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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.

  • Young@Market says:

    Hi Deepak,
    I heard that existing PMS will continue as is and the new norm is applicable only for new customers…. I have burned my hand by taking a PMS (Still licking my wounds… will exit when I feel enough is enough… I am finding it difficult to make a decision at this point as well, looking at my loss…)…. which was run by Yogesh Chabria’s firm (FAMS)…. and he left without a word and then they sold PMS without even giving notice to customers to 3rd party, I would have exited if they informed me… and I still think it was cheating coz… after having discussion and promise that only they will manage my money I opted for it… (I had an impression that he was a man of integrity… :-(… But I guess he had only the last 2 qualities that Buffett said in below quote). One fine day firm told that, folks.. now these guys will run ur PMS… and portfolio was seriously suffered…
    “In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without the first, you really want them to be dumb and lazy” – Warren Buffett