All about portfolio management services

PMS services are becoming popular with several firms now offering different strategies and clients increasingly picking them up

Kavya Balaji Nov 25, 2019

PMS primerPortfolio Management Services or PMS, as they are popularly called, offer personalised investment services to High Networth Individuals (HNI) or people having a large amount of surplus money. PMS promises customisation and possibly higher returns. This raises several questions in an investor’s mind. What are the services offered under the PMS umbrella? Are the charges high? Are they better than mutual funds? We answer all of that and more.

What is a PMS?

Portfolio Management Services (PMS) are services offered by financial institutions to manage your investment portfolio based on your requirement and risk profile, for a fee. PMS involves investments in stocks, fixed income and structured products. Structured products consist of investment in equity or commodity derivatives. PMS is offered by banks, mutual funds, financial institutions and independent PMS firms.

What are the PMS services offered?

There are three kinds of services offered by various PMS providers.

• Discretionary – The portfolio manager decides which investments to make and when to make them.
• Non discretionary – The portfolio manager suggests investment ideas. You decide whether to execute them and when to execute them. The manager would perform the actual trade based on your decision.
• Advisory – The portfolio manager suggests investment ideas. You decide whether to execute them, when to execute and the actual execution is also done by you.

Most of the companies offer discretionary PMS services. There are a few like SMC Investments & Advisors and Religare that offer other services.

What’s the eligibility criteria for PMS investments?

Till December 31, 2019, the minimum investment for PMS is Rs 25 lakh. Anyone who has signed up for a PMS service till this date will continue to have the minimum limit of Rs 25 lakh. From January 1, 2020, as per the latest SEBI guidelines, the minimum investment for availing PMS services should not be lower than Rs 50 lakh. This was increased from Rs 25 lakh at a recent board meeting of SEBI.

Most high-profile companies offering PMS require you to have a minimum investment of Rs 50 lakhs to Rs 1 crore. There are some firms who have fixed minimum investment of Rs 1 crore to Rs 3 crore.

What are the charges for PMS service?

Charges of PMS products are higher than that of mutual funds. The cost structure is ambiguous; moreover, so far these charges are not regulated by SEBI. Further, trading costs can be significant. Brokerages charge either a fixed fee or it could be based on the performance of funds with a profit-sharing model. Some even offer a combination of both.

When you look at a PMS product, ensure that you are informed about management fees, performance fees/profit sharing, transaction charges, depository charges, demat charges and other levies. PMS firms also charge fund management fees ranging from 2%-3%. For instance, Angel Broking charges a fixed management fee of 2% per year on average assets under management on a quarterly basis. This is apart from the brokerage, depository charges, service tax and other levies. Some firms could charge lower if the investment amount is larger.

But PMS charges are generally much higher and can eat out the returns. There are also firms offering lower fixed management charges (like 1.5%), but they will levy a share in profits in that case – which is usually 10-20% of the returns above 8% or 12% hurdle rate. If your PMS portfolio makes higher returns, then you would be dishing out more money in this case.

Since PMS products make profits for you, fund managers take performance fees from the profits they make. You need to ensure that the performance fees have a high-water mark level. High-water mark level is the peak value that an investment can achieve as a result of the fund manager’s expertise. This will be used as a benchmark for compensating the fund manager. A high-water mark level ensures that you need to pay fees only when the fund manager delivers reasonable profits.

How is the PMS portfolio built?

Unlike popular perception, PMS is not truly customised. PMS firms offer customisation by not investing in stocks in your ‘negative’ list or refraining from investing in companies that you feel are ‘unethical’. Higher customisation happens only if you have a very large investible surplus of Rs 2 crore or more.

Usually the PMS firm has a few model portfolios and based on your risk profile and requirements, you would be told to choose a particular portfolio. The portfolio models will differ in their style of investing, which means that the stocks chosen, the sectors invested in and the percentage of equity and debt would differ from one model to another. For instance, SMC Global has four portfolio strategies. They are Equity Quant PMS, Aggressive PMS, Moderate PMS and Conservative PMS. So, how do you select the right scheme? You need to make an analysis of the past performance using the risk adjusted returns of various PMS products on offer. Consistency of performance would help you select the right scheme.

How about the returns?

PMS is a high-risk product and returns are more visible only in the long term. Genuine PMS products can only give slightly higher returns than mutual funds. But a number of investors get duped by brokerages that offer ‘guaranteed’ returns every year or even every month. You need to verify the credentials of the broker with existing clients before investing.

Can you participate in the investing process?

You can participate in the investment process only under the non discretionary and advisory PMS products. But every PMS firm should have a system wherein you could give your feedback. You need to ensure that you get an opportunity to interact with the portfolio managers. There are firms who do not take feedback from clients. You also need to ensure that you are updated about important events like bonus shares and take overs of the securities held.

What are important documents you need to sign?

There are three main documents that you will need to look at and sign. One is the disclosure document, the PMS agreement and the fee schedule. The disclosure document contains all the terms and conditions related to the PMS service and the PMS agreement will have all details related to your rights and obligations. The disclosure document should be given to you at least two days before you sign the PMS agreement. And you shouldn’t sign the PMS agreement without going through the disclosure document and the fee schedule. If you don’t understand certain terms, the firm has to explain them to you.

Another important thing is that the PMS firm should make all efforts to rightly determine your risk profile and investment requirement before you sign up for the PMS service.

Is PMS transparent?

PMS products are supposed to be more transparent than mutual funds. Brokerages might tell you how many calls went right and at what price each stock was bought and sold. Most PMS firms give monthly statements to clients along with web access to portfolio information that can be seen 24/7.
Apart from this, you can request for ad hoc statements any time you want. But every brokerage will update the portfolio at different intervals. Some brokerages update the portfolio at the end of day on a daily basis while others might update it once a month. It is better to stay updated on a more frequent basis.

How is PMS taxed?

There is a lot of debate on whether PMS is taxed as business income or capital gains. In a tax judgment it was held that the critical determinant factor for identifying if business income arises will be the intention at the time of purchase to make profits. Based on your intentions, when you classify the income, it would be either taxed as per your tax slab (business income) or as per the capital gains tax rate if it is short term in nature. PMS services are subject to securities transaction tax.

But PMS firms have a high portfolio churn, that is, they keep buying and selling stocks and investments in the short term (less than a year). So, tax authorities tend to classify portfolios with a high level of churn, as trading / business activity rather than investing activity. This classification will result in all income being taxed at the normal income tax rates rather than the concessional rates applicable to capital gains.

Should you go for PMS?

If you have a huge investible surplus and strong risk appetite, you could go for PMS rather than mutual funds. But check the credentials and performance of the PMS provider. Also, the portfolio styles offered should be meaningful and should suit your profile. PMS should be opted for if it is substantially different from the standard products available. For instance, an equity PMS may not be substantially different from the whole range of mutual fund schemes that are there.

And remember mutual funds are better regulated than PMS schemes, in terms of portfolio and expenses monitoring.

We have been reviewing various PMS products regularly at RupeeIQ. You can read them here.

Kavya Balaji

Kavya Balaji is a senior contributing writer with RupeeIQ. With more than 14 years of experience in the finance space, Kavya loves everything to do with personal finance. She feels financial literacy is important for every household and likes to stick to simple language for explaining personal finance stories. She is a consultant with investment management companies. In spare time, she reads murder mysteries.

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