Portfolio Management Service (PMS) is a specialised financial service where experienced portfolio managers and stock market professionals manage your equity investments, supported by an expert research team. While many investors maintain equity portfolios in their Demat accounts, actively managing these portfolios can be complex and time-consuming.
PMS offers a structured approach to optimise returns while effectively mitigating risks. It empowers investors to make well-informed decisions based on in-depth research and data, all without the need for direct involvement. Moreover, PMS equips you to navigate market fluctuations with greater resilience and confidence, ensuring your investments are well-positioned for long-term success.
In this article we will be learning about what is a PMS, how does a PMS function, types of PMS, objectives of PMS and much more.
What is a Portfolio Management Service (PMS)?
Portfolio Management Services (PMS) offer personalised investment solutions tailored to help investors achieve their specific financial goals. These services involve building and managing diversified investment portfolios across various asset classes, with portfolio managers overseeing and optimising the investments on behalf of clients.
PMS focuses on maximising returns by aligning investment strategies with the investor’s time horizon, risk tolerance, and financial objectives. This customised approach is particularly appealing to High-Net-Worth Individuals (HNIs), as portfolios are designed to account for factors like liquidity needs, tax implications, and risk appetite.
Entities offering PMS are required to be registered with SEBI, ensuring transparency and reducing the risk of fraud or malpractices. PMS is widely sought after by individuals and groups, including HNIs, NRIs, HUFs, partnership firms, sole proprietorships, and associations.
PMS also enforces a minimum investment threshold. Initially set at Rs. 5 lakh in 1993, the minimum ticket size was later increased to Rs. 25 lakh. In November 2019, SEBI further revised it to Rs. 50 lakh, reflecting the growing demand and sophistication of these services.
How do Portfolio Management Service (PMS) services work?
A Portfolio Management Service (PMS) is a service that provides investors with personalised investment management. Unlike mutual funds which cater to a large pool of investors with the same investment objective, a PMS account is designed to meet your specific financial goals, risk tolerance, and investment preferences.
A team of experienced portfolio managers at the PMS house will manage your investments. They will first understand your investment goals, risk appetite, and investment horizon through a detailed discussion. Based on this understanding, they will create a customised investment portfolio for you consisting of various assets like equities, debt instruments, and real estate. The portfolio managers will continuously monitor the market trends and make adjustments to the portfolio allocation as needed to maximise returns and minimize risks.
Here are some key points to remember about PMS:
- Minimum investment amount is typically Rs. 50 lakh or equivalent.
- PMS fees are higher than mutual funds, typically ranging from 2-2.5% of the investment amount, with additional brokerage charges.
- There is no guarantee of investment performance.
Types of portfolio management services in India
There are two main types of portfolio management services in India: active and passive. There are also two sub-types of portfolio management services: discretionary and non-discretionary.
Active portfolio management
Active portfolio management is a type of PMS where the portfolio manager actively monitors the market conditions and makes frequent changes to the portfolio composition, allocation, and rebalancing. The aim of active portfolio management is to generate higher returns than the benchmark index or the market average by exploiting the market inefficiencies, trends, and opportunities. Active portfolio management involves higher risk, higher cost, and higher involvement of the portfolio manager.
Passive portfolio management
Passive portfolio management is a type of PMS where the portfolio manager follows a predefined strategy and does not make frequent changes to the portfolio composition, allocation, and rebalancing. The aim of passive portfolio management is to replicate the performance of the benchmark index or the market average by investing in a fixed basket of securities that mirror the index. Passive portfolio management involves lower risk, lower cost, and lower involvement of the portfolio manager.
Discretionary portfolio management
Discretionary portfolio management is a type of PMS where the portfolio manager has the full authority and discretion to make all the investment decisions on behalf of the investor. The investor does not have any say or control over the portfolio composition, allocation, and rebalancing. The portfolio manager acts as a fiduciary and is responsible for the performance and risk management of the portfolio. Discretionary portfolio management offers convenience, expertise, and trust to the investor.
Non-discretionary portfolio management
Non-discretionary portfolio management is a type of PMS where the portfolio manager acts as an advisor and provides recommendations and suggestions to the investor. The investor has the final say and control over the portfolio composition, allocation, and rebalancing. The portfolio manager acts as a facilitator and is not responsible for the performance and risk management of the portfolio. Non-discretionary portfolio management offers flexibility, transparency, and involvement to the investor.
Objectives of portfolio management
Listed below are some objectives of portfolio management:
- To achieve the desired return on investment (ROI) as per the investor’s goals and expectations
- To minimise the risk of loss or volatility of the portfolio as per the investor’s risk tolerance and appetite
- To optimise the portfolio diversification and allocation as per the investor’s preferences and constraints
- To align the portfolio with the investor’s time horizon, liquidity needs, and tax implications
Key elements of portfolio management
Here are some key elements of portfolio management:
- Portfolio analysis: This involves assessing the current portfolio composition, performance, risk, and return of the investor. It also involves identifying the investor’s profile, goals, risk appetite, preferences, and constraints.
- Portfolio planning: This involves designing a suitable portfolio strategy, policy, and model for the investor. It also involves selecting the appropriate asset classes, securities, and weights for the portfolio.
- Portfolio execution: This involves implementing the portfolio plan by buying and selling the securities as per the portfolio model. It also involves monitoring the portfolio performance, risk, and return on a regular basis.
- Portfolio review: This involves evaluating the portfolio performance, risk, and return against the investor’s goals and expectations. It also involves making necessary changes to the portfolio composition, allocation, and rebalancing as per the market conditions and the investor’s feedback.
Portfolio management process
Here are the steps involved in the process of portfolio management:
- Step 1: Define the investor’s profile, goals, risk appetite, preferences, and constraints.
- Step 2: Conduct a portfolio analysis and identify the current portfolio composition, performance, risk, and return.
- Step 3: Develop a portfolio plan and select a suitable portfolio strategy, policy, and model.
- Step 4: Execute the portfolio plan and buy and sell the securities as per the portfolio model.
- Step 5: Monitor the portfolio performance, risk, and return on a regular basis.
- Step 6: Review the portfolio performance, risk, and return against the investor’s goals and expectations.
- Step 7: Revise the portfolio plan and make necessary changes to the portfolio composition, allocation, and rebalancing as per the market conditions and the investor’s feedback.
Benefits of investing in portfolio management services
The following are some benefits of investing in portfolio management services:
- Customisation: PMS offer customised and personalised solutions to the investors as per their specific needs, goals, risk appetite, and preferences. PMS allow the investors to choose the type, style, and theme of the portfolio as well as the portfolio manager.
- Expertise: PMS offer professional and experienced portfolio managers who have the knowledge, skills, and resources to manage the portfolio effectively and efficiently. PMS also offer access to research, analysis, and insights from the portfolio managers and their teams.
- Transparency: PMS offer regular and detailed reports and updates on the portfolio performance, risk, and return to the investors. PMS also offer online access and visibility to the portfolio holdings, transactions, and valuations to the investors.
- Flexibility: PMS offer flexibility and convenience to the investors as they do not have to worry about the portfolio management and can delegate the responsibility to the portfolio manager. PMS also offer the option to switch between different portfolio managers, strategies, and models as per the investor’s satisfaction and feedback.
- Cost considerations: These are a critical aspect of Portfolio Management Services (PMS). Investors should be aware of management fees, performance fees, and any other associated costs that could impact overall returns. A clear understanding of these costs helps in evaluating the service's value.
- Dynamic portfolio rebalancing: This involves adjusting the asset allocation within a portfolio in response to market fluctuations or changes in the investor's financial situation. This proactive approach ensures that the investment strategy remains aligned with the investor's goals and risk tolerance, optimising potential returns while managing risk effectively.
- Real-time access: To assess the portfolio performance and market data is essential for informed decision-making. PMS providers often offer advanced technological platforms that allow investors to monitor their investments in real-time, enabling timely adjustments based on market conditions or personal circumstances.
- Regulatory compliance: This is vital in the financial services industry. PMS providers must adhere to regulations set by governing bodies, ensuring that all investment activities are conducted transparently and ethically. Compliance protects investors' interests and fosters trust in the management service, promoting a secure investment environment. Together, these factors contribute to a robust and effective investment strategy within a PMS framework.
Why should you opt for portfolio management services?
Opting for Portfolio Management Services (PMS) offers tailored investment strategies designed to meet individual financial goals and risk tolerance. With skilled portfolio managers handling asset allocation, investors benefit from professional expertise and dynamic portfolio rebalancing. Additionally, PMS provides real-time access to portfolio performance and ensures compliance with regulatory standards. This comprehensive approach helps optimise returns, manage risk effectively, and allows investors to focus on their broader financial aspirations with confidence.
Suitability of PMS
Portfolio Management Services (PMS) are particularly suitable for investors seeking personalised investment solutions tailored to their unique financial goals and risk profiles. Here are some key factors that indicate suitability for PMS:
- High net worth individuals: PMS is ideal for affluent investors who can meet the minimum investment requirements, typically starting from Rs. 25 lakh or more, allowing for diversified asset allocation.
- Long-term investment horizon: Investors with a long-term perspective can benefit from professional management that focuses on sustained growth and wealth creation over time.
- Limited time for investment management: Those who lack the time or expertise to manage their portfolios actively may find PMS beneficial, as it allows them to delegate investment decisions to skilled portfolio managers.
- Desire for customisation: PMS offers tailored strategies that align with specific financial goals, risk tolerance, and investment preferences, making it suitable for individuals seeking bespoke solutions.
- Risk management focus: Investors prioritising effective risk management can benefit from dynamic portfolio rebalancing and proactive adjustments in response to market conditions.
Overall, PMS is well-suited for individuals seeking a sophisticated, hands-on approach to investment management while aiming to achieve their financial aspirations.
What features to look for in a PMS?
Feature |
Description |
Model Portfolio |
PMS providers present model portfolios when pitching to clients. These can be evaluated for their track record in company selection and performance relative to market indices. |
Portfolio Manager Expertise |
The portfolio’s success heavily depends on the manager's ability to outperform the market. Assess the portfolio manager’s qualifications, experience, and track record to gauge their competence and expertise. |
Investment Strategy |
Understanding the PMS's investment strategy is crucial. Transparent explanations of complex strategies and their long-term viability can give the PMS an edge over other investment options. |
Fee Structure |
Fee arrangements should align interests, typically involving profit-sharing of around 20%. Management fees should range between 1% to 3%. A hurdle rate clause ensures managers earn a share of profits only when returns exceed a specified threshold. |
Customer Support & Transparency |
Effective customer engagement through regular portfolio updates fosters trust and long-term relationships. Transparency in performance appraisal is particularly valued for discretionary portfolios. |
What are the PMS charges in India?
When investing in a Portfolio Management Service (PMS) in India, you may encounter the following charges:
- Entry Load: This is an initial fee charged at the time of investment, typically around 3%, though it may vary depending on the service provider.
- Management Charges: These are quarterly fees for managing your portfolio, usually ranging between 1% and 3%, depending on the PMS provider.
- Profit-Sharing Fees: If the PMS includes a profit-sharing arrangement, this fee is applied only when returns exceed a specified threshold, known as the hurdle rate. The percentage and terms are defined in the agreement.
- Additional Charges
PMS providers may levy other fees, including:
- Custodian Fees
- Demat Account Opening Charges
- Audit Fees
- Transaction Brokerage
Conclusion
PMS offer various benefits such as customization, expertise, transparency, and flexibility to the investors. However, PMS also involve higher risk, higher cost, and higher involvement of the portfolio manager. Therefore, you should do your due diligence before investing in such services.
