PMS Investment|How PMS is different from Mutual Funds: A Complete Guide

When it comes to investing in equities, it can be done in various ways. You may either buy shares directly through your Demat account or do the investments indirectly through Mutual funds, NPS, ULIPs, or even the Portfolio Management Services (PMS). When you accept that you do not have expertise in selecting direct shares, the indirect route through professional management always helps. 

A professional fund management team makes investment decisions in the indirect options, who, in exchange for a fee, allocates and manages resources effectively to maximize your return.

While Mutual Funds, New Pension Scheme, Unit Linked Investment Plans are common products, and most of the investors are aware of the same, the Portfolio Management Services or PMS investment is not among the popular ones. The reason being the Minimum Quantum of Investment. (Also Read: ULIPs vs Mutual Funds- where to invest?)

But with the PMS managers going Superactive on Social Media Platforms, and sharing their success stories as well as updates on their portfolio management in these Good Times, they are surely gaining the attention of many.

So, is Portfolio Management Services a better option to invest in if you have a decent surplus with you? Do they really offer something unique to the Investors? Are they available in Direct options (without inbuilt sales commission)? How is the Cost structure vis a vis other avenues? How are they different from Mutual funds investment, and Who should invest, etc. are some of the questions we are going to answer in this article. 

What is PMS investment?

Portfolio Management Services, also known as PMS, is professional investment management done by asset management firms, wealth management companies, and brokerage companies on behalf of clients. 

Not only stocks, but it may also consist of other asset classes like- fixed income, debt, structured products, etc.

Depending on the structure of the PMS, the investment portfolio of every client can be unique and tailored to his/her risk appetite and investment objectives. 

When you invest in PMS, you own all the securities in your name, unlike mutual funds where you are allotted the units of the entire fund. This means that the shares be bought and sold through your Demat account. (Read: All About Mutual Fund Basics)

The firms offering PMS have to mandatorily get themselves registered with SEBI as Portfolio Management Service Providers. These firms can also take the help of only AMFI Registered distributors or those who have cleared the NISM V-A Exam for the distribution of the product. (Also Read: Titles may mislead, check out these financial advisor certifications)

Also, as per SEBI norms, now PMS houses would also have to give the option of direct onboarding to the client, not involving any distributor in-between. 

The minimum ticket size to invest in PMS is Rs. 50 Lakhs as increased by SEBI in 2020. 

What are Different Types of PMS Investment?

• Discretionary PMS: In this type of PMS, the portfolio manager is free to take and execute any investment decision on the behalf of the client, without taking his/her consent every single time. The control of the portfolio lies in his hands and the client does not interfere in the investment process. 

• Non-Discretionary PMS: In this arrangement, as the name suggests, the portfolio manager suggests the investment ideas but these are executed only after taking consent from the client. In other words, in Non discretionary PMS, Portfolio Manager does not have complete discretion on Stock selection.

• Advisory PMS: Here, the portfolio manager is just in the advisory role, just suggesting the investment ideas. It is upto the investor to execute the transactions as per his choice.

In India, the majority of the PMS investments are offered as discretionary portfolio management services. Portfolio management companies typically offer model-based services. There is a standard model followed, but a few changes are made depending on client preferences.

SEBI has recently mandated that under the Discretionary PMS, portfolio managers are not allowed to invest in unlisted securities. They can invest in securities listed on recognized stock exchanges, money market instruments, units of direct mutual funds only. 

Non-Discretionary PMS can invest in unlisted securities which include- Real Estate Investment Trusts (REITs), Alternative Investment Funds (AIFs), Infrastructure Investment Trusts (InVITs), other securities which are not listed on any recognized stock exchange but not more than 25% of the portfolio. (Also Read: All you wanted to know about REITs)

Check a detailed article on Alternative Investment Funds

How to invest in PMS?

To invest in Portfolio Management Services (PMS), firstly, you need to enter into an agreement with the PMS service provider, in which the service offerings, investment strategies, fee structure are specified in detail. Upon signing the document, you are giving the portfolio manager the power of attorney to manage your trading and bank account.

Also, you need to open new Demat, trading, and bank accounts even if you already have them. Any income coming out of the investments, whether interest or dividend, would be credited to this bank account.

Unlike mutual funds, there is no concept of Net Asset Value (NAV) here in PMS. However, the portfolio manager, as per SEBI guidelines, would have to provide the portfolio valuation report containing various other details like- securities held, transactions undertaken with date, expenses incurred, etc. at regular intervals, at least every quarter.

Also, they need to disclose the portfolio activities within seven days at the end of every month to SEBI in a prescribed format.

NRIs can also subscribe to PMS investment by opening the Portfolio Investment Scheme (PIS) Account as per RBI guidelines. Of course, there would be some extra documentation formalities than the Indian Resident, a list of which can be obtained from the service provider.

PMS Investment- Fee Structure:

Until 2020, there was an upfront fee (entry load) being charged by the portfolio managers which was as high as 2-3% of the amount invested, from the investor. But, now SEBI has abolished this upfront fee-charging in the latest amendments done in October 2020.

PMS Providers are allowed by SEBI to charge either or both fund management fees and performance-based profit sharing as well.

The annual fund management fees typically range between 1-3% and are generally charged on a quarterly basis from the PMS Account. Although, it may vary depending upon the service provider.

Also, the portfolio managers may share the profits of the scheme, if the performance exceeds a certain threshold limit. For instance, the fee structure of PMS Investment ABC as specified in the agreement with you is 2%+10%, if the portfolio yield exceeds 15% (hurdle rate). Here, it means that 2% is the fixed fee and an additional profit sharing of 10% on the returns generated over and above 15%. 

Let’s say, in FY 2020-21 the total return generated from the portfolio was 20%. Therefore, the total charges will be- [2% + {(20%-15%)*10%}].

Apart from these, there could be other operational charges like- custodian fees, fund accounting fees, audit fees, Demat charges, transaction brokerage, etc. SEBI has capped the operational charges, excluding the brokerage to be 0.50% per annum of your average daily AUM.  

In addition, SEBI has made it clear that no exit load would be charged if the portfolio is redeemed after 3 years. However, if you wish to redeem the portfolio before that you need to pay an exit load, as below:

• If redeemed in the first year itself, a maximum of 3% of the amount redeemed
• In the second year, a maximum of 2% of the amount redeemed.
• Similarly, if redeemed in the third year, the maximum 1% of the amount redeemed.

Taxation on PMS Investment:

Since the securities are held in your name, any gains realized on the sale of securities by the portfolio manager held in your PMS investment account would be treated as your income from capital gains and you are liable to pay tax on the same, regardless of whether you withdraw the money or not.

The rate of tax would be similar to that applicable to any gains made on equities. This means that if the holding period of the security is sold by the portfolio manager within 1 year of purchase, a short-term capital gains tax rate of 15% would be applicable.

And, if it is held for more than 1 year, long-term capital gains tax rate of 10% would be applicable, on the gains exceeding Rs.1 lakh in a particular financial year, without indexation.

Also, if you receive any dividend on the stocks, it would also be added to your income and would be taxed as per income tax slab rates applicable. (Also Read: Taxation rules of Mutual Funds)

PMS vs Mutual Funds- What’s the difference?

Both Portfolio Management Services and Mutual Funds are managed investment avenues and a professional fund manager manages the investment portfolio on the behalf of the investor. But there are significant differences between the two:

Pros and Cons of PMS Investment:

The Pros of PMS investment include- 

• Professional fund management 

• Flexibility to choose the composition of the investment portfolio, without any restriction. 

• Independent accounts for every client that way other investors’ behaviour will not impact your investment performance.

• Option of direct plans is also now available.

• No lock-in period and no exit load after 3 years of investment.

Apart from these advantages, there are a number of disadvantages as well, which include:

• Involves a higher degree of risk. The portfolio may get a bit concentrated towards a particular sector of the economy or to a limited number of stocks as per the conviction of the portfolio manager, increasing the downside risk to the portfolio.

• PMS is not very strictly regulated by SEBI. However, some steps are taken by SEBI to standardize the procedures adopted by the PMS managers but still these do not come under the direct purview of the market regulator.

• Tax implication on every transaction made by the portfolio manager makes it a tax inefficient investment avenue. 

• Other disadvantages include- minimum ticket size, hefty fees, lack of availability of performance track record, already described in the earlier sections.

So, Who Should Consider Portfolio Management Services?

With the kind of information flow in the market, and many institutions researching the same stocks universe, it is getting difficult for portfolio managers to beat the broad Index. Not only Mutual funds but even PMS houses are also facing this pressure.

Though sales pitches at different time intervals by the portfolio managers who can easily be accessed and approached on social media or directly ( Unlike Mutual funds Managers), may attract you towards so-called Strategies being followed by them. 

Some PMS schemes have concentrated and researched portfolios, and some have diversified. Both have their pros and cons. If the concentration is paid well, it can be a very good multiplier for the Investments, but it comes with very high risk too.  

PMS investment is not meant for retail investors. Only investors with big investment potential and who have a very high-risk appetite and understand the investment philosophies and risk dynamics well, may consider it. (Also Read: Risks in Investments and how to manage them)

All other average investors should stick to mutual funds as they outnumber almost all the disadvantages that a PMS has.

SEBI regulation, tax efficiency, low ticket size, lower expense ratios, and better risk management makes mutual funds far more lucrative. (Also Read: What is Expense ratio in Mutual Funds?)

Also, if we see from the financial planning angle, mutual funds are ideal investment avenues to plan for different financial goals.

We may choose funds according to the risk profile and investment horizon and allocate investments accordingly. Portfolio rebalancing can also be done very easily, whenever required.

If you have any experience on PMS Investment or have questions on Portfolio Management Services, do ask in the comments section below

This article is written by Mr. Varun Baid, A Certified Financial Planner.