Is a Portfolio Management Services (PMS) Investment the Best Option for You?

As you move up in your life stage, there comes a time when you have taken care of your basic financial needs and are now on the lookout for interesting avenues which will help you build wealth to optimise your returns at acceptable levels of risk. Wealth management comes into the picture at this stage. There are a host of investment options within this realm. We here will discuss the PMS (Portfolio Management Services) investing scheme, where experts called portfolio managers would help you build a portfolio that aligns with your objective of optimized returns.

What is PMS?

PMS is a popular service among HNIs, UHNIs, HUFs, partnership firms, NRIs, etc. However, they are now opening up to all other segments of investors who have the required surplus to avail of the service. This is against the backdrop of the growing interest in investing and the willingness to take risks. PMS services in India started with a minimum ticket size of Rs. 5 lahks in 1993. Given the increase in disposable income and the evolution of markets, the minimum ticket size has been hiked to Rs. 50 Lakh in 2019. Typically, it is well suited for individuals with a sufficient surplus amount which they can invest in obtaining upside but do not have the time to track the nuances of the markets and align their portfolio to the best opportunities available.

How does a PMS work?

PMS service calls for investors to provide lumpsum funds, which can be invested in a range of investments including but not limited to equity, debt, gold, etc. The effort is to create a full-fledged investment account with various asset classes in your specific name aligned with your requirement. This is the essence of PMS and is also the primary difference from mutual funds, which offer a more generic investment option.The portfolio manager is hired as a stand-in to watch over your investments and monitor for new opportunities to optimize returns and mitigate risks as applicable. In return, there is a nominal fee that the portfolio manager would charge. The PMS house will provide regular reports to help you understand how your portfolio has been performing. Entities offering PMS services need to be registered with SEBI to eliminate fraud and malpractices.

Types of PMS

There are various types of PMS in India

Based on the frequency of management
Active Portfolio ManagementThe focus is on alpha generation (higher returns than benchmark). Higher the risk, the potential for higher returns.Aim to invest in undervalued investments, and multi-bagger opportunities.
Passive Portfolio ManagementOften mimics the performance of an index by replicating the index’s portfolio. Returns are in line with the index. Lower transaction costs.
Based on the extent of control
Non-discretionary Portfolio ManagementProvides investment advisory, left to the client to execute the trade. The client has complete control over the portfolio.
Discretionary Portfolio ManagementThe portfolio manager has complete control over the portfolio. Can adopt any strategy to achieve optimal returns.

Objectives of PMS

While there are different types of PMS, the objectives are the same across all types of PMS. They are as stated below:

  1. Capital Appreciation:

This remains the primary objective of professionally managed portfolios. The optimisation of returns is attained by gaining exposure to promising investment opportunities.

  1. Aligned to risk appetite:

PMS is aligned with the specific risk appetite of the individual. It is a highly customised service and hence, will cater to the risk appetite of the individual. Apart from personal preference, the age, life stage of the individual, dependents, liabilities, and other such factors will be evaluated to profile the client according to their risk appetite, and the portfolio will be designed accordingly.

  1. Regular income:

PMS has also opted with the perspective of regular income. There are many companies or investment opportunities which offer regular dividends or interest. This can become an alternative source of passive income that individuals may use towards their commitments. There are specific portfolios built to generate this type of regular income.

  1. Liquidity:

PMS portfolios need to offer adequate liquidity to cater to the client’s requirements. Although it is advisable to look at these investment opportunities from a long-term perspective, there are times when the clients need money for their vital needs. In such cases, the portfolio manager specially curates a portfolio that will offer liquidity at the relevant timeline.

  1. Optimisation of post-tax return:

At all stages of investing, taxes play a significant role. PMS optimizes post-tax returns and looks for opportunities that offer tax-efficient returns. Given the advantage of capital appreciation and post-tax efficiency, the returns can be optimized even further.

PMS is a service open for all who can afford the minimum ticket size and have a reasonably high-risk appetite. Now that you know the nuances, it is time to decide if it is the right avenue for you!