Introduction
Are you a stock market enthusiast? Are you someone who wants to learn about new products and make a career in the same? Are you someone who takes a deep dive in the ocean full of knowledge relating to investments? Are you someone who fears making an investment in the stock market because of the horror stories of the investor losing 50% or more of their portfolios?
If you are any one of them, you are at the right place! We at Elearnmarkets have come up with something for you so that you can make an informed decision in the markets.
The truth is that making an investment in the stock market consists of risk which when approached in a disciplined manner can help one make a huge corpus.
In the last few years, Portfolio Management Services has been fairly popular with the HNI and the large family offices. As Motilal Investment Philosophy says- “Buy right, sit tight”….Are you one of those HNI customers trying to find investment in an exceedingly professional custom-built portfolio of stocks? If the answer is yes, then Portfolio Management Services can be a great choice.
In order to apprehend the mechanics of Portfolio Management Services, let’s start by delving into the definition of Portfolio Management Services in the next section.
What is PMS?
Portfolio Management Services (PMS) refer to the service provided by professional managers or fund houses to high net worth individuals to manage their funds. Absolute customization is possible in the case of portfolio management services to achieve the wealth creation goals of the investors. One of the most important things about PMS is that it offers a lot of flexibility as compared to other well-known investment products.
PMS is not subject to the same regulatory restrictions as a mutual fund. As a result, it can be more rewarding but also riskier. A recent change by SEBI has forced discretionary portfolio managers to only invest in listed stocks, bonds, and mutual funds. However, they are still not subject to the same concentration safeguards as mutual funds. In a mutual fund, the money is pooled along with the money of other investors and one gets units in the mutual funds concerned. In a PMS, the stocks, bonds, or other securities are typically held in your own name in your own Demat account and the PMS manager operates it through a power of attorney. Any kind of fraud in this mode of operation is relatively rare but you should check out your Demat and trading statements on a regular basis.
Objectives Of Portfolio Management Services
Now that we have understood the concept of Portfolio Management Services let us now learn the objectives behind it.
(i) Growth of Capital- This is one of the most important responsibilities of a portfolio manager. A portfolio manager continuously looks for the most effective investment chance that appreciates the capital of the client.·
(ii) Risk diversification- Diversification of portfolio helps in meeting the goals of the investor by maintaining a healthy risk-return ratio. It can happen in the following three ways-
A. Debt vs. Equity- While equities are known for high risk and high-income potential, debt instruments have the ability to lower the risk of a portfolio and add liquidity.
B. Domestic vs. International- A portfolio manager seeks to diversify risk by evaluating investment opportunities in domestic and international markets. This helps the client diversify risk between varied economies.
C. Tax Planning- There are various tax liabilities that an investor should adhere to while investing. Moreover, multiple tax provisions can help investors decrease their tax liability. Professionals managing your portfolio make sure that all of your investments fall in with the tax implications while helping you in saving tax wherever possible.
D. Rebalancing portfolio- This implies reverting to the earlier mix of securities after the fluctuations or movements in the market tilt the balance towards a specific form of security. This is generally done annually.
Next, we will discuss some of the advantages and disadvantages of PMS.
Advantages And Disadvantages Of PMS
Advantages of investing in PMS:
(a)High-quality portfolio- It has been noticed that people who manage their own portfolios focus more on price rather than on quality.
(b)Independent Portfolios- PMS portfolios are held individually and therefore unperturbed by other investors’ behaviour.
(c)Consistent returns- PMS offers professional management of investments with an aim to deliver superior risk-adjusted returns. It saves clients from all monitoring hassles with regular reviews and risk management.
(d)Diversified portfolio- Due to market uncertainties, portfolio management services always aim to diversify the risk, thus reducing the impact.
(e)Scope for higher risk-adjusted returns- Since the portfolio management services have a concentrated portfolio; the chance to generate superior returns is much higher.
(f)Gain knowledge- While an investment management service helps the client reach the specified financial goal; it additionally helps them to boost their financial understanding. Continuous updates about investment methods and technicalities assist the investors to make an informed and educated selection with future investments.
(g)Performance Tracking- Most services have websites or apps which help the investor track the holdings in real-time. Unlike mutual funds, where the investor can apprehend the holdings once during a month or a quarter, this provides the investor with better management of investments.
(h)Maintain liquidity- Healthy liquidity ensures that in times of need, you'll be able to sell one or more of your assets to fulfill your immediate requirements.
Disadvantages of investing in PMS:
- Tax implications- The tax implications on PMS portfolios are equivalent as those for investors who invest directly. If the stocks are held for greater than one year, long-term capital gain tax @ 10 per cent plus surcharges are levied. If the portfolio manager engages in short-term trading activity, it might result in short-term capital gains, which implies that the investor has to pay tax. Therefore, it is recommended to hold stocks for more than 3 to 4 years.
- Documentation – Since PMS requires the opening of a separate Demat account and registering the power of attorney in favour of the portfolio manager, the documentation tends to be burdensome.
How Does Portfolio Management Services Company Work?
Though we have discussed the basics of Portfolio management services earlier, have you ever wondered how a PMS company works? Let us have a brief discussion on it.
PMS companies are small companies in terms of the number of employees they have but they focus on the quality aspect, that is, to say, they hire expert fund managers, investment managers who manage portfolios of high net worth individuals. As per SEBI, to avail portfolio management services, the minimum capital required is rupees 50 lakhs. The returns are not guaranteed but a person should look into the history and background of the portfolio management house. Also, one should look for the consistent level of return that can be provided to me by the portfolio management house which can be figured out through its client history.
Portfolio Management services outline their investment strategy in advance so investors can decide if the mandate suits their wants and subsequently invest.
The portfolio management house invests the funds of the individuals in different chunks. They also go in-depth to understand the objective and time horizon of investment by communicating with the investors.
Who requires a Portfolio Management Service?
The following should think about portfolio management:
(i) Investors who plan to invest across different avenues like stocks, bonds, funds, commodities and so on however, don’t possess enough information about the whole process.
(ii) Those who have restricted knowledge about the investment market
(iii) Investors who are unaware of how market forces impact return on investment.
(iv) Investors who do not have enough time to trace their investments or rebalance their investment portfolio.
Types Of PMS
Although different companies offer different types of portfolio management services, there are some standard categories or types of PMS. They are as follows:
(a) Discretionary portfolio management services
Under this, the portfolio manager has the full discretion to decide not only what to buy and what to sell but also when to buy and when to sell which means PMS has huge flexibility in terms of not investing when they feel that the markets are not performing well or it is not an appropriate time to do so. One should look for the philosophy and style of investing as well as other details of the portfolio manager before choosing this service. What gels with your ideas, you should go with that person. The alpha-generating capacity lies with the portfolio manager with the stocks that he or she is picking.
(b) Non- Discretionary portfolio management services
Under this, the consent has to be taken from the investor by the portfolio manager before investing. But, the assets are always under the control of the portfolio manager.
(c) Advisory portfolio management services
This service is largely used by family offices. The advisory services are basically about the portfolio manager giving non binding advice to the investor. The investor then could decide as per their profile and risk appetite whether they would like to go ahead with the investments or not. Under advisory services, the assets also are not under the control of the portfolio manager. The portfolio manager’s responsibility only lies up to the point of advising. Whether to accept that advice or not is completely the discretion of the investor.
Overall, portfolio management services as an industry have grown quite well in the last few years.
Diagramatic presentation of data taken from SEBI as on October 31, 2020
The chart above shows that discretionary PMS attracts maximum clients. One reason might be that the clients want professionally managed portfolios with a greater return hence they approach portfolio management service providers.
The above pie-chart points out to the fact that most discretionary PMS invest in plain debt.
Under Non-discretionary PMS, we see a variety of mixes. It is because different investors invest as per their understanding of the market. Hence, varied opinions.
Active vs. Passive Management
Management of portfolio occurs in two ways:
Active Investment Management-
The goal is to overcome the return of the benchmark index and come up with better returns for the investor. A specific index like Nifty or Sensex is taken as a benchmark, and the investment managers build active choices on the investment to outgo this market.
Passive Investment Management-
This style involves a passive form of making decisions as well as investment tracking. The target of passive investment management is to match the performance of a particular index. The index can be Nifty 50 or Sensex, and the investment managers increase or decrease the weightage of investments as per the index it follows.
While the active management form has a higher income potential, it also carries a greater risk quotient. Although the passive form of investment management comes with a lower risk quotient, it has lower management fees.
Common FAQ’s
Here in this section let us discuss some common FAQs about PMS:
Costs associated with PMS
In a PMS, the fee, usually a percentage of the investor's portfolio, is decided by bilateral negotiations between the investor or the client and the PMS manager. This is different once again from mutual funds where SEBI has specified maximum expense ratios for different categories of mutual funds.
Tax structure associated with PMS
In a PMS, whenever there is any kind of realized gain in a portfolio, clients are liable for tax. For example, in a year if the PMS manager has made a capital gain of ₹5 lakhs on a portfolio of ₹50 lakhs, the client will have to pay a tax on that gain even if he or she has not redeemed any money from the PMS. Once again, this is different from a mutual fund where the clients are only liable to tax when they redeem money from the mutual fund. The tax rate will depend on how long the PMS manager has held security in question. If he has held it for less than one year, then short-term capital gains tax (STCG) of 15 percent will be applicable. If he has held it for longer than one year, long-term capital gains tax (LTCG) of 10 percent will be applicable. Also, gains up to ₹1 lakh per year are exempt from tax. In the case of dividends, the dividend distribution tax is deducted by the company before paying out dividends to the investor. Therefore, dividends are tax-free in investors’ hands.
Who should be looking at PMS?
Only investors with a high-risk appetite because PMS is a highly risky product. Also, for somebody who is a high net worth investor for example if you have a portfolio of ₹1 crore, you should perhaps not be looking at PMS which has a minimum investment amount of ₹50 lakhs.
How do you choose a PMS manager?
Unfortunately, unlike mutual funds, PMS products do not have publicly disclosed net asset values and portfolios. So, you have no transparent way of knowing the past track record of different PMS products. Your best bet is to go with a trusted name in the financial services industry.
Does PMS make sense to you? How does it work? What is the regulatory framework that governs it?
The answer to these questions can be explained through an example. Suppose, I have ₹50 lakhs in cash but I am not interested in buying property right now. I am looking at PMS but-
(a) Is it high risk?
(b) That statement that goes with mutual funds that mutual funds are subject to market risk- does this statement hold true for PMS as well?
(c) Should I do it or should I not?
There are two ways to look at this. One is equities as an investment class vs. real estate.
The second is within equity is PMS an attractive investment opportunity or not?
For a client when the first decision is to be made whether he wants to come into equities or go to real estate, the most important thing to note is that there is liquidity which one gets in equities which is something one doesn’t get in real estate. Also, time horizons involved in investing and taking out money can be quite elongated in equities as compared to real estate. Then, if we switch to the other question of whether PMS as an asset class is a good asset class or not. There are certain risks that are inherent in equities. Those risks are also prevalent in PMS. Within PMS typically you will find PMS providers concentrating their positions and then building portfolios which is very different from how mutual fund providers manage their portfolios, those are quite diversified. So a client coming into PMS’ has to be mindful of that one factor that concentrated portfolios may at times have high volatility and if one is able to bear that volatility and hold on for a period of two to three years; concentration also helps one in generating higher returns. So, that trade-off is something that an investor has to be mindful of before coming into PMS’.
Is PMS right for you? Is it risky for a salaried employee to go in for PMS?
Because typically 25 to 30 lakhs is a saving that a salaried person has done for a large span of time and then he or she wonders whether the concentrated risk is really your cup of tea. Who can? Or Who should go for PMS?
PMS comes with the inherent risk of equity. So, once you are into the equity market, it is very clear that you are taking that risk whereas the trade-off is you would be getting good returns. In the case of salaried people, they are more risk-averse; so it depends upon what kind of risk appetite you have. People normally come into PMS who have a longer investment horizon and a higher risk appetite. If somebody is very risk-averse, then the first thing is that equity is not a class for him at all but if he is coming within equities then probably mutual funds will be safer because of diversification. So, in PMS by nature, one is actually doing concentrated portfolios, having a small number of stocks, and taking larger positions. Hence accordingly risk goes up. Basically, if one wants a diversified portfolio, then probably, the mutual fund would be a good choice but if one wants better returns then of course PMS.
Any thumb rule with regards to investing in PMS?
If one has ₹70 lakhs to 1 crore portfolio, a 25 percent position in equities in PMS is quite reasonable and not overstretching yourself. The second thing is that in PMS, if one is not worried about one’s 100 rupees going down to 98 or 95 rupees because of volatility, then the promise of substantial returns over a long period of time like that of three to five years and your time horizon is that much, would pull one towards PMS and to that extent, PMS becomes quite a lucrative investment opportunity for whoever is looking to invest in equity.
Understanding The Working Of PMS
The thoughts of individuals who are investing in markets is that when one is a rocket scientist he or she needs to have training for that, whether one is a teacher or a physicist- all require training. But equity investing is the simplest thing which people think to do with an “I can manage it myself” attitude; although this is a very complex world in which you are making decisions and you need to know what to filter, what really to focus on, what not to focus on and then make that decision of whether you want to be invested in a particular name or not. For that, having specialized knowledge is quite important. Also, there are specialists whose day job is to understand businesses, understand management, understand the environment and then make that call. Given all of that, it is only good that you entrust such specialists with the responsibility of making those decisions for you.....especially if you don’t have the time to research and understand businesses of your own.
Assuming that you are going for discretionary service, you have a demat account, you give your POA. After this, what is the rate of churn? What is the frequency of buys and sells? How is the portfolio really constructed?
It depends upon the portfolio manager. Normally, it is expected that when one is going for a PMS, you will not be churning too much. Market norm is churning probably once a year with a concentrated portfolio and long term holding.
The idea of PMS is basically that one is looking for those kinds of stocks where we have to give some time. The story will play out over time. So, one needs to stay with it. It isn’t possible that today I will buy and after two to six months will sell. The gain depends upon what is the philosophy of the fund manager, what objective has the investor given at the time of discussing with the portfolio manager and what the investor is looking for. One can have a PMS with a very aggressive churn rate also provided somebody says he or she wants a PMS where they need a kind of hedge fund every day. So, it depends upon the time horizon that the investor specifies while taking a call on which fund the fund manager is interested in getting in. To shorten, the fund manager has to understand the investor’s philosophy and match that with his philosophy.
How much return is expected from a PMS scheme?
PMS can deliver 20 to 25 percent return over the long term. When the markets are down by supposedly 5 percent a year, expecting a positive 15 percent return may not be the right expectation. In that year, one may see a downside because markets are down but it will evolve itself if the economy keeps growing. Warren Buffet made an interesting statement regarding this; in fact his guru, Benjamin Graham used to say that markets in the short term are voting machines and in the long term they are weighing machines. This implies that in the short term we will have volatility drives in the markets whereas in the long term we will have fundamental drives in the markets. According to this philosophy, if you have a 15 percent or a 20 percent down year, there will be other years which because of earnings growth will be much better than that. In short, an alpha over that 15 percent market growth rate over a 5 to 10 year period is something that investors should expect from equities and in PMS in particular.
What should be the composition of the portfolios?
It might be said that it is better to invest in small and mid-cap companies where there is a trigger point or a catalyst for the stock to perform. Catalyst for a stock can be just a capacity expansion, promoter change; it could be market exploding, change in technology to name a few. Promoter background is an important criterion that plays its role here. It is recommended to bank on small promoters who may or may not have a track record in the past, so we will have to bank on their capability and see if what we are expecting they will be able to deliver. It is because if they deliver, then only the stock price will perform. So, there is bound to be a mistake here because the portfolio manager is taking a judgmental call on the person’s capability.
It is important to identify mispricing. Essentially, in concentrated portfolios, the portfolio manager needs to not just worry about the upside but the downside as well. Downsides can be prevented on a permanent basis if the portfolio manager does two things- get the right fundamentals and buy them at reasonable valuations. Also, try and understand why the stock is cheap and what will be the catalyst for that cheapness to go away. If this cycle can be completed by the portfolio manager, it is sure that the capital won’t be lost permanently. Lower the losses, greater the chances one makes money eventually. So, the objective for the portfolio manager is to ensure not to lose money first and then identify triggers for values unlocking over a period of time.
PMS Fee Structure
Previously we have learned the mechanics behind the process of portfolio management services. However, investing in PMS attracts some fees from the investors. Let us discuss them:
Entry load: This fee is charged when an investor enters into PMS. The provider of the portfolio management service can charge an entry load of 3 percent.
Management fees: This generally ranges from 1 to 3 percent on a quarterly basis and is charged by the service provider to manage a portfolio.
Profit-sharing: This is exclusive to each service provider and is agreed upon between the portfolio management service provider and the investor while making an agreement.
However, no upfront fee should be charged by the portfolio manager to the investor. The agreement between the portfolio manager and the investor shall conjointly embrace the manner of fees payable by the investor or client for each service rendered by the portfolio manager.
Let's have a look at the fee structure of some of the famous Portfolio Management Services-
- Porinju Veliyath Equity Intelligence PMS- They charge 2% p.a. as a management fee and 10% p.a. on the additional performance returns.
- Kotak PMS- They do not charge any performance fee. 2.5% p.a. is charged as a management fee and an exit load at 3% for one year.
- Ask PMS- They charge 2% p.a. of the portfolio value. 1.5% of capital invested is charged as a portfolio fee. If the investor earns a profit of 10% or greater on the invested amount, then the 20% of the earned profit needs to be given to Ask PMS by the investor.
There are financial advisors who don't take money in percentage terms but they charge upfront fees in exchange for advice regarding where the funds should be invested. Thereafter, the client has to take charge of the rest of the process of investing.
Some of the best advisors include Ashish Kyal of Waves Strategy Advisors, Amit Kukreja of Wealthbeing Advisors, Abhishek Kumar of Sahaj Money.
Enroll for our expert-led stock investment courses to take control of your financial future
Portfolio Construction Strategy
The construction of a strategy for a portfolio involves a lot of studies. The important one is Qualitative screening.
Qualitative screening is based on-
The niche area implies that some companies find their strong domain of operations and become leaders in that area. For instance, AI engineering is a global leader in ferrochrome alloys. It goes into most of the mining sector and it remains amongst the top two companies in the world.
When we consider cost leadership, we have clearly seen for example the telecom space where Indian players are one of the lowest cost telecom players in the world.
So, find which companies have such dominance and have maintained their dominance. Typically it is seen that to have more stable portfolios especially in volatile times, it is good to have a 50 to 65 percent kind of portfolio in the large-cap space because that gives the portfolio a lot of stability even during tough macroeconomic environments.
Registration Details And Client FAQs
In this section of the module, we will discuss some rules and regulations related to portfolio management services in India.
What is the process of obtaining registration as a portfolio manager from SEBI?
The applicant to register as a portfolio manager is required to pay an application fee of ₹1 lakh through a demand draft drawn in favour of ‘Securities and Exchange Board of India’, payable at Mumbai. This fee is non refundable.The application form has form A. The form needs to be posted to the Head Office of SEBI in Mumbai.
Capital adequacy requirement of a portfolio manager?
A minimum net worth of ₹2 crores is required.
Does the portfolio manager need to pay any registration fee?
Yes. Each portfolio manager needs to pay ₹10 lakhs as registration fee. This fee is paid at the time of grant of certificate of registration by SEBI.
What is the validity of a certificate of registration?
The validity of the certificate of registration is for three years after which the portfolio manager needs to apply for renewal of its registration certificate to SEBI. The renewal needs to be applied for three months before the expiry of the validity of the certificate.
What is the amount of renewal fees required to be paid by the portfolio manager?
The amount of renewal fees is ₹5 lakhs.
Is there any defined value of funds or securities or threshold under which a portfolio manager cannot accept from the client while opening the account?
The portfolio manager needs to accept a minimum ₹5 lakhs or securities having a minimum value of ₹5 lakhs from the client while opening the account for the purpose of providing portfolio management service.
Is it required for the investors to open a Demat account to access PMS services?
Yes. An investor needs to open a Demat account in his or her own name for investment in listed securities.
Specify the kinds of reports which the client can expect from the portfolio manager?
The portfolio manager shall furnish a report to the investor or the client as mentioned in the contract but should not exceed a period of six months.
The report shall contain-
- The composition and also the worth of the portfolio, description of security along with the number and variety as well as the amount of each security held in the portfolio, money balance and the total value of the portfolio as on the date of the report.
- Deals undertaken throughout the period of report incorporating date of the transaction as well as details of sales and purchase.
- Expenses undertaken in managing the portfolio of the client
- Details of risk predicted by the portfolio manager and also the risk relating to the securities suggested by the portfolio manager for investment or withdrawal.
The client has the right to get the details of his portfolio from the portfolio managers. Hence, the portfolio manager shall furnish to the client documents as well as information pertaining to the management of a portfolio.
What is the mechanism for disclosure of the portfolio managers to their clients?
A Disclosure Statement is provided by the portfolio manager to the clients at least two days before entering into an agreement with the client. The Disclosure Statement incorporates the amount and manner of fees payable by the investor or client for every activity, risks inherent in the portfolio, full disclosures in respect of transactions with connected parties, audited financial statements for the preceding three years. The SEBI is not involved in any way regarding the approval or disapproval of the Disclosure Statement.
Is the approval of SEBI required for any of the services offered by the portfolio manager?
No. SEBI doesn’t approve any of the services provided by the portfolio manager. The conditions mentioned in the Disclosure Statement and the consensus between the portfolio manager and the client are binding and the investor should invest based on those terms and conditions.
Is the Disclosure document of the portfolio manager approved by SEBI?
No. SEBI doesn’t approve or disapprove the Disclosure Document; neither does it validate the correctness or adequacy of the contents of the Disclosure Document.
Is early withdrawal of funds by an investor permissible?
The funds can be withdrawn any time before the contract matures. The agreement between the portfolio manager and the client sets out the terms of premature withdrawal.
Can a portfolio manager impose a lock-in on the investor?
No; although the portfolio manager can charge separate fees from the client for exiting before the maturity date, as mentioned in the agreement.
Can a portfolio manager provide a guaranteed return to the investor?
No. The portfolio manager cannot promise a guaranteed return to the investors.
Criterion on which the performance of the portfolio manager is calculated?
The performance of a discretionary portfolio manager is calculated by applying the weighted average technique taking every individual class of investments for the forthwith preceding three years and in such cases, the performance indicator is additionally disclosed.
How would the investors redress their complaints?
In the Disclosure Statement, the investors would find the name, address and contact number of the investor relation officer of the portfolio manager. Investors can also address the complaint to SEBI. On receipt of complaints, SEBI takes forward the matter to the involved portfolio manager and follows up with them.
Some of the best PMS in India:
- Motilal Oswal PMS- It is found that the Motilal Oswal broking house provides both discretionary and non-discretionary services. The maximum return for the last 5 years is 33 percent. They have the highest number of clients because they have been providing service for the last 35 years.
- Kotak PMS- The maximum return for the last 5 years is 35 percent.
- Ask PMS- The company generally looks into the Multi-Cap strategy. The maximum return for the last 5 years is 18 percent.
PMS Vs. Mutual Funds
Investing in PMS or a mutual fund seems relatively similar. But there are a few differences between the two. Let us discuss how.
The entry point is different for PMS compared to what we have in a mutual fund. It is more oriented towards investors who have more knowledge about markets compared to one when they are investing smaller amounts in the mutual fund. PMS strategies are ideally more focused in nature. The fund manager’s past experience which has been in a particular sector or a particular segment or type of managing the fund is what plays in. For example, there is a fund manager who kind of specializes more in value stocks, there is a fund manager who specializes more in mid and small-cap stocks and there is a fund manager who specializes more in multi-cap stocks. So, choosing the right fund manager becomes very important when one is investing in a PMS compared to standardization which is available in a mutual fund. So, that standardization is not available in PMS. One has to do more research and study before putting money into PMS.
From the K&E perspective (Knowledge and Experience), the investor should have invested in stocks or into PMS schemes earlier or the investor should be having the appetite to fathom the volatility which can be higher in a PMS rather than a mutual fund because PMS will tend to kind of focus on a few stocks or on a particular theme or particularly where the markets are playing out.
So, can be it said that it would be better for an investor to start with the mutual fund, learn how it works, and then maybe move on to a PMS?
Yes, it can be a good stepping stone. So, once one is comfortable with the mutual funds he or she can go on to PMS and especially if you have experience investing in direct stocks then PMS can be an option where you have one more fund manager managing your stocks.
Let’s assume we are comparing the same kind in terms of the category of a mutual fund or PMS. If we look at any large-cap mutual fund; typically it will have anywhere between 30 to 50 stocks which are the underlying stocks whereas if we look at PMS it will have as small as about 4 to 5 stocks. There are PMS which have 15 to 20 stocks or 25 stocks at a maximum. So it is a much more concentrated strategy that one is getting into and therefore the risk of a particular stock or a particular segment not performing is high when one is investing in a PMS. On the flip side, there can be benefits in case the investment which has been made which is more of a fundamental investment with a longer-term perspective is something that plays out well for the fund manager. If one has a 2 to 3 year horizon, a mutual fund is a better option but if one has a 3 to 5 year plus horizon as well as the risk appetite to fathom the volatility, then PMS should be some part of one’s portfolio.
Transparency- Mutual funds give their monthly fact sheets. The transparency is relatively lower in PMS compared to mutual funds in 2 ways- One in terms of regulatory requirement and the other in terms of standardization. The PMS industry is smaller in size and nascent compared to mutual funds which are huge. Also, there is a lot of standardization in the mutual fund industry which is not the case in PMS because different portfolio managers follow different strategies.
For example, an investor who has come into PMS two years back vs. the investor who has come into the same PMS one month back is likely to have a different portfolio. It is because the fund manager may not invest in the same stocks that he invested in 2 years back. In that context, it becomes very difficult to compare. Having said that, we should also know that transparency is available to PMS investors. Most of the PMS managers now have an online portal where every day the investors can go and check their portfolios and as and when they make changes that are disclosed to the clients on a regular basis.
Returns- One should look at the history and volatility of PMS returns vs. Mutual funds. As a matter of fact, an investor should know his investment philosophy especially in terms of understanding the underlying investments which are being made- whether it is large-cap, mid-cap or small-cap; and within that what is the liquidity profile, what is the volatility which is attached to it, what is the fund manager’s expectations as far as holding period is concerned. As a matter of risk profiling, I might be an aggressive investor but within that aggressive investor if my liquidity requirement is different compared to another aggressive investor then I have to weigh whether I should be investing into a PMS or a mutual fund.
PMS Average Returns
Courtesy: ET Now (As on December, 2020)
Costs- In mutual funds, we have a direct scheme option where the investors can directly go and invest at a different fee structure than what it is in a normal distributor-led fee structure. In the PMS also; SEBI has mandated that PMS houses should have two fee structures- one for direct investors and the other for distributor-led investments. For example- the difference in fee structure for an equity large-cap fund in PMS vs. the difference in fee structure for a large-cap mutual fund may not be the same. It may be higher in a mutual fund compared to a PMS scheme largely due to the fact there is a lot of specialization in PMS and a large cost involved in direct investment for a PMS house.
Exams To Qualify As A Portfolio Manager
To become a portfolio manager in India requires a lot of studies. You need to prepare for an examination i.e, National Institute of Securities Market (NISM) launched NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors Certification Examination.
After successfully completing the PMS Distributors Certification Examination, the candidate should:
(a)Know the fundamentals of investments, securities markets, making an investment in stocks, know-how constant profits securities, derivatives and mutual funds.
(b)Understand the function of portfolio managers, operational factors of portfolio control offerings and approximately the portfolio control process, overall performance measurement and assessment of portfolio managers.
(c)Get oriented to the taxation factors and regulatory, governance and moral factors of portfolio managers and PMS distributors.
Structure of exam:
The exam comprises 80 multiple choice questions and 3 questions based on various cases.
Hence, 80*1= 80 marks + 2*5*1 (2 cases comprising 5 questions of 1 mark each)= 10 marks + 1*5*2(1 case comprising 5 questions of 2 marks each) = 10 marks.
The duration of the exam is 2 hours. The pass mark is 60. Moreover, negative marking of 0.25 of the marks assigned to a question is applicable.
Conclusion
In portfolio management, the manager should see what theme they are picking. For example, in the case of Force Motors, the theme was luxury vehicles in India will grow to a very large extent and then go into data crunching like it happened in China…which will give an idea of what kind of numbers can come for BMWs and other luxury cars in India….and if Force Motors is the only supplier for that, how it gets benefitted. This needs to be done for all the stocks the portfolio manager is planning to invest in.
The indisputable fact that effective portfolio management permits investors to develop the simplest investment set up that matches their income, age and risk taking capability, thus makes it essential. With good investment portfolio management, investors will cut back their risks effectively and avail customized solutions against their investment-oriented problems. It is, thus, one amongst the inherent elements of undertaking any investment venture.
