- Wealth PMS (50L+)
As a high-net-worth investor in India, you have a wide range of options for choosing a portfolio management service (PMS) to invest your money. PMS are investment vehicles designed to provide professional management of portfolios, enabling investors to achieve their financial goals. Choosing the right PMS is critical to ensure that your investments are managed effectively for the long term and generate the returns you are looking for.
Before even venturing down the path of selecting the best PMS for your investments, be clear on how PMS are different from Mutual Funds and which serves your needs better.
There are two kinds of Portfolio Management Services – Discretionary, where an investor gives full discretion to the PMS to choose what to buy and how much, and Non-Discretionary, where the investor should okay each action before action is taken. Most PMS provide discretionary services, but some provide both.
Portfolio management services (PMS) and Mutual Funds are similar in that they provide professional investment portfolio management, regulated under SEBI guidelines. Both PMS and mutual funds invest in a diversified portfolio of stocks, bonds, and other securities to generate returns for investors.
However, there are some critical differences between PMS and Mutual Funds.
Level of customisation
One of the main differences is the level of customisation and personalisation offered by PMS. Portfolio Management Services start with risk profiling for each potential investor, based on which they assess the suitability of their strategies and recommend an allocation to them. So you can get a portfolio tailored to your needs and goals. In contrast, Mutual Funds follow a more standardised investment strategy in specific schemes, the same for any investor that invests in a scheme. It is up to the investor to determine the suitability of specific Mutual Fund schemes to their goals. Of course, investors can utilise the services of Registered Investment Advisors (RIA) to choose the right mix of funds.
A PMS may have standard portfolios that they would offer to customers that are like mutual funds but allow some customisation, such as limiting specific securities from any transactions or having a certain asset allocation that is automatically rebalanced.
Target Risk and Return
Another difference between PMS and mutual funds is the target or perceived level of risk and potential return. Mutual Funds are accessible to investors of different corpus ranging from a few hundred to several Crores. So they tend to be more conservative regarding the extent of diversification. For instance, Mutual Funds have a limit on the allocation to their top holding (cannot be higher than 10%). Mutual funds also have group-level limits (companies with a common promoter group), and SEBI regulation has fixed time frames in which mutual funds must fix any passive breaches of these limits due to redemptions or stock prices rising too fast.
PMS have more latitude on what they own and do not have any specific security or group limits. They can hold highly concentrated portfolios as long as they are backed by investment rationale.
Whether PMSs have actually delivered higher returns than Mutual Funds over the long term can be debated. Compare the category medians for the two over different timeframes to decide.
Minimum investment amount and redemptions
A SEBI Registered Portfolio Management Service (PMS) will require an upfront investment of Rs. 50 lakh, and SEBI may change the limit over time. However, subsequent PMS investments have no limits, meaning you may systematically add higher amounts into the PMS as you see fit. Partial redemptions in a mutual fund are allowed, but the remaining amount in the PMS should be higher than the SEBI-prescribed limits.
On the other hand, a mutual fund may have minimums as low as Rs. 100 in a scheme and can also have investors systematically add money into a scheme. Mutual funds may also offer any level of partial redemptions.
PMS and mutual funds also differ in terms of their fees. Mutual Funds have prescribed limits on the maximum expense ratio they are allowed to charge, which tend to be under 1.5% of total assets under management (AUM). Mutual funds cannot charge a profit-share model (called a performance fee) and cannot charge customer entry loads or setup fees. However, stamp duty is payable for every mutual fund investment.
PMS can have fixed/fixed + performance-based / performance-only fee models. For instance, some PMS charge a base fee of 2% of assets plus 20% of gains, which might or might not be tied to a threshold, called a hurdle rate, in any given year. PMS may have different fee structures for different customers. Additionally, the PMS may charge any fees for incidentals; annual customer audits, an entry or exit load, a setup fee and corresponding taxes.
Overall, you’re likely to pay more for a PMS compared to Mutual Funds.
Pools, Holding and Pledging
Whatever a PMS manager purchases for an investor is owned by the investor in their name, in a Demat account created specifically for the investor. Pooling of securities is not allowed. The dividends and voting rights accrue to the investor, and the Portfolio Management Service (PMS) is only a transacting agent. This also means that if certain high-net-worth investors cannot invest in a security for regulatory reasons, the PMS cannot buy that security in their account (but could buy it for other investors). An example is a lawyer in a legal firm that prevents employees from holding securities in client firms. Investors in a PMS are not allowed to pledge their PMS holdings and take loans against them.
On the other hand, a mutual fund is the owner and beneficiary of all the securities it buys. The specific mutual fund scheme receives all dividends and exercises voting rights on behalf of all the investors. A mutual fund investor cannot ask the mutual fund not to buy any specific security; the same security will be held in a common pool. A mutual fund investor may pledge their holdings and take a loan against them.
The final difference between Mutual Funds and PMSs is the most important. In a PMS, the investor is liable to pay capital gains taxes whenever the PMS Manager sells holdings. In Mutual Funds, no taxes are payable when the Fund Manager sells holdings and realises gains. Instead, a Mutual Fund investor is liable to pay tax only when she exits the fund. This offers Mutual Funds a significant advantage over PMS, especially when compounded over the long term.
Mutual funds are not taxable entities, so dividends or interest received by a mutual fund are not taxed. PMS investors that receive dividends or interest are taxed in the hands of the investor.
If you’re clear that the higher target return and customisation are what you need, how do you decide which PMS to invest in?
Track record and performance
This tends to be an over-used and often wrongly-used basis for picking a PMS, especially since recent returns are easily accessible on PMS comparison sites.
Look beyond the recent past or one cumulative return number and view the PMSs performance since its inception or over extended time frames. Anything shorter than three-five years is probably too little information based on which to decide. Have they been through at least one (ideally more) market correction where you can see how their investment strategy did versus the market?
The right investment strategy for you is the one which aligns with your investment goals and risk tolerance, not the one that has the highest returns. Some PMSs hold concentrated portfolios of small and midcaps, while others look to manage risk by holding a diversified portfolio. Knowing how a PMS invests and matching it with your needs and temperament is probably the most essential part of the process. A swing-for-the-fences approach that wins big but also loses big might be right for some investor risk profiles, but not for all.
PMS fee structures vary significantly from one to the next. Your net return can be substantially different based on a performance-based fee versus a fixed fee or a combination. Make sure to consider the impact of each on net return, not just in strong up years but in flat periods as well. As a minimum, your chosen PMS should offer transparent and competitive fees.
Reporting and Customer Service
Transparency about holdings realised and unrealised gains and taxes payable are critical. Consider how well a PMS meets these requirements. Do you need to call a specific person, write to a customer support email id and wait for a response or is there a self-service portal for you to log in and download what you need? Can you easily decipher the charges applied, not just the fees charged, but transaction costs and STT paid?
Seek feedback from existing or past investors about their experience in these aspects.
Reputation and Credibility
While Track Record and performance are viewable in black and white, Reputation and Credibility are subjective but just as if not more important. The basics are to look for the appropriate SEBI regulatory certifications. A more extensive search online can yield a decent picture based on online published content, media appearances, if any, social media presence etc.
In conclusion, choosing the right PMS is crucial for high-net-worth investors in India looking to maximise their investments’ returns. By carefully considering the track record and performance, investment strategy, fees, reputation and credibility, and customer service of different PMS, you can select the PMS best suited to your needs and invest confidently.
And not just for November 2022.
You can find performance newsletters for past months here: https://www.pmsaifworld.com/pms-performance-newsletter/
Note the top 10 PMS are identified based on overall performance since inception and not just for individual months.
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