Do you need a Portfolio Management Service?

PMS or portfolio management services were earlier available only to very wealthy clients but are now accessible to a much wider audience. This makes it important for investors to understand the product better and evaluate it as they plan their investments.

Various options for managing Investments

Let's first take a look at the various options available to investors for managing their investments. The most obvious one is ‘do it yourself'. There is a wealth of information available on the internet now and anyone with time and inclination can certainly master the art over a period of time. However, this requires an objective evaluation of one's capability and time constraints.

The second option is to invest through an Investment Advisor. This can be a good option but the challenge is to find a seasoned and professionally qualified advisor. Not many advisors know how to create an optimal portfolio based on clients' objectives, allocate assets based on risk profile, pick up stocks based on in-depth research and monitor the portfolio closely. An ill-qualified Investment Advisor can make a hash of your investment portfolio.

MF vs PMS

The third option is to invest in Mutual Funds, which is a common pool of money managed professionally. In many ways, it seems similar to what a PMS does. But there are some basic differences. Mutual Funds are not customised to your specific requirements. It can't take care of your specific needs and goals. If you would like to invest in a certain theme that you believe in, it may be available only through a PMS. Similarly if you want to avoid certain industry (either because you feel negatively towards them or because of ethical grounds) a PMS can easily structure a portfolio for you. If you have views on how your investments should be done and want to be closely involved with the decisions taken on your investments, PMS is a good option.

Basic Features

PMS can be of 2 types – open-ended and close-ended. Most portfolios are open-ended which means clients can enter the plan at any point in time. Close ended plans have a fixed start and end dates.

PMS can be offered as per regulation only on a minimum investment of Rs 5 lakh; however, in reality many portfolio managers have minimum levels ranging from Rs 10 lakh up to Rs 2 crore. It's quite common to find a minimum investment amount of Rs 25 lakh.

PMS can be discretionary or non-discretionary. A discretionary portfolio is managed by a Fund Manager who can buy or sell securities on your behalf, subject to the conditions laid down in the agreement between the customer and the PMS provider. He may still consult with you and take into consideration your views, if you wish. On the other hand a non-discretionary portfolio is run entirely based on your own inputs. For a retail investor it may not make sense to micro manage his portfolio through a non-discretionary portfolio.

All securities purchased in your PMS is kept segregated in a demat account which is in your name. This ensures visibility of your assets and allows you to keep track of transactions.

Associated costs

PMS typically works on a 20/2 thumb rule. You pay 2 per cent annual management fees, on top of which you share 20 per cent of profits you make beyond a “Hurdle Rate”. The Hurdle rate is defined at the outset of your agreement terms and till such time this return is obtained by you, you don't have to share any profit with the service provider. Until then, you share profits on the basis of “Watermark” concept. Which means you share profit only after the previous high already achieved by the portfolio is breached, and only on the incremental amount.

Apart from these, you also incur the cost of brokerage for each transaction. Brokerage can vary from 0.25 per cent to 0.50 per cent of transaction value. Many PMS' also take an upfront fee, which is typically about 2 per cent.

What to look for

Most obvious thing to look for in a PMS is the track record. Ask for the disclosure document of the PMS provider. This document has various details including the last 3 years' performance of all funds run by the portfolio manager. It will give you a good perspective. While past performance does not guarantee good performance in the future, it's certainly worth evaluating.

Check the source of research and the track record of the Fund Manager. Some PMS portfolio managers don't have in-house research and rely on brokerage houses for research inputs. Accessibility to your Fund Manager is important. Very often the ticket size of investment may be only Rs 5 lakh but the flip side could be that Fund Manager will not be readily available for an interaction. This kind of PMS then starts looking more like a Mutual Fund.

Evaluate cost very carefully. Get a clear understanding of how often stocks will be churned in your portfolio as a high level of churn will mean significant cost on brokerage. This will reduce your overall returns. PMS providers have to mandatorily give at least a six-monthly statement but many of them report more frequently. It's better to get regular updates so that you can track your returns and take corrective actions if required. Some portfolio managers also provide online access to your portfolio.

And finally, look at the exit clauses. PMS' may charge a fee if you exit a plan before a certain time period. This will be an important consideration if you think you may need the money in case of exigencies.

How much should you invest?

How much you invest in a PMS is determined by 3 factors – your risk appetite, the nature of the PMS and the kind of surplus you currently have compared to your overall portfolio.

If it's an aggressive portfolio and you are a low risk investor, it may not be suitable for you at all. On the other hand, for a moderate risk profile, a 10-15 per cent investment in equity-oriented PMS may be fine. The best way to arrive at this is by ensuring you know your risk profile and there are many tools available either online or even with portfolio managers. Also getting to understand your recommended asset allocation is important. Your portfolio manager or Wealth Advisor should be able to help you with these.

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