First permitted in 1993, portfolio management services (PMS) have seen their popularity grow. This is no doubt thanks to the stellar returns their schemes have generated, especially in recent years.
These schemes—oriented towards high net-worth individuals (HNIs) with a minimum investment size of Rs 50 lakh—invest directly in securities. Investors’ assets are not pooled into one large fund, as is the case with mutual funds, but are maintained separately.
A recent report bears testimony to this investment avenue’s good performance. According to the portal PMS Bazaar, 79% of PMS schemes outperformed their benchmarks over a 10-year period, while only 49% of mutual funds bettered the returns generated by their benchmarks. As a result, perhaps, the number of clients has increased from around 106,000 to about 147,000 in just the last five years since 2019, according to PMS Bazaar. And this despite the fact that the minimum investment size has doubled from Rs 25 lakh to Rs 50 lakh.
But despite such good returns, investors must exercise caution while choosing PMS schemes. The choice must account for the needs, risk tolerance, and objectives of the investor. And it must depend on a careful consideration of the credentials and track records of the PMS providers, and a comparison of the fees and service structures.
This is definitely not a scheme for the faint of heart. It is ideally suited to those who invest in a large ticket size, understand equities, and don’t panic at the first sign of market volatility.
These schemes offer better flexibility since they are not tied to pre-defined conditions and objectives. The fund manager has complete control in investing and divesting the holdings. If required, the fund manager can also liquidate the entire portfolio by allocating funds to liquid instruments or holding 100% cash until a suitable investment opportunity appears. Besides, such schemes can also invest in derivatives and employ hedging strategies.
Mukesh Kochar, National Head of Wealth at AUM Capital, says, “After the Covid-19 pandemic, the risk appetite of several investors revived. As a result, the post-Covid landscape has allowed the concept of PMS to gain a lot of momentum, turning what was a treacherous time into a boon for such schemes.”
PMS schemes have a fee structure comprising fixed and performance-based charges. Entry load, incurred during initial investment, fluctuates between 1% and 3%, while management charge—a recurring quarterly fee—ranges from 1% to 3%. Additionally, profit sharing fees are calculated based on a percentage of the portfolio’s generated profits. Furthermore, clients looking to exit the scheme before a designated threshold, typically one to three years, may incur exit load charges ranging from 1% to 3%.
“Understanding the fee structure is paramount for investors. Whether it’s fixed, variable, or hybrid, and in the case of management fees, if the period for which it is charged is quarterly, half-yearly or annual. Investors should also consider the tax impact. They should always ask about post-tax returns. A pre-tax return of 30% is very rosy, but that means your post-tax return ranges between 18% and 19%,” says Hemant Shah, Fund Manager of Seven Islands PMS.
“Indian markets have reported a strong performance, with the headline Nifty 50 index gaining over 27% in the last year. The broader Nifty 500 index surpassed this performance with returns of more than 38%. For HNIs/UHNIs, PMS can be a better product due to its bespoke and exclusive nature,” says Ishan Daga, Fund Manager at boutique wealth management firm Dhanvesttor.
Before investing in a PMS scheme, an investor must conduct a detailed and rigorous evaluation of the strategy, its risk-return profile, and track record. There are some other aspects that need attention as well.
An investor must understand the required rate of return they want and how much risk they can stomach, because there are options aplenty. “For example, an investor seeking higher returns may prefer a PMS [scheme] investing in small-caps or aggressive growth stocks vis-à-vis a PMS investing largely in large-caps or value stocks, which a conservative investor might prefer,” explains Daga.
A PMS may follow several strategies to enhance returns—like large-, mid-, small-, or flexi-cap, or thematic strategies. “For investors considering newer PMS options, transparency regarding the investment approach and associated fee structure, along with the underlying thought process and investment strategies, are paramount,” says Shah.
One important factor that should be considered is the tenure and involvement of the fund manager. While assessing a fund manager, it’s important to consider their skill in selecting stocks wisely, adeptness in timing the market, and prudence in allocating weights to individual stocks and sectors.
“Past performance only indicates the fund manager’s investment approach, including where, why, and for how long they invest, as well as their investment philosophy. This is particularly crucial for established companies and fund managers with a track record of at least a few years,” Shah adds.
Additionally, a reputable manager should prioritise transparency in conveying information about changes in strategies and fee charges. But a manager may only be as good as their research team, which is why the quality of the research team is very important. Generally, investors decide based on historical performance. Though it is a guide, it cannot be looked at in isolation. The consistency of the benchmark’s outperformance is very important. The risk ratios must be evaluated very deeply as a return in isolation does not have any meaning.
Shah says investors must know how many research analysts are part of the team, the length of time they spend on a portfolio, and whether the investor’s portfolio is getting enough attention. “The portfolio should be reviewed often with the relationship managers or fund managers to get an overview of whether the conviction level is the same as promised or conveyed when making the investment,” he adds.
Most importantly, investors must not fall into the trap of looking only at a scheme’s performance in a bull market. They must consider how it outperforms at such times and also how it reduces the downside in a bear market. One should also avoid over-diversified or very under-diversified funds.
“Sometimes, people invest collectively in five or six PMS schemes for diversification, but due to a lack of proper evaluation, they end up with a similar portfolio. So, it is important to select the right mix of PMS schemes that consists of a combination of different styles. The ideal number of stock holdings is between 10 and 25. As a matter of fact, a very large AUM fund should also be avoided,” says Kochar.
Then there is the question of the objectives of the PMS. Is it focussed on long-term growth? Does it employ buy-and-hold strategies? Or, does it look to minimise turnover? As a general rule, it is essential to maintain low churn.
“While a churn ratio of up to 15-20% of the corpus may be permissible based on market conditions and opportunities, the majority of assets, i.e., 80-85%, should be held for longer periods, ideally two to three years,” says Shah.
A lower churn and reasonable management fees can be notable positive contributors to an investor’s post-tax returns of a PMS.
Ultimately, PMS houses serve as platforms for responsible wealth management. But investors must tick all the checkboxes before zeroing in on a scheme.
@imNavneetDubey