The Ultimate Guide to Choosing the Best PMS in India 2023
Many options are available when investing, from stocks and bonds to gold and real estate. High Net Worth Individuals (HNIs) are progressively looking for customised solutions to aid asset diversification and growth faster than often accessible investment alternatives. This is where Portfolio Management Services (PMS) come into play.
According to their risk tolerance level, PMS allows investors to combine different asset classes. The portfolio is tailored to the investor’s financial goals and liquidity needs. Additionally, for non-discretionary PMS, the customer has to approve the portfolio manager’s investment choices.
The Assets Under Management (AUM) of discretionary PMS stood at ₹23.3 lakh crores as on March 2023, showcasing Year on Year (YoY) growth of 14.5% and Month on Month (MoM) growth of 1.8%. Discretionary PMS has the highest AUM and number of clients compared to non-discretionary, co-investment, and advisory PMS.
Although it is fascinating to invest in PMS, choosing among the available options is daunting. However, this article is the ultimate guide to the best PMS in India 2023. Moreover, it helps understand PMS and factors to consider while choosing PMS.
Understanding Portfolio Management Services
Portfolio Management Services, or PMS, is an investment management service where experienced and skilled portfolio managers manage your portfolio. Mostly you will find equity PMS. However, this is not necessary. Apart from equity, PMS also deals in fixed-income securities such as bonds. There are even PMSs that manage the portfolio of mutual funds.
Now you may be wondering if PMSs sound similar to mutual funds. However, the major difference between the two is the customisation part. Mutual funds offer no customisation. Regarding non-discretionary PMSs, the portfolio manager recommends investment ideas, and you can decide whether to buy them.
Every investment in PMSs goes to your demat account, which is not true with mutual funds. Even the minimum ticket size is higher in PMS. The minimum ticket size of PMS is ₹50 lakhs. The Securities and Exchange Board of India (SEBI) increased this ticket size from ₹25 lakhs in 2019. In 1993, the same was ₹5 lakhs.
Benefits of Portfolio Management Services
Financial analysis and asset diversification are PMS’s most significant advantages. Investment decisions made by PMS are professionally handled by seasoned fund managers and supported by technical and fundamental analysis. Portfolio managers take a comprehensive strategy and help investors diversify their portfolios, aligning with their overall financial planning. Real Estate Investment Trusts (REITs), commodities, structured products, debt instruments, and foreign investments are just a few of the numerous investment options offered by PMS. Such assets serve as an effective diversification strategy since their price swings are not directly influenced by the equity markets.
The degree of customisation offered to individual investors is any PMS’s Unique Selling Proposition (USP). An investor can pick the asset class mix in PMS in accordance with their level of risk tolerance. The portfolio has been customised to the investor’s investment objectives and liquidity requirements. Additionally, the investor must consent to the portfolio manager’s investment choices for non-discretionary PMS. As a result, the investor has some level of influence. Each investor in PMS has independent and distinct holdings.
Portfolio Management Services comes under the purview of SEBI. They are regulated under SEBI (Portfolio Managers) Regulations, 2020. This brought a lot of standardisation in terms of reporting. They must periodically submit all the details about transactions, holdings, fees, etc. Moreover, they are also mandated to periodically provide investors with statements, fees, performance, etc.
PMS uses an aggressive approach to investing and offers services for dynamic portfolio rebalancing. Fund managers adjust the exposure across various asset classes based on market movements and volatility. The quality of the portfolio as a whole is also emphasised in addition to short- and long-term benefits.
Types of Portfolio Management Services in India
Active PMS aims to outperform benchmark indices like the Nifty 50 or the S&P BSE Sensex regarding returns. The research team chooses the appropriate investments, and the portfolio manager actively oversees the investment portfolio.
Investors that desire more significant monetary gains and have a higher risk tolerance choose active PMS. When undervalued stocks reach their full potential, the portfolio manager sells them at a higher price. In addition, the portfolio manager diversifies the investments in the portfolio to reduce investment risk.
Simulating the performance of a market index, like the Nifty 50, is the goal of passive PMS. The fund manager monitors and mimics the stock market index portfolio to provide investors with returns consistent with the index it tracks.
Index funds, mutual funds, or Exchange Traded Funds (ETFs) that resemble market index portfolios are the main emphases of passive PMS. In addition, the passive PMS approach has lower transaction costs than active PMS since the portfolio manager doesn’t churn the portfolio more often.
The manager of the discretionary PMS portfolio has total control over it and is free to use any strategy to meet investing goals. Investors have little influence over investment decisions, which are solely at the portfolio manager’s discretion.
The portfolio manager makes investment recommendations under non-discretionary PMS. The decision to implement these investment ideas rests with the investor, while the portfolio manager is responsible for trade execution. The fund manager in a non-discretionary PMS follows client instructions and offers investment strategies.
Factors to consider when choosing PMS in India
Performance tends to be the result of the investing process. Thus, it’s critical to determine if PMS generates profits due to luck or the manager’s abilities. Tools are available to help you comprehend the return source and the risk level involved in producing risk-adjusted returns. Understanding how portfolios participate in markets that are heading up as well as down is crucial. It would be easier to comprehend the sustainability of future performance by reviewing various financial ratios.
The strategies and investment philosophies used by portfolio managers vary. Some managers follow a particular investment style, such as value, growth, or momentum. In contrast, others provide a mix of products and investment styles. Investors need to decide if the manager is true to their label. It would be a good indicator if the portfolio’s churn rate unexpectedly increases amid shifting market cycles. The idea that PMS should only use concentrated strategies is one of the most common myths. There are well-balanced strategies that have outperformed markets during every cycle.
The assets that portfolio managers handle are subject to a management fee. There might be a flat fee, a performance fee, or a combination of both. Investors often choose fixed fees during bullish market phases and performance fees during bearish market phases. But since the performance option has been priced above a predetermined hurdle rate, they pay huge fees when the market cycle shifts, as witnessed in 2020. Some fund managers charge performance fees only when their funds outperform their market benchmarks.
Entry and exit loads, liquidity availability, transparency in portfolio reporting, etc., are additional factors to consider.
In conclusion, PMS focuses on creating investment strategies based on the investor’s investment horizon and risk profile to assist investors in achieving their financial goals. To meet the needs of investors for investment growth, steady income, or liquidity, portfolio managers create unique portfolios. However, before investing in PMS, it’s necessary to consider performance, investment philosophy, fees, and costs.
Frequently Asked Questions (FAQs)
What are portfolio management services in India?
PMS (Portfolio Management Service) is a professional financial service that manages your investment portfolio with the help of a research team, skilled portfolio managers, and stock market experts.
What is the minimum amount for portfolio management services in India?
According to the SEBI, the minimum investment amount in portfolio management services is ₹50 lakhs.
Can we do SIP in PMS?
When an investor contributes more than a minimum threshold, the SIP option becomes accessible. For every instalment, a minimum ticket size applies. This size varies across portfolio managers.
What documents are required for PMS?
You would need to provide the following documents for opening a PMS account as an individual:
Address proof – Aadhar card
PAN and Aadhar card copy of Guardian – If Nominee is minor
Second Holder – PAN and Aadhar card copy
Copy of the POA (Power of Attorney) provided to the PMS
Demat account opening form
Can I withdraw money from PMS?
According to the SEBI, PMS cannot have a lock-in period. However, they can levy an exit load according to the terms and conditions mentioned in the agreement. Moreover, clients can withdraw early from the PMS. Yet, this would depend on the terms of premature withdrawal in the agreement between the client and the PMS.
On what basis is the performance of the portfolio manager calculated?
The weighted average method is used to calculate the performance of discretionary PMS. Here it takes each category of investments for the immediately preceding three years. Moreover, PMS also needs to disclose the performance indicator.