What Are Portfolio Management Services (PMS)? A Guide for Investors in India

Portfolio Management Services (PMS) are specialised SEBI-regulated investment services designed to cater to the needs of high-net-worth individuals (HNWIs) who seek personalised and professional management of their investments. For investors in India, understanding the nuances of PMS can help them make informed decisions and potentially achieve higher returns on their investments. This article delves into the concept of PMS, its benefits, its types, and how it works.

Understanding Portfolio Management Services (PMS)

Portfolio Management Services (PMS) refer to a bespoke investment service where a professional portfolio manager or a team manages a portfolio of securities on behalf of clients. Unlike mutual funds, which pool money from many investors to invest in a diversified portfolio, PMS offers tailored investment solutions based on the individual investor’s goals, risk tolerance, and preferences.

Types of PMS

Discretionary PMS: In this type, the portfolio manager has full discretion to make investment decisions on behalf of the client. The manager buys and sells securities, rebalances the portfolio, and makes other investment decisions without consulting the client for each transaction.
Non-Discretionary PMS: In non-discretionary PMS, the portfolio manager provides investment advice and recommendations, but the client decides to buy or sell securities. The manager executes transactions only after obtaining the client’s consent.
Advisory PMS: Here, the portfolio manager acts as an advisor, providing investment advice and recommendations while the client executes the transactions. This type offers the least direct management but still benefits from professional guidance.

What is the minimum investment amount for PMS?

The minimum investment amount for Portfolio Management Services (PMS) in India is ₹50 lakhs. This threshold has been established by the Securities and Exchange Board of India (SEBI) to ensure that PMS is accessible primarily to high-net-worth individuals (HNIs) and sophisticated investors who can afford to invest a substantial amount in a diversified and professionally managed portfolio. PMS offers personalized investment strategies and professional management, making it an attractive option for those seeking tailored investment solutions and a higher level of engagement in their investment process.

Benefits of PMS

Personalised Investment Strategy: One of PMS’s main advantages is the customised investment strategy. For instance, a portfolio management service might offer multiple investment strategies that differ in investment philosophy and risk-reward profile. The client can mix and match their allocation to these investment strategies. At Capitalmind PMS, our advisors do a customised strategy consultation for each client to understand their financial goals, risk-appetite and investment horizon to recommend the right mix of aggressive versus conservative investment exposure.
Professional Management: PMS clients benefit from the expertise of professional portfolio managers who have extensive experience and deep knowledge of market trends, sectors, and individual stocks. This expertise can help them make informed investment decisions and optimise returns.
Direct Ownership of Securities: In PMS, investors directly own the securities in their portfolio. This direct ownership provides transparency and allows investors to clearly understand the individual assets in their portfolio.
Flexibility and Control: PMS offers greater flexibility and control over investment choices. Portfolio managers can quickly adapt to market changes, rebalance the portfolio, and take advantage of investment opportunities.
Potential for Higher Returns: With a personalised approach and expert management, PMS can potentially offer higher returns compared to more standardised investment options like mutual funds. Note here what while that is the mandate that most PMS providers set out to achieve, only a subset do indeed outperform the market over longer timeframes.

Drawbacks of PMS

High Minimum Investment: As per SEBI regulations, PMS requires a high minimum investment, currently ₹50 lakh, which can be a barrier for smaller investors.
Taxation disadvantage compared to Mutual Funds: Gains realised by PMS, whether Short-term or Long-term capital gains, are taxable for PMS investors. In contrast, a Mutual Fund investor is only liable to pay tax on redeeming their Mutual Fund investments and not when the fund manager realises gains on individual positions. This is a significant difference since the MF investor can defer paying tax till the end of their investment period.
Potentially Higher Fees: Compared to mutual funds, PMS charges higher management fees, which can reduce overall returns, especially during periods of low market performance. However, some PMSs offer comparable or lower management fees than Mutual Funds.
Performance Volatility: PMS performance can be more volatile due to concentrated portfolios and active management strategies, which may not suit all investors’ risk tolerance. PMS investors need to choose PMS where they are aligned with the investment philosophy of the portfolio manager.
Manager Dependency: The success of a PMS largely depends on the skill and decision-making of the portfolio manager, leading to higher reliance on the manager’s expertise.
Transparency Issues: While many PMS providers offer detailed reporting, some investors may find the transparency and frequency of updates less than those available with other investment options, like mutual funds.
Complexity: PMS products can be complex and difficult for the average investor to understand, requiring more time and effort to monitor and manage.

How the typical PMS Works

Client Onboarding: The process begins with client onboarding, where the portfolio manager assesses the investor’s financial goals, risk tolerance, investment horizon, and other preferences. This helps in creating a tailored investment strategy.
Portfolio Construction: Based on the client’s profile, the portfolio manager constructs a diversified portfolio of securities. This can include equities, fixed-income instruments, derivatives, and other assets. The allocation depends on the investment strategy agreed upon with the client.
Ongoing Management: The portfolio manager continuously monitors and manages the portfolio, making adjustments to optimise performance. This involves buying and selling securities, rebalancing the portfolio, and taking advantage of market opportunities.
Regular Reporting: PMS clients receive regular reports detailing their portfolio’s performance, including the current value of investments, transactions made, and any changes in strategy. These reports provide transparency and help clients stay informed about their investments.
Performance Review: Periodically, the portfolio manager reviews the portfolio’s performance with the client, discussing any changes in goals or market conditions that might necessitate adjustments to the investment strategy.

Considerations for Investors

Minimum Investment Requirement: PMS typically requires a significant minimum investment, often starting at INR 50 lakhs. This makes it suitable primarily for high-net-worth individuals.
Fees and Charges: PMS involves higher fees compared to mutual funds. These can include management fees (usually a percentage of the assets under management) and performance fees (a percentage of the profits above a specified hurdle rate).
Risk Factor: Direct investment in equities and other securities can lead to higher risk exposure. Investors should know their risk tolerance and be prepared for potential market volatility.
Liquidity: PMS portfolios may include stocks that are not as liquid, meaning it might take longer to sell these assets without impacting the price. Investors should consider their liquidity needs before opting for PMS.
All PMS are different: If you were building a house, you would carefully evaluate various architects and contractors and consider the most well-suited to your needs before handing them the responsibility. Similarly, Portfolio Management Services differ in their track records in terms of duration and quality of investment returns, investment philosophy, client-friendliness of fee structure, reporting quality, and transparency. As an investor, you need to consider those aspects to arrive at your final decision.

Is PMS Right for You?

Portfolio Management Services (PMS) offer a tailored and professional approach to managing investments, making them an attractive option for high-net-worth individuals in India who seek personalised investment strategies, greater control over their portfolio, and a willingness to take on higher risk for potentially higher returns. By providing personalised strategies, direct ownership of securities, and the potential for higher returns, PMS can help investors achieve their financial goals. It is also suitable for investors who prefer a more hands-off approach and to have professional management, and can meet the higher minimum investment requirement. However, investors with lower capital and lower risk tolerance or those seeking more accessible investment options might find mutual funds or other investment vehicles more appropriate.

If you do decide that PMS is the right vehicle for you, then make sure to do the due diligence around their track record, not just absolute % CAGR, but their overall longevity, the extent to which they have delivered sustainable returns by looking at rolling returns versus suitable benchmarks, the extent to which their investment philosophy resonates with your view of the markets, the fee-structure and the quality of their reporting.

Consulting with a trusted financial advisor can provide further clarity and help make an informed decision.

If you feel a PMS is right for you, here’s a comprehensive framework to evaluate and pick the best PMS for your needs. And here's information about Capitalmind PMS investment strategies and their performance since inception.