The Portfolio Management Services (PMS) industry has evolved rapidly in the last few years. At the end of October 2020, the assets under management (AUM) managed by the PMS industry stood at ₹19.2 lakh crore, which almost doubled in size over the last five years as per data from the SEBI website. The trigger for this growth was the changes in regulations both in the mutual fund and PMS industry. The mutual fund regulations created strict silos for investing and active managers have found it challenging to outperform benchmarks.

SEBI has increased the threshold to invest in PMS to ₹50 lakh, preventing mis-selling to retail customers. PMS investors are mainly high net worth individuals (HNIs) and savvy investors with a higher risk appetite. PMS managers invest directly in financial securities through separately managed accounts. They offer flexibility regarding liquidity, performance-based fee structures, broader investment universe, taxation, the impact of redemption on NAVs, etc.

Selecting a portfolio manager is more than just analysing past performance. It involves doing the due diligence of both quantitative and qualitative factors to understand how the investment results were achieved and assessing the likelihood of the same continuing in the future. Some of the key factors to look out for include:

Organisation and people

Each PMS firm is different where the founder and investment team has spelled out the broader organisation strategy and investment philosophy. The important points to consider would be if there is a ‘star manager’ effect or a team-centric approach in making investment decisions. The bench strength of the investment team and coverage they provide help in understanding the breadth and depth of the organisation.

Investment framework

Portfolio managers use various investment management approaches and styles. Some managers adopt a certain style such as value, growth, or momentum, and some offer a combination of products and styles. Investors should assess whether the manager is true to theirlabel. A good indicator would be if the portfolio turnover ratio or churn in the portfolio suddenly goes up during changing market cycles.

One of the misconceptions is that PMS should run only concentrated strategies. There are balanced strategies that have outperformed markets across all cycles.

Fee structure

Portfolio managers charge a management fee on the assets which they manage. There could be a fixed fee, performance fee, or hybrid options. Normally, investors tend to choose fixed fees at bullish phases in the markets and performance fees during the bearish periods. However, when the market cycle turns (as in 2020), they end up paying significant fees in the performance option as the same has been charged over a fixed hurdle rate. Some fund managers offer to charge performance fees only on out-performance to market benchmarks.


Performance is often the outcome of the investment process and it is important to ascertain whether returns generated have been because of the chance or skills of the manager. There are tools available to understand the source of return and the magnitude of risk taken to generate returns (risk-adjusted returns). It is also important to understand the participation of portfolios in both trending up and down markets. A review of all the above financial ratios with your financial advisor will help in understanding the sustainability of future performance.

Some of the other considerations may be entry and exit loads, availability of liquidity, transparency in reporting of portfolios, etc. Smart money is getting allocated to PMS, but it remains a satellite allocation to their core equity portfolio for many investors. With product innovations such as ESG investing and new features which include SIPs to invest in small and staggered installments (provided they meet designated threshold), online top-ups, etc., the industry's future is bright.

The author is Chief Business Officer, White Oak Capital.