Advantages & Disadvantages Portfolio Management Services Facility

Imagine that you have a corpus of around Rs.2 crore either in your bank or in the form of shares. What exactly can you do with these funds? Firstly, you can select stocks and create a portfolio of equity stocks and constantly monitor the same. Secondly, you can allocate the entire monies to a set of mutual funds and diversify your risk. There is also a third option where you can give these funds to one of the registered Portfolio Managers who are running a Portfolio Management Service (PMS). Remember, only SEBI registered portfolio managers can run PMS schemes in India. But first, what is the concept of PMS all about?

Portfolio Management Services – For whom?

PMS is a professional fund management service where experienced and high quality fund managers actually manage your money, identify the right investment opportunities, churn the money when opportunities arise and also give you constant updates and reports on your portfolio performance. If you thought this is like a mutual fund, then there is actually a slight difference. Unlike a mutual fund, a PMS creates unique portfolios for each PMS participant. That is why the minimum corpus required to qualify for a PMS Service is at around Rs.50 Lakhs in most cases. Of course, some of the PMS services are willing to accept lower amounts also. The key difference is that there is a lot more customization that happens in a PMS account to your unique needs and there is a unique portfolio which you can monitor and view online. To that extent, it is entirely transparent.

Discretionary versus non-discretionary PMS

Broadly, there are two types of PMS services based on the kind of interaction and fund manager influence that you want. The Discretionary PMS is all about giving the complete leeway to the PMS fund manager to select stocks and create a portfolio for you. Of course, there is a broad policy framework that is first put in place based on which such discretionary decision are taken. The fund manager is required to adhere to such conditions while selecting stocks and other asset classes for you. On the other hand, non-discretionary PMS does not give discretion to the PMS fund manager. While the funds will be handed over to the PMS, the fund manager will be required to take the client’s approval before any transaction and any unapproved transaction can be treated as null and void and the investor can claim compensation in this case.

Where PMS actually scores

Let us understand how the PMS is positioned to investors and where it really scores over other fund management platforms like mutual funds:

• Unlike in the case of mutual funds, you are not subscribing to the units of a pre-created portfolio. Mutual fund schemes are mass customized. On the other hand, PMS is entirely customised to your needs.
• Most PMS Service providers provide a host of online add-ons like easy access to portfolio, portfolio analytics, high-end blogs and content to enhance your portfolio experience etc. These are useful value-adds especially if you are looking at more value for money.
• Transparency is the key to a PMS. As stated earlier, PMS is regulated by SEBI regulations and hence there is oversight on what is being done and how the funds are being managed. PMS providers are required to statutorily give a variety of disclosures to the PMS holders and to the regulator. This increases transparency for PMS holders, although the PMS does not have to make public disclosures unlike a mutual fund.
• Normally, PMS funds tend to give superior returns for two reasons. Firstly, they are able to spend time and energy picking quality stocks and holding on for a longer period of time. Secondly, since the PMS is more flexible compared to a mutual fund, it can use derivatives and structured products to enhance returns. These make PMS a lot more attractive.

Where PMS does not score

However, the PMS also has some key challenges which arise from the essential structure of the PMS scheme.

• One of the big downsides of a PMS is the higher costs. While the expense ratio in case of an equity mutual fund is around 1.75-2.25%, the expense ratio in case of PMS can range from 3.5-5.5% depending on the extent of customization. That takes away a good chunk of your returns, especially in a bad year. Also, there are participatory schemes wherein the PMS will be entitled to a higher commission in the event of out performance.

PMS is a product that is more suited to the HNI investor who has a larger corpus. Of course, you need to take a final call after weighing the pros and cons as above.