No, you do not pick your PMS by filtering for the top 10 best-performing PMS based on the last 1 year return on a data aggregator site and picking one of those.

In this article:

• Where to find a comprehensive list of Portfolio Management Services in India
• Level 1 criteria to shortlist PMS out of the several available
• A set of in-depth Level 2 criteria to apply to your shortlisted PMS
• Why rolling returns matter more than point-to-point returns
• Apply the Step-by-step framework to choose the right PMS
• There is no "Best PMS", but there is a "Best PMS for you"

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How to choose the Best Portfolio Management Service for your investments

If you’re a successful high-earning professional, a small-business owner, or an early startup or even an established business team member who has encashed their ESOPs, chances are you’re looking for a reliable investment manager like a PMS to invest and grow your money. But with well over 100 Portfolio Management Services (PMS) available in India, each promising attractive return, choosing the right one can be overwhelming. This guide provides a comprehensive framework of Level 1 and Level 2 criteria to help investors make informed decisions.

What is Portfolio Management?

Portfolio management involves making decisions about investment mix and policy, aligning investments to objectives, and balancing risk against performance. This includes asset allocation for individuals and institutions and balancing risk against their goals and investment objectives. At its core, portfolio management provides a strategic plan that guides investors in achieving their financial objectives.

Where to find a comprehensive list of PMS in India?

If you’re wondering where to begin building that initial list to apply Level 1 criteria, we recommend using the APMI website. APMI is the Association of Portfolio Managers of India, a trade body of portfolio managers registered with SEBI. The APMI site is updated monthly with the performance of all active Portfolio Management Services in India.

Why the APMI site and not the data aggregators you come across when searching “Top PMS in India”? Because not all PMS choose to share their data with the data aggregators, and the data submitted is not validated to ensure it is directly comparable. Also, the data aggregators are distributors who have marketing arrangements with PMSs, incentivising them to highlight some portfolio managers, not others.

Back to the evaluation framework. Level 1 consists of the basics. These are objective criteria a PMS should satisfy to be in your consideration set. Think of Level 1 criteria as necessary but not sufficient.

Level 1 criteria: Basic requirements for selecting a PMS

1. Should be a SEBI-registered Portfolio Management Service (PMS)

   • Portfolio Management Services are a class of investment vehicles defined and regulated by SEBI. There are clear rules that SEBI-registered PMS need to adhere to. From having Portfolio Managers with minimum academic qualifications and having cleared NISM Portfolio Manager certifications to be eligible to manage portfolios. In addition, there are clear requirements of quality of operations, compliance, trading, performance reporting and redressal mechanism of clients for a PMS to be eligible to offer its services. Like most things today, “buyer beware” applies. Several fly-by-night entities claim to offer PMS services but meet none of these criteria. At the minimum, a PMS you’re considering needs to be registered with SEBI. You can check on the SEBI website to validate they are, in fact, a legitimate PMS.

2. Five or more years of tenure managing actual client funds

   • Since when have they been running the PMS, and how long have they been in the financial services industry? Ideally, they should have at least five or more years of experience managing actual client assets. “Actual” means funds managed by the PMS and not included in the marketing literature from other sources, like model portfolios they publish.

3. Minimum Investment Requirement

   • The SEBI-specified minimum for PMS per client is ₹50 Lakhs (₹50,00,000). However, depending on their target clientele, some PMS might choose to have a higher minimum. Ensure the required investment aligns with your available capital.

4. Fee Structure

   • Management Fees: Understand the annual management fee, which is typically a percentage of the assets under management (AUM). These fees can range from 1% to 3%.
   • Performance Fees: Some PMSs charge a performance fee, which is a percentage of the profits above a predefined hurdle rate. Ensure the fee structure aligns with the value provided. Various PMSs offer a wide range of fee structures, so ensure the fee structure aligns with what you consider acceptable.

5. Performance Track Record (level 1)

   • Historical Returns: Review the PMS’s historical performance over various time frames (1-year, 3-year, 5-year). Compare these returns with relevant benchmarks like Nifty 50, BSE Sensex, or Nifty500. To reach level 2, the PMS needs to have outperformed its benchmark net of costs and fees over five-year timeframes. 
   • Several investors stop at the CAGR (annualised return) number or, worse, consider just the last 1-year when evaluating returns. Looking at returns between any two dates only gives you partial information. Which is why you need a Level 2 assessment for performance.

Level 2 criteria: Advanced evaluation for selecting a PMS

1. Deeper understanding of Performance Track Record

   • Rolling Returns > Point-to-point Returns: As of writing this, the ARK Innovation fund shows a five-year absolute return of +8.2%. This compares terribly with the S&P500’s +87% over the same period but at least shows a positive return. But that point-to-point statistic hides how terrible ARK has, in fact, been for investors. Investors who invested in ARK Innovation in early 2021 are down 70% as of May 2024.
   • A rolling return comparison shows how an investment has done over time with respect to its benchmark. Ideally, an investment should have delivered higher rolling returns (5y-3y-1y) than its benchmark for most of its history.
   • Consistency: Look for consistency in performance across different market cycles. A PMS performing well in bullish and not disastrously in bearish markets indicates robust management. Some metrics that convey these are Upside and Downside capture Ratios and Sharpe and Sortino Ratios.

2. Risk Management

   • Volatility Measures: Assess the portfolio’s volatility using standard deviation but look beyond. The Sortino ratio measures downside variability by measuring the variability of negative returns. Compared to the benchmark, it gives you a sense of whether the PMS tends to lose more or less money than the benchmark on its bad days.
   • Drawdown Control: Evaluate how the PMS manages drawdowns (peak-to-trough declines). Effective drawdown control can protect your investment during market downturns. Specifically look for periods when the market went through significant corrections and see how the PMS did during those phases. This emphasises the need to consider PMSs that have been through market cycles, including ups and downs.

3. Alignment with Investment Philosophy

   • Every PMS has its investment philosophy or beliefs about how markets behave and where investment returns come from. It expresses those beliefs through how it invests. Since there is tremendous diversity in the beliefs of various market participants, there is also a significant difference in how various PMSs invest. You need to be aligned with your PMS’s investment philosophy to stay invested for the long term. A lot of second-guessing happens because investors invest with a PMS without considering the extent of overlap between their own beliefs and those of the PMS.

4. Reputation and Credibility

   • Go beyond how often you see their ads online or how often they appear in the media, given that most financial media (TV, newspapers) is sponsored. Seek out independent points of view. Are they balanced about their views, or do they make extravagant claims based on short-term performance? Do they talk about their mistakes or only highlight their wins? Assessing the credibility of a PMS needs more than a brief google search. Sign up for their email newsletter, follow their social media presence and let your opinion form over time.

5. Flexibility, Client Service and Support

   • Tailored Strategies: Check if the PMS offers customized investment strategies based on your financial goals, risk appetite, and preferences. Do they allow you to allocate across strategies based on your risk preferences, or does each investment need to meet the minimum threshold?
   • A good PMS should provide regular updates and detailed reports on portfolio performance. Ensure they offer clear and timely communication. Get a clear sense of their customer service practices and their responsiveness. Speaking with current or past clients will give you an accurate picture.

6. Transparency

   • Reporting Standards: Ensure the PMS provides transparent and detailed reporting on portfolio composition, transactions, and performance. Look for sample reports and if available, walk through the client dashboard.
   • Fee Transparency: The fee structure should be transparent with no hidden charges. Full disclosure of fees helps in evaluating the net returns.

Summary of the Level 1 and 2 criteria for shortlisting and identifying your PMS

#	Criteria	Details
Level 1 (Basic Criteria)
1	SEBI-registered	Must be a SEBI-registered Portfolio Management Service (PMS). Check the APMI website.
2	Tenure	At least five years of experience managing actual client assets
3	Minimum Investment	Minimum investment requirement as per SEBI: ₹50 Lakhs but some PMS have a higher threshold
4	Fee Structure	Fee structures vary significantly across PMS. Does the fee-structure align with your expectations? Typical Management Fees: 1-3% of AUM Some have Performance Fees: Percentage of profits above a predefined hurdle rate
5	Performance Track Record (Level 1)	Has it delivered excess returns net of costs and fees above the benchmark? Historical Returns: Review 1-year, 3-year, and 5-year performance against benchmarks like Nifty 50, BSE Sensex, or Nifty500
Level 2 (Advanced Criteria)
6	Performance Track Record (Level 2)	Rolling returns are better than point-to-point returns to evaluate performance. Rolling Returns: Consistency in performance over time. What % of the time has it exceeded the benchmark? Downside performance also matters. Metrics: Upside/Downside Capture Ratios, Sharpe Ratio, Sortino Ratio
7	Risk Management	Volatility Measures: Standard deviation, Sortino ratio Drawdown Control: Evaluate performance during market downturns. Falling much more than the benchmark could be a problem with the risk-level of the portfolio.
8	Alignment with Investment Philosophy	Ensure alignment with your own beliefs and long-term investment philosophy. Only if you agree with it will you be able to stay invested in the face of short-term gyrations.
9	Reputation and Credibility	Seek independent viewpoints, balanced views, and transparency in communication
10	Flexibility, Client Service, Support	Tailored strategies, regular updates, detailed reports, and responsive client service
11	Transparency	Reporting Standards: Transparent and detailed reporting on portfolio composition, transactions, and performance Fee Transparency: Clear and full disclosure of fees

 

Step-by-Step Framework to Choose the Right PMS

1. Define Your Investment Goals and Risk Tolerance

   • Clearly articulate your financial objectives (e.g., wealth creation, retirement planning, income generation) and your tolerance for risk. This will help in aligning with a PMS that matches your needs.

2. Shortlist Potential PMS Providers

   • Based on the Level 1 criteria, create a shortlist of PMS providers. Use online resources, financial news, and recommendations to aid your research. Your shortlist should be no more than 5-7 PMS.

3. Apply Level 2 criteria to the shortlist

   • Investigate the shortlisted PMS providers based on level 2 criteria. Look for testimonials, reviews, and consult with current clients if possible.

4. Conduct Interviews or Meetings

   • Arrange meetings with the portfolio managers or representatives of the shortlisted PMS providers. Discuss their investment philosophy, strategies, and how they plan to achieve your financial goals.

5. Review Sample Reports

   • Request sample reports from the PMS providers. Assess the clarity, detail, and frequency of their reporting. Transparency in reporting is crucial for monitoring your investments.

6. Make an Informed Decision

   • Based on your analysis and consultations, select the PMS that best aligns with your investment goals, risk tolerance, and preferences. Ensure you understand the terms and conditions before committing.

There is no “Best PMS”, but there is a “Best PMS for you”

If we told you here’s the “best diet” or the “best workout” that will work miraculously for every individual’s health and fitness goals, you would most likely dismiss that claim as unrealistic. That’s because we intuitively know that each person’s starting point for their body and physiology differs from the next. What works superbly for person A might cause all kinds of discomfort for person B. So A might see significant improvement in their health markers, while B might have to abandon the diet a week into the program, thereby seeing no benefits. Identifying the right PMS is a lot like that.

The best PMS for you is the one that aligns with your beliefs about the market, your risk tolerance, and, for lack of a better term, the extent to which you resonate with the team that runs the PMS. If you consider the market views and investment framework of your PMS to be valid, you are likelier to stick through the inevitable periods where your portfolio goes nowhere compared to the benchmark. And make no mistake, irrespective of which PMS you pick, there will be those periods.

Ask yourself what you will do if your portfolio is down 10% six months after you made your investment. Will you panic and withdraw, or will you give it a minimum of 36 months before revisiting your decision? Only go with the PMS where your answer is the latter. Hence, it is the best PMS for you.

Choosing the right PMS requires comprehensively evaluating both objective and qualitative factors. You can make an informed decision by defining your financial goals, assessing the performance and fee structures, investigating the reputation and expertise of portfolio managers, and ensuring transparency and client service. Trust and reliability are paramount; ensure the PMS provider you choose has a strong track record and complies with regulatory standards. These steps will help you select a PMS that aligns with your investment strategy and enhances your financial journey.

Other Recommended Reading

What are Portfolio Management Services? A guide for investors in India	The basics of what Portfolio Management Services are, minimum investment required in PMS, how PMS operate, benefits and drawbacks to consider.
Looking for the best PMS for your investments? Take a look at Capitalmind PMS	One concise page with information about Capitalmind PMS, its strategies and daily-updated performance since inception.
How to invest a lumpsum amount?	Whether from an ESOP buyback, a startup exit, property sale or inheritance, investing a lumpsum can be a rewarding yet challenging task. This guide helps think through the process of investing a lumpsum.
Investment options for HUFs: Comparing Mutual Funds vs PMS	HUFs are an interesting structure that offers some benefits for long-term wealth planning and transfer. Considerations for HUFs to invest in Mutual Funds or Portfolio Management Services.
The advantages for Accredited Investors in India	By meeting certain criteria, experienced investors can get access to beneficial terms for investing in various investment vehicles including PMS and AIFs.

Contact our team to learn more about Capitalmind PMS and get a customised strategy consultation.