Portfolio management services

PMS was the exclusive privilege of large investors and High Net-worth Individuals (HNI) earlier. However, many of them have reduced their portfolio size requirements to as less as Rs.5 lakh. PMS have finally arrived for retail investors as several PMS providers have reduced their portfolio size requirements to accommodate them.

There are the additional exercises of implementing investment plan and monitoring investments, in order to ensure that investments are on the right path towards wealth creation. While mutual funds offer to take over these exercises to a large extent, the investor may not be very comfortable with the investment objectives and strategies. Further, the investor may have specific ideas on how his or her money should be invested and managed. If that is so the best option is a Portfolio Management Service (PMS).

PMS are fund management services provided by professionals who have expertise in investing. Today such expertise is with banks, stock broking houses, research houses, mutual fund houses, private companies and so on which offer PMS. They offer to invest in equities and other securities such s mutual funds, bonds, etc, on investor’s behalf.

When an investor approaches a PMS provider, a portfolio/fund manager studies the risk profile and subsequently creates an investment portfolio that is suited to meet the investor needs. This customized service offers flexibility in terms of stock selection as the investor can convey stock and sector preferences to the portfolio manager. A PMS provider treats every customer uniquely and gives him or her individual attention. There are no fixed investment horizons or lock in periods either.

There are two types of PMS on offer—discretionary and non-discretionary. Under the discretionary plan, the investor has a say in the investment calls (invest and disinvest decisions) made by the firm. In the case of the non-discretionary plan, the portfolio manager decides when to invest and disinvest without concurrence.

In general, the fee structure varies from firm to firm and largely depends on the size of portfolio. PMS providers allow the investor to choose between two types of fee structure, i.e. ‘fixed’ and ‘fixed plus profit sharing’. In the case of a fixed fee structure the charges may be anything between 1% and 2.5% per annum of the value of the portfolio. In the case of ‘fixed plus profit sharing’ the fixed component varies between 0.50% and 1.5% per annum of the value of the portfolio. In addition, depending on the quantum of profits generated, the profits are shared between the investor and the PMS provider.

For instance, a well-known PMS provider charges fixed fees of 0.75% to 1%, depending on the portfolio size. It claims 20% of the profits if they exceed 7% of the value of portfolio. So, if the investment is Rs. 5 lakhs the investor may be required to pay flat fees of Rs. 5,000 per annum (1% x Rs. 5 lakh). Over and above that, if profits worth Rs 1 lakh have been generated, the investor has to pay an additional sum of Rs. 13,000 (20% x Rs. 65,000). There is no profit-sharing that takes place on Rs. 35,000 as only those profits are shared which are greater than 7% of the value of the portfolio.

Investing money wisely is as important as earning it. However, this is not an easy task since managing money involves a lot of time and effort. It has become increasingly complex to shortlist the investment products with the variety of financial products on offer today that are most suitable and give the best returns. This is where PMS help the investors. But PMS must have a good track record for the investors to park their funds. The onus therefore lies on the investor about the selection of PMS.