Big Story | A guide to investing in PMS schemes

For investors belonging to higher income groups, Portfolio Management Services (PMS) can provide the extra edge when it comes to putting their money to work.

As of April 2020 (the latest numbers available with market regulator SEBI) there are over 300 portfolio managers in the country handling PMS products with assets under management (AUM) of about ₹4.48-lakh crore (excluding contribution from the government-run Employees’ Provident Fund as well as other PFs). But with thin disclosures on portfolios, returns and costs, PMS remains a less understood product.

How it works

PMS refers to a portfolio of stocks and mutual funds (through direct plan) and debt instruments set up by an asset management company (AMC) for individual and corporate/institutional clients.

These portfolios are based on schemes or strategies that the AMC offers, similar to mutual funds schemes. Investors get to choose from the various schemes available with different AMCs. The portfolio of each PMS scheme that an investor puts money in is held in a separate demat account.

The service to individual clients is predominantly ‘discretionary’, wherein the client provides the PMS provider the Power of Attorney’ to execute transactions in the demat account on his/her behalf.

Non-discretionary and advisory services are also available. Under non-discretionary PMS, transactions can be executed only after approval from the client. Both these usually suit larger clients such as corporates, institutions or family offices, where the amounts invested are huge.

PMS products may be opened and closed for inflows, as per the decision of the fund manager. But they are always open for outflows and are hence not close-ended products.

From ₹5 lakh earlier, the minimum investment amount in a PMS scheme was raised to ₹25 lakh in 2012 and then again ₹50 lakh in January 2020. While the ₹50-lakh limit does not apply to existing investments as on the date of implementation, any top-up by existing clients must take the value of the portfolio to ₹50 lakh at the time of the re-investment.

New clients have to bring in a minimum of ₹50 lakh. Beyond the ₹50-lakh floor, both old and new clients can top-up any amount as per the norms laid down by the respective AMC.

Clients can bring in their investments in the form of cash or securities.

Edge over mutual funds

Today, mutual fund products are more or less straight-jacketed after SEBI’s new classification norms came out in 2018. This was done in the interest of retail investors whose investment ticket sizes are very small.

PMS products meant for high net worth (HNI) clients have some more flexibility. For one, if you invest ₹50 lakh across even 10 or 20 different mutual funds, the chances of overlaps in the stocks or other securities these funds hold will be quite high.

Diversification, after a point, may not bring the intended benefit. For the same ₹50 lakh, a PMS holds just one set of high-conviction stocks/mutual funds or debt securities.

Mutual funds cannot take more than 10 per cent exposure to one stock. There is no such restriction for PMS. Some PMS schemes hold even 20-30 per cent in a single stock.

Trivantage Capital’s Super Six, for example, is a financial sector-focussed fund with a concentrated portfolio of just six stocks.

Due to liquidity constraints in small-cap stocks, the investment universe for mutual funds may be quite narrow. PMS schemes may be able to dig deeper.

NAVs of mutual funds may get impacted if sudden mass exits happen from the funds.

Since PMS holdings are in individual demat accounts, this problem will not surface.

Similar to mutual funds, PMS funds focussed fully either on equity or debt, or on a combination of both, are available.

Sectoral and multi-asset funds also exist. Where they differ is that themes offered by PMS show more variety.

Unifi Capital, for instance, offers an ‘Insider Shadow’ fund, where it invests in fundamentally sound companies which have repurchased their own shares or where promoters have acquired additional shares at market prices — this demonstrates their confidence in the company’s prospects. PMS schemes from AMCs such as IDFC, First Global and Right Horizons follow artificial intelligence-, data science- and machine-learning-based strategies.

Non-standardised returns

Despite the big-ticket size and niche offerings, performance disclosure of PMS schemes are not standardised. AMCs currently disclose monthly performance (in per cent terms) on a weighted average basis for all clients, in their monthly report to SEBI. Only a single consolidated return for multiple strategies/funds is put out. Besides, a practise of excluding returns of withdrawn portfolios or showcasing returns of only certain portfolios that are doing well, also exists in some pockets.

This apart, not all AMCs report by pooling or aggregating returns of clients. Some such as Motilal Oswal report returns on a ‘model portfolio’ basis where the composition of all client portfolios are maintained similar to the model.

Reporting returns without considering the cash component in the portfolio is also prevalent. This arises because some AMCs follow a system of not investing all the funds in one go and instead gradually deploy them in the markets. Sometimes, returns are also reported without netting off the fee and/or other expenses.

These anomalies have made it difficult to use performance metrics as a filter to choose from among PMS funds.

The accompanying table compares the average returns of some PMS schemes (which have shared their data with aggregator PMS Bazaar) with that of broader benchmarks as well as relevant mutual fund categories.

But for reasons mentioned above, it must be taken with a pinch of salt.

However, new SEBI regulations require returns to be calculated on a ‘time weighted rate of return’ (TWRR) basis, instead of weighted average basis. TWRR takes into account in-between subscriptions and redemptions to the fund. Here, returns for sub-periods before and after an inflow/outflow are first calculated and then combined.

Many AMCs already report their returns on the TWRR basis. Besides, from October 1, AMCs must report TWRR returns separately for each strategy or investment approach(on pooled portfolio basis), along with the benchmark returns for each. The cash component must be included for return calculation, and all expenses excluded.

Multiple cost structures

The fees charged for PMS may be fixed or variable or a combination of both.

Usually, fixed fee is 2-2.5 per cent per annum of the assets managed. Some AMCs such as Anand Rathi charge only a fixed fee.

Many AMCs generally charge an asset management fee of 1-1.5 per cent along with profit sharing. Customers of Ambit can choose between a fixed fee of 2.5 per cent, and a profit share of 20 per cent over and above the hurdle rate of 8 per cent or 10 per cent. Avestha has a one per cent fixed-fee option. If not, under variable fee, a profit share of 5 per cent of the gains earned on the portfolio on high-water mark basis, is charged. A high-water mark is the highest value a fund reaches. The performance-based fee is payable only if the value of the fund cross the high-water mark.

From October 1, AMCs cannot charge an upfront fee. There is a cap on charges including broking, demat and custody costs.

While many AMCs impose different exit loads for early exit, some such as Marcellus and Unifi don’t. Now, from October 1, SEBI has brought in a ceiling on the exit load — at 3 per cent of the amount redeemed in the first year, 2 per cent in the second year and 1 per cent in the third year. Most importantly, from October 1, clients can be directly on-boarded without intermediaries/distributors. This is akin to direct plans of mutual funds. How much reduction in fees and what other changes this move will result in, remains to be seen.

Regulatory requirements and disclosures are definitely improving. Yet, you must keep in mind that PMS will suit only HNI investors and even within them, those with a high risk appetite. Before taking the plunge, it will be wise to consider the pedigree and the track record of the AMC and the credentials of the people managing the PMS.

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