Portfolio Management Services- Tailor-Made Investing

Portfolio Management Services 

- Tailor-Made Investing

PMS, offered by various entities registered with the market regulator.  PMS have equity and debt options. Earlier, they used to offer real estate, unlisted shares and structured products options as well, but now these come under the Alternative Investment Fund (AIF) category and are managed according to the market regulator's separate regulations on AIF.

PMS were a big hit before the 2008 market crash but faced accusations of misuse. Many were not registered and indulged in heavy churning. After that, the Securities and Exchange Board of India, or Sebi, introduced stringent regulations. Among other things, it raised the minimum investment limit from Rs 5 lakh to Rs 25 lakh. It also banned pooling of accounts of different investors.

HOW IT WORKS

The investor and the portfolio manager enter into an agreement detailing the investment strategy, goals and other details. The investor can offer either a sum of up to Rs 25 lakh or stocks worth this much. PMS are offered on discretionary as well as non-discretionary basis. In the former, the manager takes investment decisions and has the power of attorney to manage the investor's demat account. In nondiscretionary, he merely suggests investment ideas; the rest is the investor's prerogative.

PMS' closest competition is mutual funds. Both differ in terms of working, fee, Sebi regulations and risk-reward profile. While the main aim of PMS is offering customised services, many brokerages offer investors the choice of different model portfolios. "In this, the service providers have different model portfolios such as large-cap and mid-cap. Investors choose depending upon their needs," says Sandip Sabharwal, CEO of portfolio management services at Prabhudas Lilladher. These models define in which stocks the money will be invested.

ASSET HOLDINGS

In PMS, investors hold stocks, whereas in mutual funds they hold units. In PMS, the investor can know which stocks he is holding at any given point in time by logging in to his demat account. This is difficult in case of mutual funds.

FEE STRUCTURE

The investor can negotiate the fee with PMS providers, unlike in mutual funds. "Most PMS charge a 2% annual fee and get 20% profit beyond a hurdle rate," says Prateek Pant of RBS Private Banking, which offers non-discretionary PMS.

The hurdle rate determines at which level profit-sharing will take place. For example, a 12% rate means the PMS provider will get 20% profit above 12%. "If the hurdle rate is not met, one may end up paying less than what mutual funds charge," says Pant of RBS Private Banking.

However, investors negotiate for a lower fee if the assets to be managed are big. Mutual fund fees are fixed in percentage terms.

MODEL PORTFOLIO

While many PMS providers offer standardised portfolios, some offer investments tailored to clients' goals. For instance, a client may want to invest a large amount in a single stock. This is not possible in mutual funds, as they cannot hold more than 10% net asset value in a single stock. While this spreads risk, a big disadvantage is that mutual funds cannot hold a big stake in a company even if it is a very good investment. PMS do not have this limitation.

FOR THE RECORD

While many PMS providers offer standardised portfolios, some offer investments that are geared to meet clients' specific goals

The performance of mutual funds is in public domain. For PMS, you will have to take the provider's word. This is because different PMS clients have different objectives and want different strategies. However, it is easy to get a performance report card in case of a model PMS portfolio.

ACCOUNTABILITY

Unlike mutual fund managers, PMS managers are directly accountable to the client, who can seek clarifications, especially in the discretionary portfolio.

TAKING A CALL

"You can look at PMS if you are getting services that are really customised. But how many portfolio managers can offer you such a service?" asks Mallick. In today's competitive market, PMS providers need more clients and so prefer to offer mass pre-fabricated products.

But what about PMS offered by asset management companies or AMCs? "PMS of AMCs don't make much difference as they offer products that are similar to their mutual funds schemes," says a portfolio manager who offers non-discretionary services.