Understanding Portfolio Management Services (PMS)

Authored by: Bharti Agarwal

Investors are usually vigilant for a type of investment that yields a high return in exchange for a low risk of losing the principal amount. Truth be told, a combination of high return and low risk is fictional. Risk and returns sit on either side of the equation and are directly related. Hence, the higher the returns, the higher is the risk and vice versa. The options of this process of risk-taking and return delivery are manifold. You can choose from these options depending upon your risk and return appetite. For starters, there are two types of investment products – Financial and Non-financial assets. Financial assets are also bifurcated into market-linked products like equity shares, mutual funds, etc., and fixed income products like Bank fixed deposits, Public Provident Fund, etc. Portfolio management Services offers Professional management of market-linked investment with an aim to deliver higher risk-adjusted services. It provides customized services to investors with high net worth and high-risk appetites & provides greater flexibility to investors and yields high return. It is a process of choosing an appropriate mix of investment and the percentage allocation of those investments are the same as Mutual Funds but it also provides customized services as per the risk appetite, needs, requirements, and financial objectives. In simple words, PMS is a Financial Product in which a portfolio manager takes care of investors’ portfolios in return for a fee on their return as a commission. Hence, the top line of an investor is the bottom line of the manager. These managers hold experience and expertise in the investment domain and that’s how it generates higher returns with a trust value. For that matter, you are given a tracker and reports of your investment for you to track the developments in your investment and returns along with expert recommendations.  

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The minimum ticket size of ₹50 Lakhs is the threshold to enter into mainstream PMS as per SEBI guidelines although you can start with a smaller ticket size as well through various services. In India, major players in the PMS business are – Motilal Oswal PMS, Ask PMS, Kotak PMS, ICICI Prudential PMS, Birla Sunlife PMS, etc. It is well established that Indians save rather than invest. We cling to physical assets like land, gold, house, etc. because of our risk-averse nature. This trend has been shifting substantially in the last two decades as Financial Literacy is growing.  In 1993, When the PMS regulations were first announced, the minimum amount of investment in PMS was 5lakhs, later this was hiked to 25lakhs and in November 2019, SEBI further hiked the minimum investment amount in PMS to 50 lakhs. Also, there is a need to know that SEBI does not approve any of the services offered by the Portfolio Manager. An investor has to invest in the services based on the terms and conditions laid out in the disclosure document and the agreement between the portfolio manager and the investor. On the basis of handling, Portfolio Management is of two types- discretionary as well as non-discretionary portfolio management. In discretionary PMS, the client’s funds are managed by the portfolio manager who is responsible for stock selection and executing investment decisions. Non-discretionary PMS is a consultative investment approach wherein the portfolio manager suggests investment ideas. The choice and timing for investment rest with the investor while the execution of the investment decision is done by the portfolio manager. In advisory PMS the portfolio manager offers non-binding investment advice. Most PMS Service providers provide a host of online add-ons like easy access to portfolios, 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.  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.  

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