Portfolio Management Services (PMS) is a method of investing in the equity market with the promise of customized tailor-made advice aiming to generate better returns than Mutual Funds (MF) can offer. In comparison to MFs, where multiple investors’ funds are pooled in to invest in a set of securities managed by a fund manager with a broad investment objective, here, a portfolio manager takes care of your personal portfolio. Every Investor in a PMS would be a separate client, and his/her portfolio would be managed based on the philosophy or mandate of the PMS, whereas in MF, there would be units of the Fund based on NAV Value Allotted to the Investors.

Mutual funds are tightly regulated products and you can invest even a few thousand rupees in them. On the other hand, PMS are relatively less regulated but require an initial investment amount of at least Rupees Fifty Lacs (INR 50 Lacs).

Portfolio Construct & Return Potential

While MFs are diversified in nature with an average of 40-50 stocks in a portfolio with sector and individual stock limits in place, PMSs use a more concentrated approach, with the flexibility to hold fewer stocks as they like, with no restrictions or limitations on sectors or stocks.

Thus, for example, if a PMS and MF both like the same stock/same sector and expect them to deliver extraordinary returns, a PMS can take a much more concentrated position than an MF. This leads to a much better return potential. However, the volatility and the risks the PMS might face will also be higher than an MF. Based on limited data available of PMS, many of them have even failed to beat the benchmark; and during the market crashes and bull market, led to the destruction of capital instead of delivering outsized returns.

On the other hand, there have also been a select few high qualities fund managers and PMS who have delivered excellent returns in both bull and bear phases of the market. So it’s a double edge sword one must wield before considering investing in it.

Fee structure

The fees involved for PMS are usually a fund management fee pegged at a percentage of your portfolio and/or a performance-based profit-sharing fee or a combination of both. The charges exclude additional operational charges that may be applicable, such as transaction brokerage, Demat charges, operating costs, etc. In the case of MFs, it is a fixed fee structure. A Total Expense Ratio is charged annually, including management fees, administrative costs, and distribution fees. It is calculated on the NAV (Net Asset Value) post deduction of expenses. Other charges include entry & exit load, transactional costs, etc.

Taxation

PMS portfolios have an immediate tax impact when compared to MFs. In a PMS portfolio, an investor is taxed as a direct stock owner vis-à-vis a mutual fund, whereas a tax incidence occurs only when the investor sells the actual units of the mutual fund. The underlying activity of stock buying and selling has no impact whatsoever on the tax bill of the MF investor.

Thus, higher the churn in a portfolio, higher the tax impact will be for a PMS investors against an MF Investor

Regulatory

In terms of regulations, PMS is not subject to all the regulations that exist for Mutual Funds. This lack of regulation can be equally rewarding and highly risky too. Unlike MF’s, which are intensely regulated by SEBI, where fund managers need to be compliant and disclose their complete portfolio and NAV’s monthly, PMS lacked public disclosure until 2013. Some prominent players still choose to keep their data private except up to a point mandated by SEBI and Law. Therefore, historical records and past performance of PMS in public domains could suffer from data quality issues and it would be a folly for retail investors to simply take investment decisions based on the same and would require much more due diligence. However, in the recent years, the reporting structure for PMS has also been showing improvement due to regulatory requirements and advancement in technology and better data availability.

Risks

Ideally, PMS is not a product for retail investors unless their net worth and investments reach a minimum threshold, say at least INR 3 Cr. Investors with a surplus investible yet a low-risk appetite should avoid investing in PMS due to risks of high volatility and lack of diversification.

The higher fees and tax impact mean that PMS will need to generate an alpha over Mutual Funds for them to be able to generate equalized return. Given the advent of passive investing in India along with many large cap Mutual Funds even underperforming the benchmark, for many PMS this will become a difficult task and on a post-fees, post-tax basis, the returns could be even sub-Mutual funds.

Who should invest in PMS?

Here is our take: if you are an HNI or UHNI with significant investment potential and high-risk appetite and are seasoned investors with experience and robust knowledge of the volatile financial markets, only consider PMS as an investment avenue. But remember, due to the high risks involved, keeping your PMS holdings below 15 to 20% of their total investments would be an ideal strategy.

Suppose you are a novice investor with a low-risk profile or even an investor approaching retirement or have a short-term investment view. In that case, Mutual Funds are a far safer investment vehicle to pick for wealth creation.

For more information on investment strategies, reach out to our expert advisors on +919819070552