Portfolio Management Service: 22 Things You Should Be Aware

Portfolio Management Service is gaining momentum during this bull market phase. It is coupled with the effect of dull real estate market and gold. Here  I am trying to collate the most common questions that comes to investors planning for PMS. 

1. What is Portfolio Management Service?

Portfolio Management Service is a professional service offered to wealthy investors to meet their investments objectives. The Investment solutions provided by PMS cater to a niche segment of elite customers. The clients are normally Individuals or Institutions entities with high net worth. Data from the Securities and Exchange Board of India (Sebi) shows that there are nearly 1880registered portfolio managers at present, down from 267 in 2012. But barely 100 firms would be active, with a large chunk of the business being concentrated in the hands of the top 8-12 fund managers. 90% of total AUM is concentrated in the hands of top 10-15 fund managers.

2. What is the PMS history in India?

Portfolio Management Service had a big success story before the 2008 market crash but faced accusations of misuse. Many of the PMS providers were not registered and indulged in heavy trading which resulted in heavy loss for the customers. After that, the Securities and Exchange Board of India introduced stringent regulations. Among other things, it raised the minimum investment limit from Rs 5 lakh to Rs 25 lakh. It also banned pooling of accounts of different investors. Then again PMS gained momentum after 2013 and now more elite customers are moving to PMS due to its consistent performance.

3. Who is a Portfolio Manager?

As per Sebi regulations, a portfolio manager is a person who advises, directs or undertakes management or administration of a portfolio of securities or funds. All the portfolio managers fall under the ambit of Sebi Portfolio Managers Regulations, 1993. The minimum ticket size for an investor to avail of PMS is Rs 25 lakh. Portfolio Manager is any person or a a body corporate who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client. So it is basically a service offered to a customer, for which the portfolio manager charges a fee, and it is not any partnership that he gets into with the client. Though there are profit sharing plans, there is no loss sharing plans :)

Checklist for PMS Aspirants

4. What is the minimum and maximum limit for investing in PMS?

The minimum ticket size of the portfolio we offer for is INR 25 lacs. There is no upper limit on the amount you can invest.

5. What is discretionary PMS?

In discretionary PMS, the choice and timing of the investment decisions rest with the fund manager. Most of the popular PMS providers have major portion of their AUM in this category as Portfolio Managers get maximum flexibility and freedom to choose the portfolio.

6. What is non-discretionary PMS?

In non-discretionary PMS,  the portfolio manager gives investment and the client takes the decision on choice and timing. The portfolio manager executes the trade on behalf of the client.

7. What is advisory PMS?

In advisory PMS, the portfolio manager gets paid only for the investment advice. The final decision and execution about investments are taken by the client on his own.

8. Can PMS invest in IPOs?

Yes. Portfolio Manager has the choice to invest in IPOs.

9. Can PMS perform Day Trading?

SEBI forbids any day trading activity by Portfolio Managers.

10. Can PMS invest in Derivatives (Futures/Options) segment?

Under SEBI guidelines, a Portfolio Manager is allowed to invest in the Derivatives Segment only to the extent of the value of the portfolio. My advise is to verbally check and confirm on this with your Portfolio Manager.

11. Can Client partly or fully withdraw  money from PMS account?

Yes. It is a simple process of informing your Portfolio Manager through a formal communication channel and client should get the money back within 3-5 working days. The catch for partial withdrawal is your portfolio‘s value should not fall below the prescribed limit of Rs. 25 Lacs, as per SEBI regulations. My advise is to verbally check and confirm on this with your Portfolio Manager.

12. Is investment under PMS risk free?

As per SEBI regulations governing Portfolio Management Services in India, neither capital nor returns can be guaranteed. But there are PMS which gives consistent 30% above CAGR for the past 5-6 years. Keep in mind that past performance is not indicator for future.

13. Can a NRI avail of the Portfolio Management Service?

The Portfolio Management Services is open for all Indian nationals, resident or otherwise. NRIs will have to open a PIS Account as required under RBI guidelines in order to invest in the PMS scheme. In fact, PMS seems to be good option to wealthy NRIs as direct share trading fees are normally higher for them.

14. Who can open a PMS account in India?

A PMS account cn be opened by below individuals or categories

1. An Individual
2. A Hindu Undivided Families
3. An Association of Persons
4. A Limited Companies
5. An NRI, overseas company, firm, society or an overseas trust (subject to RBI approval)

15. Is top-up facility available for PMS?

The answer is yes for most of the PMS services. My advise is to verbally check and confirm on this with your Portfolio Manager.

16. What is the fee structure for PMS?

The fee structure for portfolio management services is generally flexible in nature. Portfolio Managers normally provide 2-3 options in which client can choose according to his/her trading ideology and risk appetite. Basically there are 3 types of fee structure as given below.

1. Entry load: PMS products have an option of charging the investor an entry load at the time of purchasing the PMS.

2. Fixed management fees: In this type of fee structure, the portfolio manager levies a fixed charge which may vary between different products. It is usually charged on a quarterly basis and can also be charged annually.

3. Profit sharing/performance linked charges: In this type of structure, along with a fixed fee, the portfolio manager charges a certain amount/percentage of profits over and above the stipulated fund return. The fund manager can claim a certain percentage of profit over and above a pre-determined hurdle rate (say if the return is above 10% or 20%). In profit sharing PMS, the percentage of fixed fee is usually lower.

The method of charging is however decided at the inception and documented in the agreement. In addition to the above, all charges linked to equity investments like custodian fees, demat account opening charges and transaction brokerage is chargeable to the client.

17. What is high water-mark principle by SEBI?

Profit  sharing / performance  related  fees  are  usually  charged  by  portfolio managers  upon  exceeding  a  hurdle  rate or benchmark as  specified  in  the agreement. However  there  is  no  uniformity  in  practice  on  how  the  profit/performance  of  the  portfolio  computed. It  is  advised  that,  henceforth,  profit/performance shall be computed on the basis of high water mark principle over the life of the investment, for charging of performance/profit sharing fee.  

High  Water  Mark  Principle: High Water  Mark  shall  be  the  highest  value  that the portfolio/account has reached. Value of the portfolio for computation of high watermark  shall  be  taken  to  be  the  value  on  the  date  when  performance  fees are charged. For the purpose of charging performance fee, the frequency shall not  be  less  than  quarterly.

The  portfolio  manager  shall  charge  performance based  fee  only  on  increase  in  portfolio  value  in  excess  of  the  previously achieved high water mark.

Consider that frequency of charging of performance fees is annual. A  client’s  initial  contribution  is  Rs.25,00,000 which  then  rises  to  Rs. 27,00,000 in  its  first  year ; a  performance  fee/profit  sharing  would  be  payable  on  the Rs.2,00,000  return.  In  the  next  year  the  portfolio  value  drops to  Rs. 26,00,000 hence no performance fee  would  be  payable.  

If  in  the  third  year  the  Portfolio rises to Rs.28,00,000, a performance fee/profit sharing  would be payable only on  the  Rs 1,00,000  profit which  is  portfolio  value  in  excess  of  the  previously achieved high water mark of Rs.27 ,00,000, rather than on the full return during that year from Rs.26 ,00,000 to Rs.28,00,000

18. What about my tax liability?

In PMS there are 3 types of incomes. You have to pay according to the category mentioned below.

  • Short term gains: Profits realised on sale of investments within one year; taxed at 15%.
  • Long term gains: Profits realised on sale of investments after one year; tax free.
  • Dividends:  Tax free at the hands of investors up to Rs. 10 Lakhs.

19. How can I track my investments?

Usually PMS providers update customers with information in following ways:
  • Daily reporting by e-mail/ Weekly hard copy option
  • Complete picture on your investment though website
  • Audited, comprehensive year-end report to facilitate tax payments
  • Access to relationship manager or investment tea
  • Access to research notes generated by  in-house team

20. Is there any tax benefits for PMS like mutual funds?

No. There is no tax benefit for PMS.

21. How much is the AUM under PMS in India?

As per December 2016, the total AUM under PMS in INdia is ₹11.74 lakh crore as at November-end. According to SEBI data, portfolio managers handled assets worth over ₹9.06 lakh crore for discretionary services, besides over ₹1.97 lakh crore for advisory services and another ₹69,760 crore for non-discretionary investments. Of the total assets managed by such managers, about ₹8.1 lakh crore was contributed by Employee Provident Fund Organisation (EPFO), according to SEBI data.

22. Most Important Question: Should I invest in PMS?

This final question is not an easy one to answer. It is completely dependent on your risk profile. But I would suggest investment via PMS only if

1. You are a wealthy person who has strong financial background and mindset to take a hit of 50% at-least during bear market cycles. Believe me, during tech bubble in 1999, the US mighty Cisco declined by 86%, lost a large portion of their market capitalization. You should have enough financial support to overcome a bear market.

2. You have enough patience to take the word of your fund manager during bad times and have faith with PM management team.

3. Your self trading and investment CARG is way below the average PMS returns of top fund managers.

4. You have no time or interest to follow your stocks and requires a professional help.

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