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Portfolio Management Services

by Tavaga Invest

What is Portfolio Management Service?          

Portfolio Management Service (PMS) is a facility offered by a portfolio manager with the intent to achieve the required rate of return within the desired level of risk. An investment portfolio can be a mix of stocks, fixed income, commodities, real estate, other structured products, and cash. A portfolio manager is a licensed investment professional who specializes in analyzing the investment objectives of the investor and has a vast knowledge of the various instruments in the market. The portfolio manager is better positioned to make informed decisions for investments in securities as opposed to a layman. 

PMS is a customized service offered to High Net-worth Individuals (HNI) clients. The service is tailored as per the investor’s return requirements and the ability and willingness to assume the risk. An Investment Policy Statement (IPS) is drafted by a PMS to understand the financial position and needs of the client. The portfolio manager ensures that the return requirements coincide with the risk profile. Before executing the optimum portfolio, PMS also studies the various constraints such as time horizon, tax applicability, liquidity, and other unique considerations of the client. 

What are the types of Portfolio Management Services?

  1. Active Portfolio Management: This form of portfolio management aims at beating the performance of a market index such as Nifty. An active portfolio manager will take different positions than that of the tracking index, and actively buy and sell securities as per institutional research to create more returns than the index. However, to generate an excess return, the strategy undertakes a higher level of risk.
  2. Passive Portfolio Management: Such a PMS strategy aims to mimic the performance of an index by investing in the same securities with similar weights. This is known as indexing or index investing. The transaction costs, resulting from securities turnover, are low as compared to active management as the portfolio churning is at a minimum. However, incurring transaction costs leads to an overall return being lower than the tracking index. The returns of the portfolio are pegged to the market returns. Therefore, the variance in returns is low.
  3. Discretionary Portfolio Management: The portfolio manager is given complete control of the portfolio and is free to adopt any strategy which is suitable to the IPS. Such PMS demand higher involvement in decision making justifying higher fees associated with discretionary portfolio management. This is the best option for clients with limited time and knowledge of investing
  4. Non-discretionary Portfolio Management: The PMS will only suggest investment ideas while the investor will be responsible for choosing the recommendation and timing. This employs PMS in an advisory capacity as the final call rests with the investor instead of the portfolio manager. 

Portfolio Management Process?

The portfolio management process is the means through which the portfolio manager defines the investment objectives of the investor, translates them into achievable goals, allocates assets to achieve those goals, monitors the returns, and rebalances the portfolio for any mismatch in the risk and return profile of the portfolio. The 3 steps of the portfolio management process are:

  1. Planning: Planning is the first step of portfolio management and involves the making of the Investor Policy Statement (IPS). Investor policy statement defines the willingness and the ability to take risks from the investor’s point of view. It also sets the objectives of the investors in terms of their risk and returns keeping in mind the IPS of the individuals.
  2. Execution: Execution is the second step and involves the allocation of the investment corpus to various asset classes and various products within the asset classes to match the risk-return profile stated in the IPS.
  3. Feedback: In the third and final step of portfolio management, the portfolio manager monitors the performance of the portfolio and makes changes to the assets wherever they are falling short of their expected returns. Rebalancing of the portfolio might be done to achieve better returns or the portfolio might stay as it is if it is performing as per expectation.

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Which is better, Portfolio Management or Mutual Funds (MFs)?

The following attributes distinguish between PMS and MF:

  1. Customization: PMS offers a higher degree of customization tailored specifically to the goals of an investor. Mutual funds, on the other hand, offer customization to the extent of the classification and diversity of the fund.
  2. Engagement: PMS is personalized promoting a dialogue between the portfolio manager and investor. An investor can convey any changes in the risk profile or personal situations to maximize returns. MFs offer low engagement with the investor limited to fact sheets. Portfolio managers for PMS are also directly accountable to the investors.
  3. Fee structures: MFs charge a fixed fee attributed to the entry and exit of investments as well as annual expenses for maintenance (known as the expense ratio). PMS demands a share in the profit over a particular rate of return (known as the hurdle rate) in addition to the annual maintenance fee. The alignment of incentives is highly preferred in the case of PMS so that the portfolio manager takes responsible decisions in an attempt to attain supernormal returns. 
  4. Asset ownership: Under PMS, the investor retains direct ownership of shares of the company. However, MFs offer units in the form of investment. 
  5. Investment size: MFs entertain any amount of capital. However, PMS demands a capital investment that must be over the minimum limit of Rs 50,00,000.

Is PMS a good investment?

Pros of investing in PMS:

  • Professional oversight (control and monitoring)
  • Risk profiling
  • Convenient execution of trades
  • Customized service

Cons of investing in PMS:

  • Higher assumption of risk
  • Transfer of control of assets
  • Competence of the portfolio manager

For an investor with limited time and knowledge and high capital base, PMS is a suitable option given the investment management institution is reputed and offers transparency of operations. PMS also helps in better realization of diversification benefits than aimlessly investing in any number of securities. The returns and the performance of the portfolio are highly dependent on the accuracy of the security analysis done by the portfolio manager and hence are highly dependent on the competency of the investment management institution.

What features to look for in a PMS?

  • PMSes have model portfolios that they furnish when soliciting clients. The PMS model portfolio may be assessed for a track record of company selection and overall performance against the market index.
  • The performance of the portfolio is solely dependent on the manager’s ability to outperform the market. Therefore, a crucial aspect of selecting PMS is conducting due diligence of the portfolio manager. A portfolio manager’s educational background and experience ultimately point to the competency and expertise that they bring to the fund. 
  • The investment strategy is another parameter that can give PMS an upper hand over other schemes available in the market. It makes sense for the investor to understand the strategy before committing funds. If the strategies are complex, the viability of such strategies over the long term should be outlined transparently.
  • The fee arrangement of the PMS based on the performance of the manager should serve as a win-win situation. The profit-sharing of returns is typically 20 per cent. Fees charged for the management of the fund should not be over industry standards, which are in the range of 1 to 3 per cent. A hurdle rate clause ensures profit sharing with the manager only if the performance of the fund beats the minimum required hurdle rate. 
  • Customer support and transparency are valued by investors, especially for discretionary portfolios. PMSes appraising portfolio performance frequently benefits from customer engagement and establishes a long-standing agreement.

What are the PMS charges in India?

  • When you start investing in a PMS, you may be charged an entry fee, commonly known as the ‘Entry Load‘. This fee is typically around 3%, although it may vary.
  • The ‘Management Charges‘ refer to the service fee for managing your portfolio in a PMS. This fee can range from 1-3%, depending on the service provider, and is charged quarterly.
  • If a PMS has profit-sharing agreements between the client and the provider, in addition to other fixed fees, then the ‘Profit Sharing Fees‘ are based on the terms of the agreement. These fees are charged above a hurdle rate, which is the minimum amount of profit that the PMS needs to earn before it can charge a profit-sharing fee.
  • A PMS may also levy other fees such as Custodian Fees, Demat Account opening charges, Audit charges, Transaction brokerage, and more.

Which are the top PMSes in India?

AUM of PMSes (Updated April 2023)
AUM of PMSes (Updated April 2023); Source: PMS Bazaar, Tavaga Research

The Portfolio Management Services (PMS) industry in India experienced robust growth of approximately 14.5% last year. The assets under management (AUM) of PMS reached ₹26.9 trillion. With almost 400 AMC offering these services, An investor may become overwhelmed by the range of choices offered.

The table below lists the top PMSes in India.

PMS CompanyFixed Fee (per annum)Performance FeeBrokerage and Exit Load
Equity Intelligence2%10% of returns above 10% p.a
Motilal Oswal2% – 2.25%0.3% brokerage per transaction; 1% – 2% load
ASK1.5%1.5% plus 20% above 10% profits
Alchemy PMS2% – 2.5%
Nippon PMS2% – 2.5%
Kotak PMS2.5%0.1% brokerage per transaction; 3%, 2%, 1% year-wise load
ICICI PMS1% – 3%2% – 2.5% load
Birla Sun Life PMS2.5%1.2% – 2.2%
Angel Broking2%0.5% brokerage per transaction
Source: PMS Websites, Tavaga Research

The fee arrangements are varied depending upon the strategy of the PMS. Some funds charge fees based on the commission model opted by both parties. Funds may also be subject to an exit load. Other discretionary funds may outline the profit-sharing arrangement at the inception of the agreement.

SEBI’s Rules and Regulations in the PMS Space in India

  • These regulations by SEBI have come into play effective October 1, 2020. The regulations are:
    1. No upfront fees will be charged; operational fees excluding brokerage cannot exceed 0.5 per cent per annum of the client’s average AUM.
    2. A maximum exit load of 3 per cent can be charged in the first year, 2 per cent in the second year, and 1 per cent in the third year. No exit load is applicable after three years.
    3. Clients will have to be onboarded directly, avoiding client engagement with the intermediaries and distributors.
    4. CA has to certify the minimum specified net worth of portfolio managers of Rs 5 crores.
    5. A monthly report is mandatory, with performance reported net of expenses and after-tax. Performance return has to include cash holdings and investments in liquid funds
  • As per the change in guidelines, it is mandatory for operators of PMS schemes to disclose the details of distributors’ commissions to the investors every quarter. This regulation will bring PMS in line with the MF industry in that the investors will be made aware of the commissions earned by distributors.

SEBI also mandated the contents of the performance report, which is to include the composition and value of the portfolio along with a description of securities and goods, cash balance, and aggregate value of the portfolio as of the date of the report. 

SEBI has also mandated the portfolio managers to utilize the services of certified distributors who have AMFI registration numbers or have cleared the NISM Services V-A exam.

  • With real estate in a contractionary state of affairs, equities have witnessed a significant uptick in investment. Mutual funds have been unable to perform consistently, and PMSes have stepped in to gain market share. Investors who were traditionally seen investing in real estate have now resorted to PMS schemes. 

The market regulator has been striving to bring the PMS industry at par with the MF industry in terms of investor-friendliness. To maintain oversight, SEBI has to ensure consistency and transparency in the reporting framework. The fee structures for PMSes across various schemes have been under the radar, comparing them with the expense ratios of mutual funds. The spur in demand for PMS in India should be in conjunction with the regulatory ecosystem in place to prevent mis-spelling or misappropriation of funds.

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Gulaq September 30, 2022 - 11:30 am



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