction concentrated bets focused on a few midcaps or a few stocks across market capitalizations is where PMSs can really add value, according to Randev.

What to focus on

So, what must investors focus on when shortlisting a PMS scheme? Most experts point towards the track record—how long has a scheme and its fund manager been in existence? The longer it is, the better. Nitin Shanbhag, senior executive group VP, Investment Products - Motilal Oswal Private Wealth, suggests looking at the manager’s track record across multiple market cycles. “Understand the underlying strategy and where the returns are coming from," says Dhawan.

Nishant Agarwal, managing partner & head, Family Office of ASK Wealth Advisors, says one also needs to check whether a PMS is a one-man show or follows a team approach. It’s also worth checking whether the portfolio manager relies on third-party or own research. Randev says investors must not only compare the returns of a particular PMS strategy with that of its benchmark index but also with that of a similar category of MFs.

While scheme expense cannot be the key deciding factor, it is something worth looking at. “When the market is going up, you can overlook expenses. But the same expenses will hurt in a flat market," says Randev.

Fees and other charges

PMSs typically offer investors a choice of fixed, variable and/ or hybrid fee models for portfolio management. Unlike in the case of MFs where the total expense ratios are capped, there is no Sebi-imposed upper limit on PMS fees. Operating expenses can be another 0.1 – 0.3%. These include brokerage and custody charges and are subject to a 0.5% cap by Sebi.

Under the fixed fees model, a client may be charged a fixed fee (anywhere between 1.75 – 2.5% ) per annum on the portfolio value. The variable fees model comes with only a performance fee of, say, 20% profit share on returns in excess of a certain hurdle of, say, 10%. The hybrid model combines fixed and performance fees.

Given the high minimum investment and a myriad of schemes on offer, investors are better off consulting an advisor before choosing one.