Portfolio Management Services (PMS) is an investment service offered by a professional fund manager. The investment portfolio is managed by the fund manager on behalf of the investor instead of investors managing it themselves. The investment portfolio can comprise of equity stocks (most PMS houses in India offer equity stocks only), fixed income and structured products. The PMS are managed through a demat account and a power of attorney is given to the fund manager to buy and sell securities on behalf of the investor. PMS is a preferred route for investors who require personalized investment solutions and who desire to create long term wealth solutions.
Types of PMS:
Discretionary PMS:
The fund manager takes all decisions on the portfolio
He / She chooses the securities as well as the timing of its buying or selling
Majority of the PMS in India are of this type
Non-Discretionary PMS:
Here, the fund manager only suggests the investment idea to the investor.
The choice as well as timing rests on the investor and not the fund manager.
On approval from the investor, the fund manager executes the trade on behalf of the Client.
Advantages of PMS:
Transparency: The investor is aware about scripts bought and sold in their account. Also, the current value of the script, its cost price, sector allocation and performance relative to a benchmark are known the investor
Custom Portfolios: The investors can have the benefit of tailor made portfolio based on risk return objectives. In case an investor cannot hold a particular stock in his / her portfolio due to any regulatory requirement (like an employee of a particular firm cannot own stocks of his own firm), then the investor can mention such scripts in restricted list and the fund manager will not buy that particular script
Flexibility: The fund manager has the flexibility to take concentrated bets (within the risk governance guidelines)
Risk Control and Monitoring: A research team to monitor and control the risk on a continuous basis. More about the risk practices is discussed a bit later in the article.
How is PMS different from Mutual Funds:
Pooled Funds:
Each PMS account has a separate bank account and demat account for each client
In a mutual fund, investor’s funds are pooled together into one large fund
Units v/s Individual Stocks:
Under a mutual fund, investors are issued units of the fund
In a PMS, the investors are holding individual stocks in their own name
Minimum Investment:
To invest in a PMS, one needs a minimum of INR 50 lakhs (INR 5 million) [as per SEBI regulations]
Concentration:
The PMS fund manager can take concentrated positions in stocks. Generally, a PMS fund manager owns ~15-25 stocks under any scheme.
Even a mutual fund can hold concentrated positions but this is generally taken under a category named “focused funds” which buys ~25-35 stocks
Fee Model:
Generally there are two fee models:
Fixed Fee Model: Fixed fee of 2-2.5% p.a. on assets under management
Hybrid Model: certain amount of fixed fee + performance fee on achieving a base minimum performance (hurdle rate)
In case of mutual funds, as per SEBI regulations, equity mutual funds fees are capped at 2.25% p.a and debt funds at 2% p.a.
Are there any risks in investing in a PMS?
Indeed! Any investments in markets is subject to a certain degree of risk. The risk varies from investment to investment. Say, an investment in a small cap company will be higher than a mid-cap company. Similarly, the risk involved in a B+ rated security will be higher than the risk involved in a AAA rated debt security.
What an investor should do is understand the risk governance framework followed by a PMS fund manager. Some key points to check are:
Overall investment in a particular sector should not exceed 30-35%
An investment in a particular script should not be more than 10-15%
An investment in a particular group should not be more than 20-25%
And the most important parameter is the emphasis on quality of the scripts which the fund manager purchases
Taxation:
The taxation of a PMS is like holding individual stocks in an investor’s portfolio.
In case the stock is held by the fund manager for less than 12 months, short term capital gains at 15% (plus surcharge and cess) is charged to tax
In case the stock is held by the fund manager for more than 12 months, long term capital gains at 10% (plus surcharge and cess) is charged to tax
FinFact:
Overall assets managed by portfolio managers as on 31st May 2021 was INR 21.3 lakh crores (of which INR 15.80 lakh crores was managed by EPFO and PF managers) v/s INR 10.8 lakh crores in May 2016, almost 100% growth in 5 years!
Hence, approx. net PMS market size (excluding EPFO funds managed) is ~ INR 5.5 lakh crores as on 31st May 2021.
Mutual Funds AUM as on 30th June 2021 was ~INR 33.67 lakh crores. PMS market is ~16% of the size of the overall mutual funds industry.
PMS does offer tailor made solutions for investors and just like any other investment, even for a PMS investment, a long-term horizon is required. In a PMS the investor can monitor the stock bought or sold by the fund manager and that leads to a good deal of transparency.
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Good read for someone new to PMS concept, thank you for sharing
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