Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Commentary

SEBI Pushes PMS Minimum To 25 Lakh

The Securities and Exchange Board of India, the market regulator, has upped the minimum investment in Portfolio Management Services (PMS) to Rs. 25 lakh. The earlier minimum was Rs. 5 lakh. This applies immediately for new clients; for existing ones, additional investments need to top up to at least Rs. 25 lakh.

Many brokerages and independent managers offer PMS products, where a manager trades the stock markets, and the Rs. 5 lakh minimum was supposed to deter people who couldn’t really afford to lose that money. (I’m not sure how the higher limit helps, but I suppose it does deter the less well-to-do from losing their shirts)

The unfortunate problem with PMS products has been their overall misuse. There are good PMS products, mind you, and many are offered by smaller, boutique investment advisors; these are usually not available to the masses (reference-only). But the vast majority of what you hear are abused in many ways:

  • High fees+Brokerage: typical models use a 2 and 20 – 2% as management fees and 20% of the profits (above a hurdle rate). Typically, when offered by brokers, they also charge a hefty brokerage and churn portfolios.
  • Ditching the product when they can’t make hurdle rates. In 2008, a large fund abruptly stopped the PMS service after losing 30%, simply because they would now need to make that back, and then a profit, before they could charge the profit share fees.
  • PMS pooling: Funds were placed in a pool account and then traded. Then profits and losses were assigned to clients. This was supposed to be appropriately assigned, but in practice, there were “favoured” PMS accounts which got allocated more of the profits (and lower losses). This was stopped by SEBI by banning pooling, by making segregation into individual demat accounts compulsory. But the practice continues when it comes to derivatives (where there is no demat).
  • Misselling: A customer was duped in a Kotak PMS (Moneylife) with a dud product that was dressed up and mis-sold.
  • Bad performance: Many products tend to perform much worse than regular mutual funds or indexes. Much of this is attributed to risk taking, but it’s because the high commission structure – PMS companies will pay advisors 2% to 5% upfront for getting them money – requires a higher return to compensate.

While the Rs. 25 lakh minimum doesn’t do much about the above abuse, it helps raise the bar – hopefully, people at that level will read more about the abuse and ask tough questions before they invest. However, noting how high-barrier investment products have been abused around the world (like a Norwegian town being sold US subprime securities), I wouldn’t hold my breath.

Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial