PMS Explained: Professional Management with Direct Ownership

(This article is Part 2 of 6 in our PMS Guide for NRIs: The Nuts and Bolts series)

Portfolio Management Service is professional money management, but with a twist that matters enormously to NRIs.

Here's the simple explanation: You hire a professional fund manager to invest your money, but unlike mutual funds, you actually own the individual stocks they buy for you.

Let me break this down with an example. Say you invest Rs 1 crore in a mutual fund. You get units worth Rs 1 crore, but you don't own any actual shares of Reliance or TCS. You own units of the mutual fund scheme, and the fund owns the stocks.

With PMS, that same Rs 1 crore gets invested directly into stocks in your name. If the manager buys 1,000 shares of Reliance for your portfolio, those 1,000 shares sit in your demat account with your name on them. You're the legal owner.

Why does this matter for NRIs? Three big reasons.

First, taxation. In many countries, owning actual stocks is treated very differently from owning mutual fund units. For US residents, this difference can save you from PFIC rules. For others, it might mean cleaner tax reporting or better treaty benefits.

Second, transparency. You see every single transaction. When the manager buys or sells something, it reflects in your transaction statement. Your quarterly statement shows exactly which stocks you own, how much of each, and what they're worth. No black box.

Third, control. Do you have trading restrictions due to your employment or access to insider information? You can inform your PMS manager about these constraints, and they'll ensure your portfolio avoids those specific stocks, keeping you compliant with all applicable laws and regulations.

The catch? The minimum investment is Rs 50 lakhs. This is mandated by SEBI. The regulator wants to ensure that only people with substantial money and presumably better risk understanding can access this service.

But here's what's interesting: while Rs 50 lakhs might sound like a lot, for many NRIs who've been working overseas for several years, this threshold becomes achievable. And once you cross it, PMS opens up investment possibilities that simply don't exist in the mutual fund world.

For NRIs, PMS solves the operational nightmare of direct investing from overseas while giving you the benefits of owning actual securities. You don't need to figure out how to open multiple trading accounts or folios with different mutual fund AMCs. The PMS provider handles all of that.

Different Types of PMS

PMS comes in three flavors according to SEBI regulations, but as an NRI, you'll quickly realize that only one makes practical sense.

Discretionary PMS is where you hand over the keys to the portfolio manager. You set the broad mandate – maybe you want a large-cap focused portfolio, or you prefer growth stocks over value plays – and the manager takes it from there. Every buy, every sell, every portfolio tweak happens without you having to approve each individual trade.

This is what works for NRIs. The manager makes decisions during Indian market hours while you're either sleeping or busy with your day job in a different time zone. You don't need to wake up at odd hours to decide whether to invest, cut losses or hold on.

Another crucial advantage that often gets overlooked: clear accountability. In discretionary PMS, the portfolio manager owns the CAGR (Compound Annual Growth Rate) – the returns generated by their investment decisions. Your job as an investor is to influence the XIRR (Extended Internal Rate of Return) through your timing of investments and withdrawals.

This separation is powerful. When you evaluate your portfolio manager, you look at their CAGR to judge their portfolio management skills. When you evaluate yourself, you look at how your XIRR compares to their CAGR – the difference tells you whether your investment and withdrawal decisions helped or hurt your returns.

This clarity helps you make better decisions about both manager selection and your own investment behavior.

Non-Discretionary PMS sounds appealing on paper – the manager gives you investment recommendations, but you have the final say on every trade. In practice, this creates timing challenges for NRIs that can hurt your returns.

Here's how it typically works: Your portfolio manager identifies an opportunity, say a quality stock that's fallen 15% on temporary bad news. They send you a detailed recommendation with their analysis. You usually have 24-48 hours to respond with your decision.

The problem isn't the timeline – it's the context gap. When you receive that recommendation at your local time, you're reading it without the benefit of real-time market sentiment, recent news flow, or the subtle cues that come from being plugged into the Indian market ecosystem daily.

More importantly, by the time you approve the trade, market conditions might have changed. That attractive entry price might be gone, or new information might have emerged that changes the investment thesis entirely.

The bigger issue is consistency. Investment success often comes from systematic execution of a strategy. When every decision requires your approval, there's a natural tendency to second-guess recommendations, especially after a few trades don't work out. This can lead to cherry-picking only the "safe" recommendations while passing on the higher-conviction but riskier calls that may sometimes drive superior returns.

Here's the uncomfortable truth about non-discretionary PMS: when the portfolio decision becomes shared between you and the portfolio manager, the responsibility for returns also becomes shared. If a recommendation doesn't work out, was it because the manager's analysis was wrong, or because you approved it at the wrong time, or because market conditions changed between recommendation and execution? This shared responsibility makes it harder to evaluate the manager's true performance and creates accountability issues on both sides.

For NRIs, non-discretionary PMS also creates an operational burden. You need to stay reasonably current with Indian market developments to make informed decisions on recommendations. This defeats much of the purpose of hiring professional management in the first place.

Advisory PMS takes the consultation model even further. The manager provides research and recommendations, but you execute all trades yourself. For this to work as an NRI, you need your own demat and trading accounts with Indian brokers, real-time market access, and the time to monitor markets during Indian hours.

If you can do all that, you probably don't need a PMS in the first place. You're better off with direct investing.

Here's the thing about choice: having three options doesn't mean they're all equally viable. For NRIs, the time zone difference, limited access to Indian markets, and the practical challenges of staying on top of rapidly moving situations make discretionary PMS the only sensible choice.

The key is finding a portfolio manager whose investment philosophy aligns with yours. You need someone with a track record that gives you confidence to sleep peacefully while they handle your money halfway across the world.

But here's what you should insist on: detailed reporting and clear communication protocols. Even though you're giving discretionary power, you should receive comprehensive monthly statements and quarterly performance reviews.

The discretionary model works because it's built for the reality of modern investing – markets move fast, opportunities are fleeting, and having to consult with every client before every trade would increase overheads and may kill performance.

For NRIs, the discretionary model is not just convenient; it's freedom.

Read other sections of the guide here :

At Capitalmind, we help NRIs optimize their Indian investments through compliant, growth-oriented strategies. For more details, reach out to us at NRI Desk

Disclaimer : This article does not constitute any solicitation of securities business from Residents of the United States of America or from a jurisdiction where accessing this without proper registration is restricted.

PMS Explained: Professional Management with Direct OwnershipPMS Explained: Professional Management with Direct Ownership

Different Types of PMS

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