What's what of Portfolio Management Services

For a High Net worth Individual (HNI), who is seeking a professionally customised portfolio of stocks or even bonds, then Portfolio Management Services (PMS) can be one of the main investment avenues to choose from. In this article, you will find everything that you need to know about PMS.

What is PMS?

Let us start by understanding what exactly PMS is. PMS is a portfolio management service that is targeted towards HNI and Ultra HNI (UHNI) investors, having high risk-taking ability. The minimum investment required here is Rs 50 lakh, which was recently upgraded from the previous requirement of Rs 25 lakh.

HNI and UHNI investors usually look to invest in direct equities to get higher returns for a higher risk. They usually do not have much time to manage their portfolio. Therefore, they need someone to look after their investment portfolio. Here, PMS steps in, helping these busy individuals to manage their portfolio which also involves advising.

Types of PMS

There are three major types of PMS. In India, majority of the portfolio management companies provide model-based services, where a standard model is offered with a bit of customisation available as per the preference of the investors.

1. Discretionary

In this type of PMS, there are exclusive rights available with the portfolio manager to make the decision on behalf of the investors, without consulting the client. Currently, most of the portfolio management companies offer discretionary PMS.

2. Non-discretionary

Here, the portfolio manager advices on suitable investments depending on the investor’s risk appetite. Whereas, the decision is solely taken by the investor. At the investor’s own discretion, he can select stocks or other investment avenues but the execution is done by the portfolio manager.

3. Advisory

Here, the portfolio manager suggests suitable investments and the investor can select the investment and even execute it at his own discretion. Usually these do not come under the purview of PMS and are exclusively known as Portfolio Advisory Services (PAS). These services are the one’s that have virtually zero conflict of interest.

PMS agreement

When you avail the PMS service, usually you will be asked to sign an agreement. This pact contains all the details of the services that are mutually decided along with strategies and model portfolio to be implemented and tracked by the portfolio manager. When you sign a discretionary or a non-discretionary PMS, then you give power of attorney to the portfolio management company to operate your trading and bank account.

If you already have one, even then, you need to open all of these again, so that a portfolio manager can clear power of attorney. Thus, whenever the bank account that is linked to the PMS is credited for any dividend or interest or any other amount received, then the portfolio manager will redirect that in your portfolio to reflect the true returns of the portfolio.

PMS Fee Structure

The cost of PMS is usually on the higher end, as compared to any other similar investment options. Following are some of the costs that an investor needs to bear under PMS:

Entry load

Whenever you avail the PMS service, you need to pay the entry load. This is anywhere between one per cent and three per cent. Entry load gets deducted from the amount of your investment. Therefore, if you wish to invest in PMS, always invest two per cent to three per cent higher than the intended investment amount. Say if you wish to invest Rs 50 lakh then, make sure that you actually set aside Rs 51 lakh to Rs 51.50 lakh.

Management fees

This fee is charged for managing your portfolio. Again, it might be anywhere between one per cent and three per cent, depending upon the pricing policy of the portfolio management company.

Profit sharing

If you have mutually agreed for profit sharing in the agreement signed between you and the PMS provider then, this is an additional cost that you need to incur in addition to the fixed cost under PMS.

If PMS is successful in getting the returns over hurdle rate, then you need to share profits that you have earned above the hurdle rate with PMS. Hurdle rate is nothing but the promised rate of return.

Other charges

Apart from the above fees and charges, PMS also charges the investors for custodian fee, demat account opening charges, audit charges and brokerage on a particular transaction.