Portfolio Management Services (PMS)

What is Portfolio Management Services (PMS)?

It is a customized investment product based on investor’s needs and objectives. In PMS, a group of experienced professionals do extensive research and analyze the securities for the client. Client just need to give money to the portfolio manager, who in turn invest on behalf of client. Portfolio manager understands client goals and risk appetite; tries to optimize the returns by investing in securities like equity, fixed income , commodities etc.

Why PMS?

Financial markets are complex to understand and taking one’s own investment decisions requires proper knowledge, experience, proper research & analysis, continuous monitoring and is thus, a very time taking task for an individual. Practically, it is not viable for an individual to manage his/her heavy portfolio besides his/her primary profession – making portfolio a mess. Thus, investors hire experts who manage their portfolio on their behalf and in best of their interest.

Who can invest in PMS?

1. An Individual
2. A Hindu Undivided Families (HUF), Partnership Firms, Sole Proprietorship Firms
3. An Association of Persons
4. Limited Companies
5. An NRI, overseas company, firm, society or an overseas trust (subject to RBI approval)

Is there any minimum ticket size?

As per SEBI, the minimum ticket size of the investment required in PMS is Rs. 50 Lakhs.

Initially it was Rs. 5 Lakhs, which was then increased to Rs. 25 Lakhs. This was again doubled to Rs. 50 Lakhs in November 2019, making it look like a niche HNI product.

What are the types of PMS?

• Discretionary – In this type of PMS, there are exclusive rights available with the portfolio manager to make the decision on behalf of the investors, without consulting the client. Currently, most of the portfolio management companies offer discretionary PMS.
• Non-discretionary – Here, the portfolio manager advices on suitable investments depending on the investor’s risk appetite. The decision to invest is solely taken by the investor; however, the execution is done by the portfolio manager. This is also known as Advisory PMS.

What is the PMS fee structure?

The PMS fee structure is little detailed and is explained hereunder:

1. No entry loan on PMS (recently abolished by SEBI)
2. Management Fee – anywhere between 1%-2% of the fund size (AUM)
3. Performance Fee – only on returns generated above the hurdle rate (minimum rate). Till hurdle rate, no performance fee is payable. (Hurdle Rate is normally between 10%-15%).
4. Other Combinations like
   1. Higher Fixed Management Fee with no Performance Fee
   2. Lower Fixed Management Fee with pre-defined Performance Fee (over hurdle rate)
5. Exit Loads on PMS (applicable only for early exits) – as under:
   1. Max 3% – if exit in 1^st year
   2. Max 2% – if exit in 2nd year
   3. Max 1% – if exit in 3rd year
   4. No exit load after 3 years
6. Other miscellaneous operational fees like custodian fee, demat account opening charges, audit charges, transaction brokerage, etc. – on actual.

How PMS are taxed in India?

Pass through status is given to PMS investor. This means that the gain/loss shall accrue to the investor at the time of sale of securities (it shall not be booked first by PMS entity and then by the Investor). In normal situation, the profits from PMS are treated as normal capital gains and equity/debt taxation rules will apply. However, in some special cases (involving derivatives, etc.) – the gain is also treated as Business Income. Thus, the tax implications have to be assessed separately for each of the respective PMS’s.

What are the benefits of PMS?

PMS might sound similar to mutual funds but customization is what makes the former stand-out of the crowd. Tailor-made investing is the USP of PMS. Engagement of the investor with the fund managing team is very high and the investor is well aware of what is being done to his/her fund. Another most important benefit of PMS is high performance-fees and low management-fees. Incentive of the manager is directly tied with his performance. Hard hurdle rate is set so that the manager cannot earn fees on the same extent of return again and has to exceed the high water mark to receive further incentives. This keeps the manager aligned and act best in the interest of the portfolio. Other benefits like transparency, convenience, constant portfolio tracking, etc. are minimal pre-requisites which is easily made available.

What are the drawbacks of PMS?

1. Investment product not ideal for retail investors; rather HNI’s only
2. High Documentation formalities
3. Tax incidence arises at the time of transaction by the portfolio manager – and not at the time of redemption (unlike Mutual Fund). Thus, if there is regular churning – one may have to pay STCG tax instead of LTCG tax.

What’s our take on PMS?

Now, there is a partially true popular belief that PMS carry unprecedented risk. This is just because of few rotten apples which brought negative publicity to the PMS industry. Undoubtedly PMS carry higher risk but that’s because of their potential to deliver. However, the kind of PMS an investor gets into is completely in their hands – which shall also decide the quantum of risk. Different PMS have their investment strategies laid down beforehand. For instance, the PMS beforehand tells you if it is going to follow growth or value strategy. In fact, few of the PMS have limited exposure strategy where they transfer the downside risk with the help of derivatives (for eg: options) and bet on their upside – this safeguards your investments from falling keeping upside potential uncompromised.

Apart from this, the regulators are becoming well aware and imposing laws to counter corrupt practices like upfront (entry) fees has been abolished, doubling ticket size and required net worth of the portfolio manager (tightening eligibility), not allowing investment in unlisted companies in case of discretionary PMS, etc.

So, all we are trying to say is your due diligence is of utmost importance before putting your money in PMS. Look at the credibility and past performance of the PMS. There are great PMS products available to tailor fit your goals and suit your risk appetite as well.

Let us see the journey of PMS industry – it grew from Rs. 3.63 Lakh Crores to a whooping Rs. 18.54 Lakh Crores industry in last 10 years.

Happy Investing!!!