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Portfolio Management Services (PMS) play a vital role in helping individuals effectively manage their investments. For those who lack extensive knowledge or experience in the financial markets, PMS offers the expertise of professional portfolio managers to optimize investment returns.

What is Portfolio Management Service?

Portfolio Management Services (PMS) in India refer to professional investment management services provided by portfolio managers or investment advisory firms. PMS involves the active management of investment portfolios on behalf of clients, aiming to achieve their financial goals and optimize returns.
PMS offers personalized investment strategies based on client’s objectives, risk tolerance, and preferences. Portfolio managers conduct research, analyze market trends, and make informed investment decisions. They actively monitor portfolios, rebalance holdings, and adjust investments as needed.
PMS providers are licensed and regulated by the Securities and Exchange Board of India (SEBI). It is different from mutual funds as there is no pooling of assets, and each investor has a unique portfolio suitable to their needs and risk tolerance levels. PMS requires a minimum investment of INR 50,00,000.

How Does PMS Work?

Portfolio Management Services involve a collaborative relationship between the client and a team of professional portfolio managers. The process begins with the client providing their investment objectives, risk tolerance, investment horizon, and any specific preferences or constraints. Based on this information, the portfolio manager develops a personalized investment strategy. The portfolio manager then actively manages the portfolio by making informed investment decisions, monitoring the investments, and adjusting the portfolio as needed.

Features of Portfolio Management Services

  • Customization: PMS offers tailored investment strategies that align with the investor’s financial goals, risk appetite, and preferences. This personalized approach helps in achieving specific investment objectives.
  • Diversification: PMS emphasizes diversifying investments across different asset classes (equities, bonds, mutual funds, etc.), sectors, and geographical regions. Diversification helps reduce the impact of market volatility and minimize the risk associated with concentrated holdings.
  • Portfolio Management: Portfolio managers actively monitor the financial markets, analyze investment opportunities, and make timely buy/sell decisions. This proactive approach aims to maximize returns and manage risks effectively.
  • Research and Expertise: PMS providers have access to extensive research, analysis, and market insights. Portfolio managers leverage their expertise to identify investment opportunities, evaluate companies’ financial health, and stay updated on market trends.

Types of Portfolio Management Services

  1. Discretionary PMS: Discretionary PMS is a type of portfolio management where the portfolio manager has full authority to make investment decisions on behalf of the investor without requiring prior approval for each transaction. The portfolio manager has the flexibility to actively manage the portfolio based on market conditions, investment strategy, and investors’ objectives. They can make buy/sell decisions, allocate assets, and adjust the portfolio holdings as needed. Discretionary PMS is suitable for those who prefer a hands-off approach and trust the expertise of the portfolio manager.
  2. Non-Discretionary PMS: Non-Discretionary PMS, also known as advisory PMS, involves the portfolio manager providing investment advice to the investor but the final decision-making authority rests with the investor. The portfolio manager offers recommendations, insights, and research-based guidance to the investor, who makes the ultimate investment decisions. The portfolio manager executes transactions only after receiving approval from the investor. Non-Discretionary PMS is suitable for those who want to retain control over their investment decisions. At the same time, benefiting from the expertise and guidance of a professional portfolio manager.
    It’s important to note that within these broad types, PMS providers may offer variations or hybrid models to suit different investor preferences. Some providers may offer thematic PMS, where investments are focused on specific sectors, themes, or strategies. Others may specialize in value-based investing.
  3. Active Portfolio Management: Active portfolio management aims at generating higher returns than a benchmark index like Nifty50 or BSE Sensex. This is achieved by actively trading securities based on market conditions. Active PMS is suitable for investors who have higher risk tolerance levels and seek higher capital gains.
  4. Passive Portfolio Management: Passive portfolio management involves mimicking the performance of a market index such as the Nifty50 by tracking and replicating the index portfolio. This is suitable for investors who want to invest in line with the market trend and have lower risk tolerance levels.

What is the Minimum Ticket Size for PMS?

The minimum investment or minimum ticket size for Portfolio Management Services (PMS) in India has evolved over time. Initially set at INR 5 lakhs, it was later increased to INR 25 lakhs and then to INR 50 lakhs in November 2019. The purpose of the minimum investment amount is to ensure investor safety, attract serious investors, and allow PMS providers to focus on a smaller segment of high-net-worth individuals (HNIs). The higher threshold helps in maintaining service quality and catering to investors with a better understanding of the risks involved in PMS.

Fee Structure for PMS

The SEBI Portfolio Manager Regulations do not specify a specific fee scale for portfolio managers to charge their clients. Instead, the regulations state that portfolio managers can charge fees based on the agreement with their clients for providing portfolio management services. The fee structure can be a fixed amount, a fee based on returns, or a combination of both. However, portfolio managers must obtain explicit prior permission from clients to charge fees for each activity they directly or indirectly render, including outsourced services.
These charges vary among PMS providers. Following are some key charges:

  • Entry Load: This charge is levied when investors enter a PMS and typically ranges from 1% to 3% of the investment amount. It is a one-time charge.
  • Management Charges: PMS involves active management of the portfolio, and PMS providers charge management fees for their services. These charges are higher than those of mutual funds due to customization. Management charges vary between 1% and 3% per quarter, depending on the PMS provider.
  • Profit-Sharing: Some PMS schemes impose profit-sharing charges. The provider shares a portion of the profits generated for the client. Typically, a threshold return is set, and profit-sharing kicks in only if the returns exceed that threshold. The sharing ratio is predefined.
  • Exit Load: If an investor chooses to exit a PMS before a specific period, an exit load may be applicable. Usually, there is no exit load if investors stay invested for more than 2 years. Exit loads encourage investors to remain invested for the long term.

In addition to the above charges, PMS providers may also impose additional fees for services such as custodial fees, Demat charges, Demat movement charges, audit fees, brokerage or transaction charges, and statutory charges. These charges can vary and are billed to the client separately.

Key Activities of Portfolio Management

  • Investment Strategy: The portfolio manager develops an investment strategy based on the client’s objectives, risk tolerance, investment horizon, and market conditions. This strategy outlines asset allocation, sector preferences, and investment style.
  • Research and Analysis: The portfolio manager conducts thorough research and analysis to identify potential investment opportunities. This involves analyzing financial statements, company fundamentals, economic trends, and market dynamics.
  • Portfolio Construction: Based on the investment strategy, the portfolio manager constructs a well-diversified portfolio by selecting suitable securities such as stocks, bonds, mutual funds, or alternative investments. The portfolio construction aims to balance risk and return objectives.
  • Active Management: Portfolio managers continuously monitor the portfolio’s performance, keeping track of market trends, news, and economic indicators. They make buy/sell decisions based on their analysis and market conditions, aiming to optimize returns and manage risks effectively.
  • Risk Management: The portfolio manager assesses and manages risks associated with the investments. This includes monitoring market risks, credit risks, and liquidity risks and employing risk mitigation strategies like hedging or diversification.
  • Performance Reporting: PMS providers provide regular performance reports to clients detailing the portfolio’s performance, investment positions, transactions, and overall returns. These reports help clients track their investments, assess the effectiveness of the portfolio management strategy, and make informed decisions.

Advantages of PMS

  • Professional Management: PMS provides access to professional portfolio managers who have expertise in investment research, asset allocation, and risk management. Their knowledge and experience can help optimize investment returns.
  • Customization: PMS offers personalized investment strategies that cater to individual financial goals, risk tolerance, and preferences. This customization ensures that the investment strategy aligns with the client’s specific needs and objectives.
  • Diversification: PMS diversifies investments across different asset classes, sectors, and securities. This diversification helps reduce risk by spreading investments across multiple opportunities, thereby minimizing the impact of any single investment’s performance on the overall portfolio.
  • Research and Expertise: PMS providers have dedicated research teams that conduct in-depth analysis of companies, industries, and market trends. Their expertise allows them to identify promising investment opportunities and make well-informed decisions on behalf of clients.
  • Time-saving: Managing investments requires continuous monitoring, research, and decision-making. By delegating portfolio management to professionals, clients can save time and focus on other aspects of their lives or businesses.

Disadvantages of PMS

  • Cost: PMS services come with higher fees compared to other investment options such as mutual funds. The management fee and performance fee can eat into overall investment returns. It is important to carefully assess the fees and potential returns before opting for PMS.
  • Minimum Ticket Size: Many PMS providers have a minimum investment requirement, which can be a barrier for smaller investors. The minimum ticket size is around INR 50,00,000.
  • Market Risk: PMS investments are subject to market fluctuations and associated risks. While portfolio managers strive to manage risks, there is no guarantee of positive returns, and the portfolio value may decline during market downturns.