Guide to the World of PMS

What do you do when you have extra money after most of your expenses and lifestyle needs have been met? You possibly invest it in fixed deposits, public provident funds, gold, etc. What do you do when you get even more money? You perhaps invest it in mutual funds, stocks, etc. Still, if you get even more in windfall, what do you do? Possibly refrain from buying that dream sports car and instead invest in a good quality Portfolio Management Service or PMS.
 

What is a PMS?

A PMS is a dedicated professional financial service where experienced managers often create equity-led portfolios to maximize your profits, giving you the most bang for your buck. They are backed by a strong team of professionals who understand finance, annual reports, corporate moves, market trends, and local and global macroeconomics to pick assets that can work to your advantage. This tailor-made service is crafted, keeping in mind your risk tolerance as well as your goals and future needs.

What is the history of PMS in India?

How did it all start? In 1993, the regulator Securities and Exchange Board of India (SEBI) introduced regulations for PMS, marking the beginning of a new era in capital markets. Before this, PMS were largely unregulated. But once the regulations came into force, major banks, insurance firms, and a few niche players started getting into this space catering to rich clients who were seeking dedicated and tailor-made financial services.

Evolution of PMS through the years

As the 1990s Indian economic reforms led to increased prosperity, PMS has also gone from strength to strength. While initially the playground of just high-net-worth individuals, the user base has expanded vastly. There are now over 400 PMS firms registered in India with SEBI, managing assets worth around Rs 7.5 lakh crore. PMS has also evolved, offering not just equity or fixed-income plans but also real estate, private equity, and hedge funds. In India, investing in PMS requires a minimum of Rs 50 lakh. This threshold came into effect in 2019, raising the bar from the previous minimums of Rs 5 lakh (set in 1993) and then Rs 25 lakh. The bar was raised to ensure only serious investors take this route.

What are the different types of PMS?

There are typically three kinds of PMS that one can choose from:

Discretionary: This is a hands-off approach. You set your goals and risk tolerance, and the manager makes all buying and selling decisions within those parameters. Ideal for investors who want a professional to handle everything.

Non-Discretionary: Here, the manager acts as your investment advisor. They research, analyze, and recommend investments, but the final decision to buy or sell is yours. This is a good option for investors who want guidance but retain control.
 

Advisory: This offers the most control. The manager provides investment advice and recommendations, but you execute the trades yourself through your own brokerage account. This suits experienced investors seeking professional insights.
 

PMS vs. Mutual Funds

PMS provide a very large universe of investments, unlike mutual funds, which are often restricted to specific asset classes or sometimes by the kind of stocks they can pick. PMS can pick large-cap, mid-cap, and small-cap based on what they think will work best, unlike a large-cap mutual fund which will have to mostly focus on buying large-cap stocks. However, PMS are also more expensive than mutual funds and sometimes understanding a mutual fund’s investment philosophy is easier than that of a PMS as the mandate is much wider in the latter. They also do not have to disclose as much data as mutual funds have to. PMS also use different demat accounts for different investors, while mutual funds have money accrued into one fund from different investors.

High-Reward Strategy

A PMS is a high-reward strategy, but this also can come with high risk because it is often very portfolio-manager-led. If this manager’s philosophy does not work in some market cycles, it can give you returns even poorer than a plain-vanilla Nifty 50 Index fund. Therefore, one has to be very careful when choosing a PMS and not just go for an asset manager who may be in vogue. There have been cases of new managers selling a new philosophy supported by a lot of data which makes it look like there could not be anything better than this given approach. But it is only when the portfolio is put to test in a bull and bear run that one realizes if the outreach had as much merit. In recent times, SEBI has even noticed that some of the PMS have been “incommunicado.” This has alarmed the regulator, which is now considering taking action against such firms to ensure that there is no mismanagement.

Who can provide PMS services?

SEBI has very specific regulations on how a PMS can come into being. The PMS needs to have professionals with experience in the financial services sector and equally good financial education. They should also have experience of at least five years in the securities market, for example, as a portfolio manager, stockbroker, investment advisor, research analyst, or fund manager. Applicants must have a minimum net worth of Rs. 2 crore and, upon approval, the portfolio manager must pay a registration fee of Rs. 10 lakhs to SEBI for the grant of the certificate of registration.
 

New Onboarding Rules

SEBI has also tightened the rules over onboarding new clients in a bid to make PMS more transparent for their clients. It has now asked PMS to enter into a written agreement with the client that clearly defines the relationship and sets out their mutual rights besides asking the clients to sign the annexure on fees and charges and add a note that they have understood the fee details. PMS have also been asked to be more explicit about the fees that they will charge, including performance fees, and offer a tool for multi-year fee calculations.
 

Conclusion

In essence, PMS offer a sophisticated investment avenue for high-net-worth individuals seeking personalized and professionally managed investment solutions. By understanding the types, benefits, drawbacks, and regulatory framework of PMS, investors can make informed decisions to achieve their financial goals. Whether opting for discretionary, non-discretionary, or advisory services, it is crucial to carefully choose a PMS provider that aligns with your financial objectives and risk tolerance. As the financial landscape continues to evolve, PMS remain a valuable tool for maximizing returns while navigating the complexities of investment markets.