Have ₹50 lakh to spare? It may be time to consider a PMS investment

Portfolio Management Services invest your money in a tailor-made clutch of instruments; but the high-risk, maybe-high-return avenue is not for the faint-hearted

Financial services firms offer Portfolio Management Services tailored per each investor’s risk appetite, investment horizon and returns target.

Straight out, wealth management advisories will tell you that a Portfolio Management Service (PMS) is for money-savvy high-networth individuals (HNIs). And they are right.

Financial services firms offer PMSes tailored per each investor’s risk appetite, investment horizon and return targets. The aim is to invest the monies in a focused set of instruments, such as equity, debt and other structured products, to maximise returns.

The catch is that in India, the minimum PMS investment size is ₹50 lakh. While it’s true that HNIs are more likely to have the wherewithal to sink half-a-crore rupees in one investment basket, young investors, and professionals doing exceedingly well, are increasingly looking at PMS.

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How PMS differs from MF

A mutual fund (MF) scheme invests in a bunch of companies (in case of equity scheme), debt instruments and so on. It then sells you units out of these investment baskets, so that your portfolio is more or less standardised. On the other hand, a PMS invests your money in a more customised way, and you get to actually hold the shares or bonds in your own name — there is no question of units.

You open a demat account, sign a power of attorney with the PMS manager, and let him invest the ₹50 lakh in the way he deems best for you. PMSes come in two types: discretionary and non-discretionary. In the former, the portfolio manager handles your fund individually, autonomously. y. In the latter, he gives you periodic advice and acts per your direction.

What PMS investors value most about the instrument is the flexibility it offers. While MFs go by a strict set of norms, PMS gives the investor greater leeway. For instance, an equity MF cannot invest more than 10% of its corpus in one company. A PMS can. This means you can put in lumpsums in stocks that are doing exceedingly well, and which you think promise to do well in future, too.

The risk factors

There is a reason why the regulators have introduced a ₹50-lakh threshold for PMS — it’s far riskier than MFs and other instruments. The regulatory bodies do not want small, gullible investors convinced into investing in PMS by smooth-talking wealth managers. The ₹50-lakh cut-off (it was ₹25 lakh until January 2020) serves that purpose.

If you’re a non-HNI investor, and are looking at PMS, you’re certainly placing several pricey eggs in one basket. The risk it holds needs to be fully understood. Yet, if your investment horizon is sufficiently long, and your portfolio manager has an excellent track record, your PMS might fetch you excellent returns.

For non-HNI investors, PMS may be considered for long-term goals, such as higher education of child (of currently young parents) or a plan to buy a larger property after 10-15 years. Some like to use it as part of their retirement kitty. The longer time horizon is to make sure the downtrends get ironed out.

Maturing market

“It’s a sign of a maturing investment market,” said a Chennai-based wealth manager. “When investors realise that a good manager can do wonders with their money, they are willing to overcome their fears and expand their risk horizons.”

He went on to say that some — like IT professionals with lumpsum bonuses, and employees whose companies have made ESOP (employee stock ownership plan) buybacks — find themselves with money that they feel doesn’t have to be invested traditionally. One of his PMS clients is a co-founder of a start-up that got acquired by a larger firm; this client invested the proceeds from his stake sale in a PMS product.

Also, a working couple may pool in part of their savings to open a PMS product. Sometimes, proceeds from a property sale or an inheritance may also be invested in PMS, though tax issues need to be addressed first.

Question of transparency

For a long time, finance experts advised caution about PMS products because they are not as closely regulated as MFs. But over the recent years, Indian regulators have stepped up vigilance on PMSes to ensure there is greater transparency.

Also, a PMS, by its very nature, promotes active interaction between customer and investment manager. MFs, on the other hand, are ‘mass’ products — while your agent might engage with you closely, the MF managers themselves cannot interact with customers on a personal basis.

What perhaps works best for PMS customers is that their investment managers have some skin in the game. PMS managers charge an annual maintenance fee, but their bigger income comes from profit-sharing with the customers. The profit-share is based on a pre-agreed rate of return threshold (typically 20%), often referred to as ‘hurdle rate’, and makes sure the manager is incentivised to get the customer higher returns.

Increased regulation

To improve transparency, the Securities and Exchange Board of India (SEBI) recently introduced norms around operational fees, entry and exit load, and the client onboarding methods. It has also mandated monthly reports by PMS managers, which customers are advised to scrutinise meticulously.

The reporting requirements have also been tweaked so that PMS managers have to be more transparent about returns, commissions and so on. Still, the PMS sector is not as tightly regulated as MFs.

Akin to almost all investment avenues, investors who take informed, conscious decisions are the best-served.

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