A Portfolio Management Service (PMS) is a financial offering where an experienced portfolio manager handles your investments in stocks, bonds, debt instruments, and individual assets.
Unlike Mutual Funds, the portfolio handled by PMS can be customized as per the investor’s goals and objectives to some extent.
Asset management or Wealth Management firms offer PMS catering to high net-worth individuals (HNIs) with a minimum investment value of 50 lakhs.
Here’s everything you need to know about it.
A tailor-stitched suit will always look better on you than a readymade suit. Similarly, an investment portfolio created for your goals will deliver ideal outcomes.
Mutual funds can deliver superior returns over the years, but investors cannot customize the underlying assets. And, retail investors may not have the ideal resources to create their own custom portfolio by investing in direct stocks.
That’s when PMS comes into the picture.
Unlike mutual funds, PMS is flexible. You get to have more control over your investments and shape your portfolio as per your choices.
Here, the portfolio manager takes investment decisions and actions on your behalf. It includes choosing what and when to buy/sell the asset and how to distribute your money across various asset classes.
These decisions are made keeping your goals in mind. Most PMSs in India operate with this model.
In this model, the portfolio manager will first lay the suitable suggestions in front of you. Once you approve the advice, the manager will go ahead and make the transaction on your behalf.
Active management will focus on maximizing the returns by investing in various asset classes. Portfolio managers will adjust your portfolio as per market conditions to ensure suitable risk-reward.
Passive management focuses more on safety by investing in avenues that replicate the benchmark-such as index funds. Here, the returns may not be as superior, but the portfolio will carry lower risk.
PMS opens up a gateway for you to build your own portfolio.
You can choose:
You may not have the time or resources to execute all the customizations on your portfolio. With portfolio management services, a certified expert handles all your transactions.
The portfolio managers have the required knowledge to minimize the risk and maximize returns. They analyze the market, revisit your financial goals, and adjust your investments accordingly.
Portfolio managers have the freedom to hold up to 100% cash to use it when the opportunity arises. This flexibility comes in handy to turn the market conditions in the investor’s favour.
Having an option to directly communicate with the portfolio manager ensures transparency and increases your awareness.
You can discuss the investment strategy with the portfolio manager and seek performance insights at your convenience. Your account statement will highlight all the necessary information regarding your portfolio.
PMS has a high minimum investment threshold of 50 lakhs. It is not easily accessible by the majority of the retail investors.
As a thumb rule, investors should go for a PMS only when 20% of their overall net portfolio or net worth is equal to or less than 50 lakhs and they have a prior experience in products like Mutual Funds.
Unlike mutual funds, PMS hold a concentrated portfolio of investments.
Mutual funds usually have a small allocation to about 50 to 60 stocks. PMS, on the other hand, prefers to hold 20 to 30 stocks with high concentration, enabling high-risk-high-reward opportunities for investors.
Every portfolio management service has a different fee structure. You may have to pay fixed maintenance fees, audit fees, exit load, and profit participation fees.
The fixed maintenance fees can be about 2 to 2.5% of the asset value. Exit load may range between 1 to 2.25% of the withdrawal value based on the holding period. And many PMSs also follow profit-sharing fees above 10% returns.
Make sure you review and understand the fee structure of the PMS before investing.
Before April 2023, PMSs didn’t have as strict norms as mutual funds. Now, SEBI has issued new regulations for PMS houses.
As per new norms, investors can know specific situations in which the transactions will take place from the investor’s account or pooled from the portfolio manager’s account.
SEBI has also set rules to protect investor’s information. As a well-informed investor, you are allowed to seek this information from the PMS house.
PMS is for sophisticated investors who can comfortably invest 50 lakhs for a longer horizon. As mentioned above, those 50 lakhs shouldn’t be more than 20% of your portfolio.
Investors who possess a long tail of stocks or ESOPs can transfer their portfolio to PMS. That way, you can customize your portfolio as per your preference. For example, skipping the stocks you already hold ESOPs of or investing in companies that fit under Sharia law. Your entire portfolio can be reshaped by an expert portfolio manager.
Investors who have prior experience in the equity market via mutual funds and have an appetite for a higher risk can look into PMS.
Non-individuals such as HUFs, partnership firms, sole proprietorship firms and body corporations can also invest via PMS.
Also Read- When is the right time to invest via PMS
Opting for a Portfolio Management Service is the next step after your mutual fund and stock investments.
As your income and portfolio grow over the years, you can start exploring PMS. Make sure you compare multiple PMSs before choosing the one that works best for you. Understanding how the portfolio manager works is worth looking into.
A wealth manager with years of experience can help you choose the right PMS. If you don’t have a financial planner, VNN Wealth is just a call away. Reach out to us for more information on Portfolio Management Services.
