You might have started your long-term investment journey using the mutual fund route or direct equity. However, if you are in your 40s, it is quite possible that now that wealth has increased substantially. As a result, your relationship managers or wealth managers might be recommending a PMS (Portfolio Management Service) at this stage.
What is a PMS?
PMS is an investment service offered by a portfolio manager (including brokers and mutual funds). Its investors get the flexibility to tailor a portfolio according to personal preferences and financial goals. However, as per Sebi regulations, you need to have a minimum portfolio size of Rs 50 lakh to invest in PMS products.
There are three types of PMS – Discretionary, non-discretionary and advisory.
In the case of discretionary PMS, the portfolio manager chooses stocks and bonds and the timing of the “buys”, based on his discretion. The majority of the PMSes in India are of this type.
Under non-discretionary, the portfolio manager suggests the investment ideas while they execute after seeking the investor’s approval. In an advisory setup, the portfolio manager offers investment ideas while the investor handles execution.
As an investor, you should consider PMS on the following occasions:
Supposing you are an employee of a popular listed entity for many years and have accumulated many of its stocks. You might now want to build an equity portfolio without overexposure to the stock or sector concerned.
While mutual funds might not give you portfolio customisation, PMS providers do so based on your requirements.
However, investors can work around their customisation in many cases by continuing with MF investments. For instance, in the above case, ESOPs can gradually be sold-off (as it vests) to reduce single-stock exposure.
Mutual funds usually don’t take ‘cash calls’ and stay invested in equities most of the time. However, in a PMS, depending on market conditions, one has the flexibility even to hold 100% in cash or go for a higher concentration of portfolio to benefit from market opportunities.
While the non-existence of such prudential limits gives management flexibility to the PMS, it is also difficult to time the market. In the long run, staying invested with a diversified portfolio has provided the best risk-adjusted returns.
Sometimes, investors are recommended a PMS to broaden their scope of investing. For instance, to invest in alternative assets such as art and antiques or into structured products. Legendary investors keep it simple by choosing from three or four basic assets – equity, debt, gold, and cash – for investment purposes.
Portfolio size of Rs 2 crore
While, as per Sebi rules, Rs 50 lakh is the minimum threshold, you also need to diversify among PMS products. Having a Rs 1 crore portfolio with Rs 50 lakh invested in a single PMS is a case of poor diversification.
Moreover, it is essential to check if these PMS providers have managed to beat the benchmarks and done consistently well.
The data of performance shared by PMS portfolio managers might not be the aggregate returns of all their investors and perhaps only that of its ‘model’ portfolio. So do the necessary due diligence.
Thanks to their disclosures and regulation, mutual funds are the best bet for those investing to achieve varied financial goals. However, if you have already achieved your financial goals and seek lifestyle-enhancing opportunities from your incremental savings, PMS could be the way.
Alternatively, in a core-satellite portfolio structure, you could invest in PMS as part of a satellite portfolio to improve the overall portfolio returns. Again, these investments will put you in the next orbit if they pay off. And if they don’t, they do not affect your current life goals.
Midcap and smallcap exposure
Many top-performing mid-cap and small-cap mutual funds have grown too big, making their liquidity management more challenging. No wonder some are also invested in more than 50 stocks.
In such cases, a PMS with a good track record of performance can be a good source of diversification as portfolios are managed individually.
However, while comparing performance, ensure you factor in the total costs to find its actual returns to PMS investors. As a thumb rule, avoid costly funds or fix a low return threshold for profit sharing.
Well regulated mutual fund products are better for chasing your financial goals. PMS could be at the periphery to enhance portfolio returns if need be.
The article was first published in the Times of India, on 13 December 2022 here.