WHAT IS PMS?
Portfolio Management Services (PMS) is an investment portfolio in stocks,cash, fixed income, debt, structured products and other individual securities, managed by a professional money manager, that can potentially be tailored to meet specific investment objectives. One has the freedom and flexibility to tailor his/her portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of portfolios, each account will be unique. Investment Management Solutions in PMS, can be provided in the following ways:
- Discretionary – Under these services, the choice as well as the timings of the investment decisions depend solely on the Portfolio Manager.
- Non Discretionary – Under these services, the portfolio manager only suggests the investment ideas. The choice as well as the timings of the investment decisions rest solely with the Investor. However the execution of trade is done by the portfolio manager.
- Advisory – Under these services, the portfolio manager only suggests the investment ideas. The choice as well as the execution of the investment decisions rest solely with the Investor.
In India majority of PMS providers offer Discretionary Services.
PMS can be offered only by entities having specific SEBI registration for providing portfolio management services. Currently in India PMS is offered primarily by asset management companies (AMCs) and brokerage houses.
The Investment solutions provided by PMS cater to a niche segment of clients. The clients can be Individuals or Institutions and entities with high net worth. Ideal for investors who:
- want to invest in asset classes like equity, fixed income, structured products etc
- want personalised investment solutions
- require long‐term wealth creation
- Appreciate a high level of service
Benefits of PMS
Investors hold stocks in PMS. In PMS, the investor can be aware which stock he/she is holding at any given point in time by logging in to the demat account.
PMS providers will provide more than one option for fee structure. A popular option availed by investors is fixed fees OR profit sharing depending on portfolio performance.
While many PMS providers offer standardised portfolios, some offer highly customised investment portfolio. For instance, a client may want to invest a large amount in a single stock. This is very much possible in PMS.
For PMS, one will have to take the provider’s word. This is because different PMS clients have different objectives and want different strategies.
However, it is easy to get a performance report card in case of a model PMS portfolio
PMS offers details, if asked by the client, in money management. The investor gets the details regarding every purchase and sale of shares , brokerage and other charges, portfolio manager’s exact fees, date of a specific transaction , purchase and sale prices of shares. It is possible to find where the portfolio manager helped to make profit and where losses were made by him/her. This is normally present in the discretionary model of portfolio management of PMS
PMS managers are directly accountable to the client, who can seek clarifications, especially in the discretionary portfolio.
PMS is not limited to a stated objective and a narrow set of terms. The portfolio manager has a lot of flexibility with regard to how and when he wants to invest or divest the client’s money, as per the stated objectives of the type of PMS option.
Each client’s portfolio has a separate status. This helps in avoiding the action of other investors. In a PMS, the portfolio manager will sell the portfolio of the interested clients only and thus will not affect the other clients who wish to stay invested.
Limitation of PMS
One limitation faced, is the authority given to the manager to have control over investments. When one manage and trade by themselves, it is a different scenario. However, trusting a portfolio management advisor is difficult and risky as well. There are many known cases of churning, where the consultant shifts investment from one fund to another. Some investors restrict this practice by limiting the commission to the consultant depending on his performance; however, if there is a loss, it wouldn’t matter much to them. All in all, the professional brokers are very efficient and the process and detailing is strong, since the amount invested is big.
Some Pointers regarding PMS
- Investors should check data to ensure that historically the PMS has outperformed the market both on the upside and downside.
- Portfolio Management Services are completely supervised by the regulator of capital markets in India, SEBI.
- As per the SEBI regulations, to invest in PMS one must have a minimum corpus of INR 5,00,000. However, most PMS have an entry barrier at Rs 25,00,000
- There is no upper limit on the amount one can invest.
- Further, while the corpus at the Client level should be at least INR 5Lakhs, the investment per strategy offered should be in accordance with the minimum investment limit of each strategy.
- PMS have both equity and debt options.
- Previously PMS included real estate, unlisted shares and structured products options as well, but now these come under the Alternative Investment Fund (AIF) category and are managed according to the market regulator’s separate regulations on AIF.
- Every time a portfolio manager sells a stock there is an incidence of capital gain or loss. Capital gains get added to the investor’s income and tax may be payable while filing returns.
What is the Fee Structure for PMS?
- Most PMS providers offer a choice between a fixed-fee structure (flat fee on portfolio value) and a composite profit-sharing one(lower flat fee plus share of returns generated). They charge an annual fee between 1- 2.5 per cent and a profit sharing fee depending upon the option selected. The latter is charged for the returns generated in excess of a pre-determined hurdle rate
- In the fixed fees model, the investor has to pay an annual fee.
In the variable fees model, fees of approximately 15% – 20% on profits generated are levied.
- An understanding of how the fees is being levied is important as it can drain the thecorpus fund of the person significantly.
- Some PMS schemes charge an entry load of 3% which is applicable only at the time of entry into the PMS.
- There are other charges like brokerage charges, audit charges, fund management charges among others.
- Management fees are chargeable on daily average NAV at the end of each quarter or withdrawal of fund whichever is earlier
- The investor even can opt for a combination of fixed and variable model
- Portfolio managers charge fees in 2 categories — basic fees and performance fees. Currently portfolio managers usually charge performance fees after the portfolio crosses a benchmark or hurdle rate as is laid out in the agreement.
- The Performance fee charged uses the principle of high watermarking, as mandated by SEBIi.e. performance fee is charged if and only if the Client portfolio value is higher than both the initial investment amount into the scheme and the last portfolio value on which the previous performance fee was charged
High-Water Mark means the highest peak in value that an investment fund or an account has reached. This term is often used in the context of fund manager compensation, which is performance based. The high-water mark ensures that the manager does not get paid large sums for poor performance. So if the manager loses money over a period, he or she must get the fund above the high watermark before receiving a performance bonus.
Comparison between Portfolio Management Services(PMS) Fees and Mutual Fund Charges
Entry load is charged at the time of buying PMS as a percentage of total amount invested.Fund Management Charges are administrative costs for the PMS manager to monitor your account. Exit load is charged in case of withdrawal before the specified date. Trading charges are charged by the broker for for using their platform for trading, which is usually a percentage of the amount traded per transaction.
Expense ratio is the percentage of total assets that are spent to run a mutual fund.
After 1 year Value of Mutual fund Investment
PMS Investment- After 1 year value of investment
PS: There is a lock-in period in PMS ranging between 1-5 years whereas there is no lock-in period for MFs except in case of Tax Saving Funds
Debalina Roy Choudary
Content Writer- Dilzer Consultants Pvt Ltd