All about Portfolio Management Services

Managing investments in equities requires time, knowledge, experience and constant monitoring of the stock market. Portfolio management services (PMS) come as an answer for those who need an expert to help manage their investments. This is typically a high-end product, designed specifically for high net worth individuals.

It is also a product, which should be looked at after your basic financial goals, and liquidity requirements are adequately taken care of.

Types of PMS

The portfolio manager (professional expert on stocks / mutual funds) will pick up a set of stocks / mutual funds and line them based on your investment goals and risk appetite.

The portfolio manager makes buy-sell decisions at her/his own discretion; s/he does not refer to the client for every transaction. The portfolio manager will do transactions within the agreed parameters to achieve the client's investment goals.

Non-discretionary portfolio management

The portfolio manager cannot make buy-sell decisions at her/his own discretion; s/he has to refer to the client for every transaction. 

Pool portfolio management

Mutual fund is a best example of pool portfolio, where the investor's funds are pooled together and the money is put into stocks. It is less customised as compared to a non-pool portfolio which is more aligned to individual financial goals / risk appetite.

Customised / Model portfolios

There will be typical model portfolios categorised on the risk / return profile of the customer. Investors can choose from one of those. This is similar to the non-pool portfolio where the customer's account is handled in a stand-alone manner. This is customised to your preferences.

Dynamic portfolios

An actively managed portfolio is termed as a dynamic portfolio. Portfolio managers re-align their exposure pattern in line with market trends.

Typically, PMS may be offered in two structures:

• Fixed fee structure
• Performance linked fee structure

In fixed fee structure client has to pay fees, which is fixed by the PMS company, whereas in case of performance linked fee structure, client has to pay a certain percentage of returns generated as fee.

Usually the fee ranges from 15 to 20 per cent of the profit.

Under both scenarios, apart from management fees, separate charges will be levied towards brokerage, custodial services and towards meeting tax payments. One can observe wide variations in fees charged, across various PMS providers in the market.

The process is simple enough; the client gives her/his money to the service provider company; company portfolio manager invests the money on behalf of the customer and generate returns.

Client pays fees according to the fee structure decided prior.

Obviously, like any other financial product, PMS too has its pros and cons.

Unlike mutual fund there is no pressure to keep certain percentage of cash in the account, so the portfolio manager can take decisions without any pressure

• Tries to be more customised; normally have options to leave out certain stocks/sectors etc
• Flexibility allows many new concepts: for example, funds that attempt to make money both sides
• Hedging: Normally used to manage risk

Negatives

• Higher risk due to flexibility allowed for investment decisions
• PMS is also relatively tax inefficient as capital gains is computed on each underlying transaction which is not the case for the mutual fund.
• Minimum entry size of Rs 5 lakh or thereabouts

Equity PMS is a pure equity service and should be looked at only after one builds a substantial corpus with mutual funds. These are two different asset classes (although, the underlying asset class is the same) and an as-is comparison will be irrelevant. One can highlight the following differences whilst comparing PMS with mutual funds:

Passive vs active

Mutual funds are passively managed instruments, they are meant for relatively long term. Further, since the SEBI clamp down on mutual funds which indulged in derivative instruments, fund managers have restricted their risky positions. PMS does not have any such restrictions, they are more actively managed and can take considerably higher risk positions which could provide huge upsides; however, if it goes wrong, the portfolio could drag down considerably.

Sectoral allocation

Pattern of investment is different, there is more action happening here, the churning of portfolio is more rapid, also, as compared to a mutual fund house, the volumes may be significantly lower. PMS can have a more concentrated sectoral allocation.

Flexibility

If one is bullish on certain sectors, but find that equity funds have marginal exposures to the sector the investor may have to pick up a sector specific mutual funds which may have to be offloaded at the right moment.

In a PMS, the portfolio manager can accommodate such sector / stock preferences when s/he invests. But don't expect to completely dictate what stocks or sectors the portfolio manager will buy on the portfolio.

Risk

Considering that PMS products have more flexibility, the risk would be higher.  This could be especially when some calculated bets go wrong. Most mutual funds are pretty diversified and hence carry relatively lower risk.

Conclusion

PMS is definitely for the moneybags; evaluate it well from several perspectives: expertise, track record and investment philosophy, flexibility, operational efficiency and the fee before you hand over the reigns.

It could end up being a well paying affair if you get this one right. However, restrict the composition in your portfolio keeping in mind the relatively higher risk levels. This is essentially a high-risk-high-return product.