D id you know that India has more than 1,100 individuals across 122 cities with a wealth of more than Rs 1,000 crore each? Or that more than 600 of them—including 149 new faces—saw their wealth stay the same or increase in 2022? These are just two of the many interesting insights thrown up by the IIFL Wealth Hurun India Rich List 2022, which also showed that overall wealth is on the rise, and there is no dearth of wealthy individuals in the country.
With the overall increase in wealth and the number of wealthy people, a corresponding rise in the demand for wealth management services could not be far behind; in fact, the past few years have shown that an increasing number of wealthy people—high net-worth individuals or HNIs—are opting for professional money management services. But these HNIs are not approaching just any money manager. They are seeking the services of specialists—those whose skill sets include dealing with a large corpus of money.
These professionals offer portfolio management services (PMS)—wherein an expert/experts manage and grow the wealth using various financial instruments. PMS is fast gaining traction as the go-to destination for wealthy individuals looking for higher returns, as these fund managers generate alpha—returns over the benchmark—while providing bespoke investment schemes. The numbers corroborate the trend: the total assets under management (AUM) of these fund managers have jumped from Rs 10.45 lakh crore in FY16 to nearly Rs 28 lakh crore in FY23, per data from capital markets regulator Securities and Exchange Board of India (Sebi). More importantly, the number of investors availing the services of PMS firms—though a fraction of mutual funds (MF) investors—has also increased from 52,288 in FY16 to nearly 144,000 in FY23. This assumes significance as while the rise in AUM can be attributed to rising stock prices and valuations, the jump in client numbers clearly shows that many HNIs are looking for PMS products to enhance their wealth.
The modus operandi at a PMS firm is fairly simple. A fund manager manages a portfolio of stocks—typically with 20 to 30 stocks—as part of a scheme or portfolio designed around themes like value investing, growth stocks or entrepreneurship. While PMS may appear similar to MFs, a key difference between them is that one can invest as low as Rs 500 in an MF, while the minimum investment for a PMS is Rs 50 lakh, as mandated by the markets regulator. “PMS is not exactly a mass product. It is for those who have generated wealth or are in the process of generating wealth. The approach is more curated and tailor-made,” says Sunil Rohokale, MD & CEO of ASK Investment Managers.
NOT A MASS PRODUCT
While investing in a PMS scheme now has a stiff entry barrier of at least Rs 50 lakh, this was not always the case. When Sebi first formulated the PMS guidelines in 1994, the minimum ticket size was Rs 5 lakh, which was subsequently revised to Rs 25 lakh, and finally to Rs 50 lakh in 2020. “PMS is distinctly differentiated from other investment instruments in terms of catering to the investment needs of discerning, informed and higher-risk appetite investors,” says Jiten Doshi, Founder and Chief Investment Officer of Enam AMC. “It is targeted at investors seeking the right balance of performance, personalisation and their risk tolerance.”
While the minimum ticket size is largely restrictive for a majority of the population, the PMS industry has outpaced the MF segment, which saw its total AUM rise from Rs 13.53 lakh crore in March 2016 to Rs 40.04 lakh crore in March 2023, per data from the Association of Mutual Funds in India. And while comparisons between MFs and PMS is common, another vital difference between them is that MF investors can choose between active and passive schemes, but a typical PMS investor is looking for active fund management. “There is no reason why investors looking at index returns or just investing in the Top 30 or 50 stocks should opt for it [PMS], as they can get much cheaper products in the form of ETFs (exchange traded funds) or passive index funds,” says Manish Sonthalia, Chief Investment Officer–Equities at Motilal Oswal Asset Management. “PMS is typically meant for mid- and small-cap stocks… [It] is an HNI product and investors are looking for returns. It is a stock picker’s product… and it’s all about active fund management.”
While passive schemes offered by MFs that replicate the returns of benchmark indices are available at much cheaper rates, with some charging just 20-30 basis points, “PMS firms can charge maximum fees of 2.5 per cent,” says Sonthalia. But that has not stopped investors from across the country from availing these services.
BHARAT RISING
The richest Indians are spread across more than 100 cities in the country, shows the IIFL Wealth-Hurun India list. In other words, there is enough money sloshing around in the far-flung towns and cities of India, and any industry—such as PMS—that is dependent on wealthy people, has to tap into these areas. And while PMS players are going hammer and tongs to woo wealthy Indians, the PMS industry has benefitted substantially from the government’s recent policy decisions.
“The trinity of financialisation, formalisation and digitisation has increased the velocity of wealth across India, including in non-metro locations,” says Doshi of Enam AMC. This has led to increased awareness and acceptance of PMS products, and access to them. “Further, the rapid growth of independent financial advisors, wealth platforms and online aggregators of PMS has further complemented the growth phenomena.”
For instance, around 40 per cent of the inflows for Marcellus Investment Managers comes from outside the five biggest metropolitan cities—Mumbai, Delhi, Chennai, Kolkata and Bengaluru. “The trend is upwards in the ‘non-Big 5’ cities. We call them the ‘Next 20’ cities. These cities will increasingly become more important for us, and the industry as well,” says the company’s Founder & CIO Saurabh Mukherjea.
Even the Association of Portfolio Managers in India (APMI) acknowledges the trend. “Indian families are increasingly moving towards financial savings and away from saving through gold and real estate. To the extent that in Tier II and III towns—[that] were prone to saving through physical assets—the financialisation of savings and growth in PMS assets is sharper,” says Rashim Bagga, Principal Officer at APMI.
REGULATORY PUSH
It is not often that an industry is happy when a regulator tightens norms, but Sebi’s moves have played a major role in making PMS an attractive proposition for wealthy Indians. And PMS firms have wholeheartedly backed the regulator for making the industry more investor friendly by overhauling the regulations governing them. First formulated in 1994, PMS regulations had hardly seen any major revamp for the first 25 years or so, leading to a lack of transparency in almost all aspects of fund management, from performance evaluation to charges & fees, and portfolio disclosures, among other aspects.
But the regulator brought a paradigm shift when it increased the minimum investment ticket size from the then existing Rs 25 lakh to Rs 50 lakh in 2020. This clearly signalled that PMS could only be sold to HNIs and not retail investors, who have the option of investing in MFs.
Further, the regulator also enhanced disclosure norms, standardised performance measurement, and plugged the loopholes that were encouraging mis-selling. For example, upfront commissions—that typically incentivised distributors to push their clients for regular but unnecessary churning of schemes—were stopped, akin to what had been mandated for MFs a few years earlier. “The most important regulatory change that has happened is regarding transparency, in terms of how frequently one discloses NAV (net asset value), etc. Second was benchmarking. Third was disclosure of charges. Fourth, [the regulator mandated that] if you (PMS) are using a partner [for distribution], you cannot be paying anything upfront, as that will encourage mis-selling,” says Rohokale of ASK, who was part of the committee that helped Sebi draft the new rules.
“The intent of the regulator was to encourage entrepreneurship but with a good governance structure, so that norms related to minimum net worth, number of people, etc., were put in place,” he adds. “The intent was not to kill the industry, but to create an industry that is clean and has only serious players.”
Incidentally, the tightly-regulated MF industry had moved from upfront commissions to trail ones in 2018, and the same was mandated for PMS in 2020 as well. Simply put, upfront commission refers to a one-time payment to the distributor at the time of buying a product. Trail commission, on the other hand, means a recurring fee to be paid to the distributor till the investments are made. Consequently, trail commission incentivises distributors to encourage investors to stay invested.
“That one set of regulations has cleaned up the PMS industry and it has gained by leaps and bounds,” says Mukherjea, who was also a part of the Sebi committee that drafted the new rules. “Earlier, the law was silent on many counts, so there was opacity on what was allowed and what was not. Hence, it was a big step. If you bring in transparency, harmonisation and clarity, then an industry can improve its performance even without any mass publicity and, in turn, drive financialisation.”
This assumes significance as many fundamental aspects were standardised with the new rules. For instance, earlier exit loads—fees paid for taking out the invested money before the stipulated period of time—were charged by PMS players on an ad-hoc basis, but the new rules capped it at 1 per cent for money withdrawn after three years; 2 per cent after two years, and 3 per cent for money withdrawn within one year.
THE OUTLOOK
Mukherjea believes that the PMS industry stands to gain as an increasing share of household savings flow into financial assets. “As per RBI data on household savings, 95 per cent of the savings are in physical assets and only 5 per cent is in financial assets. And since physical assets are not really giving any post-inflation returns, an increasing number of people are looking at products like MFs, PMS, insurance, etc., for returns,” he says.
In a similar context, Rohokale says increased financialisation of savings is happening on the ground. “As the Indian economy grows from $3 to $5 trillion, where will the money go? With the rise in incomes, the money will go into financial savings within which PMS is a well-established long-only product,” he says.
PMS players neither have an aggressive marketing campaign, nor a catchy jingle, but the coming years will bring them many opportunities to grow. All they have to do is play by the rules and perform their fiduciary responsibilities in the best manner possible.
@ashishrukhaiyar
