How PMS (portfolio management services) works?

POSTED BY Vandana Manwani ON December 11, 2019 COMMENTS (17)

If you are a high net-worth individual, looking for investing in a professionally customized portfolio of stocks, then PMS (Portfolio management services) can be a good choice for you.

In this article, we will discuss everything about PMS – Portfolio Management Services.

What is Portfolio Management Services (PMS)?

PMS is a service targetted at HNI investors who have a high-risk appetite, and the minimum ticket size of the investment required in PMS is Rs. 50 Lakhs – as increased by SEBI recently.

A lot of investors want to have a direct equity portfolio and may want high returns by taking a huge risk. A lot of investors manage their portfolio, but not everyone might have all the expertise needed to manage the stock portfolio. For this kind of investor, PMS can be a good option to look for beyond equity mutual funds.

There are 3 types of PMS

Discretionary: Discretionary Portfolio provides the service provider a right to make decisions on behalf of the client, whether he wants to sell or buy the shares. He is not bounded to consult with the client.

Non-discretionary: The portfolio manager suggests investment ideas suitable to risk appetite investor, while the decision is taken by the client. The client at his discretion can select stocks or other investment products. However, the execution of trade is done by the portfolio manager.

Advisory: Under these services, the portfolio manager only suggests investment ideas. The choice, as well as the execution of the investment decisions, rest solely with the Investor.

Note: In India, the majority of Portfolio Managers offer Discretionary Services. Most of the portfolio management companies provide model-based services. A standard model is followed and a bit alteration is done for individual client preference.

PMS is an individualized pool of funds

When you opt for a PMS scheme, a bank account, Demat account, and trading account are separately opened in your name and all investments are made in your name only. Accordingly, any income or dividend coming out of the investment made will also be credited in your bank account and the shares will be held in the Demat account in your name.

It means you hold all stocks individually, unlike mutual funds, where there is a pool of funds managed by a fund manager and performance is evaluated based on per day NAV. Each fund performance is influenced by all the investors jointly based on their sentiments, whereas in PMS the behavior of individual investors is isolated from one another.

PMS agreement

When you opt for a PMS service, you need to sign an agreement, which specifies all the details of services to be provided along with strategies and models of portfolio to be followed by the portfolio manager. When you sign it, you give a power of attorney for operating your trading and bank account to the portfolio manager.

If you are having a Demat account, trading account and bank account, you have to open all of these again to avail PMS. So that a portfolio manager can clear power of attorney. Therefore, whenever dividend or interest income or any other amount is credited to the bank account linked to PMS, the portfolio manager will redirect that amount in your portfolio.

As per market regulator Sebi’s instructions, a portfolio manager is required to furnish performance reports to their clients every 6 months. Most portfolio managers give a username and password which can be used to login to their website and see the portfolio statements.

The fee structure in PMS

PMS has a high cost of maintenance as compared to any other investment option. It has entry load, yearly management cost as well as profit sharing. However, they vary from provider to provider.

1. Entry Load – When you opt for portfolio management service, you are charged an entry fee which is generally termed as the Entry Load or Set up cost. It is 1 to 3% or it may vary. It gets deducted from the amount of your investment.

So, as we said, to avail, this service minimum amount is Rs. 50 lakh. So, you have to keep aside Rs. 50 Lakh + 2 or 3% of set up costs to start investing in PMS.

2. Management Charges – This is a service charge for managing your portfolio. It may vary from 1-3%, depending upon the service provider.

3. Profit-Sharing Fees – If a PMS has profit-sharing agreements between the client and provider, in addition to other fixed fees, then this charge is based on such terms of an agreement. Some charge this fee-based in the hurdle rate.

The hurdle rate is a promised rate of return. If a portfolio has given more than that percentage, then 10% or any percentage will belong to PMS company. It means you have to share profit if your portfolio has managed to give returns above what was promised.

Apart from the charges mentioned above, the PMS also charges the investors on the following counts as all the investments are done in the name of the investor:

  • Custodian Fee
  • Demat Account opening charges
  • Audit charges
  • Transaction brokerage

However, the fees of the service providers are negotiable, so you can exploit it as much as you can. There is no standard norm defined for the PMS fee.

Advantages of PMS

  • A portfolio of stocks and debts monitored and professionally managed by an expert.
  • PMS promises to outperform benchmark i.e Higher returns than the benchmark in the long run.
  • You get to invest across asset classes – debt, equity, gold, and mutual funds.
  • No limit to the extent to which you can invest in a certain stock.
  • No herd behavior is followed by an expert, they keep your requirements in their mind and accordingly invests in the segment preferred.
  • Diversified as well as focused portfolio depending on investor’s profile.

Disadvantages of PMS

  • As per SEBI guideline Minimum investment required is Rs. 25 lakhs (From 1st Jan 2020 it will be increased to Rs. 50 Lakh) because of which a small investor won’t be able to enjoy services offered under PMS.
  • PMS providers share profits but not losses.
  • Long documentation procedure, you need to open a new Demat Account, trading, as well as bank, account for PMS.
  • High set up cost – you have to pay 1 or 2 % of your AUM i.e. the amount you want to invest, at the time of investment. Along with this you also have to pay yearly management cost.

How PMS are taxed in India?

PMS taxation has always been quite debatable in the past whether it should be treated as Business Income or Capital Gains, but from the last few years after a recent court ruling, it’s now clear that profits from PMS will be treated as normal Capital gains and equity taxation rules will apply.

This means that any short term capital gains (before 1 yr) will be taxed at 15% and any long term capital gains will be taxed at 10% (after 1 lac limit per financial year) without indexation benefits.

Difference between mutual fund and PMS

A lot of investors might wonder how much PMS is different than an equity mutual fund. Here is a video which talks about the difference between PMS and Mutual funds.

Also, here is the tabular comparison between PMS and mutual funds

Basis of difference Portfolio management services Mutual Fund
Impact of sentiments Individual portfolios are isolated from other investors behavior The sum total of all the investors’ in fund impacts the overall performance of a fund
Limitation No caping on the purchase of listed stock. However, PMS can not invest more than 25% of AUM in unlisted equity shares. Caping of 10% of AUM of a fund in a single stock, it means a limitation on investment
Public Data on past performance No standardized terms of working & publication of data Standardized method of representation of data on the website of every fund house
Cost structure Variable or fixed fee structure (usually very high but negotiable) Fixed fee structure
Entry Load High set up cost i.e 1 or 2% of AUM of an investor is chargeable as set up fee No setup cost or entry load
Initial requirements Accounts required Demat + Trading + New bank account (new accounts are to be open if required by the PMS company) Existing Bank account
Required Minimum investment The Minimum ticket cost Rs. 50,00,000 SIP Rs. 1000

Lump-sum Rs. 5000

We hope this article helped you to understand PMS in brief. Please comment on how you liked it and if you have any queries regarding PMS. In case you want to invest in PMS, we can also help you in that regard. Just email us at help@jagoinvestor.com and we will get back to you.

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17 replies on this article “How PMS (portfolio management services) works?”

  1. PKV says:

    Can NRIs enrol in PMS?

    1. Jagoinvestor says:

      Yes, they can

      If you are NRI and want to go with PMS, we can help you find a good one .. Just contact us or leave your details

  2. Shahzaib says:

    Thanks for sharing article. Its amazing and nice information on Portfolio

  3. Dr Ashutosh Dhanuka says:

    I think the only type of PMS that could be of some use is Advisory type and that also is inferior to Self knowledge and DIY approach. No body gives a damn to some one else’s money. If they work on assuring a certain return , shall they actually invest considering Long term Value investing principles?.Better to consult a Fee only Advisor if one cannot DIY..

    1. Jagoinvestor says:

      Thanks for sharing your views Ashutosh..

  4. Thank you for sharing this useful information.

  5. George says:

    Please read this before jumping for PMS.
    HSBC settles actor Suchitra Krishnamoorthi’s case
    TNN | Mar 18, 2014, 01.01 PM IST
    MUMBAI: Four months after market regulator Sebi issued HSBC a show-cause notice on why it
    should not be barred from accessing securities market for “fraudulent churning” on a complaint from
    actor Suchitra Kriahnamoorthi, the bank has settled her losses. While the amount can’t be disclosed
    due to a non-disclosure clause, the actor said her losses have been “amicably settled” and
    reimbursed.
    She had deposited Rs 3.6 crore in mutual funds at the bank and the settlement would have covered
    that and more.
    The actor had been fighting a four-year long battle with the global banking major after she
    deposited Rs 3.6 crore in her HSBC account for investment in MF portfolio. “”The assured profits and
    growth of my money never happened,” she said when she complained to Sebi last January against
    Suchitra Krishnamoorthi had deposited Rs 3.6 crore in
    mutual funds at the bank and the settleme… Read More
    the bank for cheating and misrepresentation.
    She alleged she had suffered huge losses by the “negligence” of bank and her portfolio manager.
    She said she had been assured of a 24 per cent return if she appointed the bank as her portfolio manager. However, with four different relationship managers in five years,
    she made no profits, only losses, Suchitra had claimed when she complained to Sebi last January.
    But she had been fighting for four years.
    “Since I could not afford to pay continuous lawyer fees, I handled the matter on my own. The economic offences wing had dismissed my case without any explanation. I was
    shocked but appealed to Sebi – the officials at Sebi were supportive and firm and spent a year on my case. It was the show-cause notice they issued in November that was
    the scale tipper. Even RBI originally dismissed my claim and I had to reopen it,” said the actor to TOI on Tuesday. She added, “Everyone kept telling me it was an impossible
    fight but we forget that even corporations are made of people and somewhere everybody has a heart. I would not have fought so hard if I didn’t absolutely believe I was
    right.”
    The Sebi probe had found “excessive churning” and that the money was invested in 38 different funds but some were “not in line with her risk profiling”.

    1. Jagoinvestor says:

      This case is very famous and you are correct in pointing out that some PMS might be a rip off.. but then some stocks are also rip off , some mutual funds are also rip off..

      We are talking about the concept here. NOt all PMS are bad ..

  6. RK says:

    Do you suggest PMS for an individual?

    1. Jagoinvestor says:

      PMS is always for an individual only .. most of the times. Yes, you can go for it .. but the minimum ticket size is 50 lacs? If you can send us a mail on help@jagoinvestor.com, we can recommend a PMS to you which we give to our clients.

      Manish

      1. RK says:

        Thanks Manish. Just sent an eam

  7. Chandan says:

    Thanks for providing this article . But with PMS being “A portfolio of stocks and debts monitored and professionally managed by an expert” , how is this different from a MF in general ? Seems to be the same as mutual fund but packaged differently and marketed to a different segment

    1. Jagoinvestor says:

      Yes Chandan

      PMS is actually a bit different from MF and mostly for higher risk takers who are expecting higher returns. Look at the chart we have provided in the article and also watch the video which is there in the article, you will understand .

      Manish

  8. JK says:

    Not one word about the taxation?

    1. Jagoinvestor says:

      Just added it .. thanks for pointing that out .. Its going to be normal equity taxation for PMS !

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