These days investors are looking at PMS Schemes as a more viable option to mutual funds. Particularly where the ticket size is above Rs. 25 lakhs. One clear advantage of selecting a PMS scheme is your ability to tailor the product as per your risk profile. This may not necessarily be true given that most large PMS schemes are now beginning to look a lot more like a packaged mutual fund with little variation based on individual investors. This at times defeats the whole purpose of investing in a PMS scheme. Below, we try to analyze some key points that you should understand before making up your mind.

Portfolio management services (PMS) is a service offered by professional money managers to the more discerning investors, which can be tailored to meet specific investment objectives.

Investors can be individuals or institutional entities with high net worth. Minimum investment amount that investors need to put in for a PMS scheme is currently set atRs. 25 lakh as per SEBI.

Read more on why is there A Minimum Ticket Size?

Points To Keep In Mind While Selecting a PMS Scheme   

[1] Types of PMS – Discretionary and Non-Discretionary

In discretionary PMS, portfolio manager takes investment decisions and has full discretionary power to manage investor’s portfolio, i.e. he can buy/sell stocks without consulting with the investor.

In non discretionary PMS, portfolio manager can suggest investment ideas; the rest is investor’s choice. In both the scenarios, portfolio manager charges fees/commission on monthly, quarterly or yearly.

[2] Fee/ Commission Structures

A PMS investor has a choice to decide how he would like to pay his portfolio manager. Unlike mutual funds where expense ratio for each fund is pre-decided for every investor, in a PMS scheme the investor can choose from different commission slabs which portfolio managers offer. In short, it’s an (individual) agreement between the investor and the portfolio manager.

Example

Investor A invests in a discretionary PMS an amount of Rs. 25,00,000 and agrees to pay a fund management fees as below:

Fixed management fee of 2% per annum (charged quarterly @ 0.5% on average NAV) plus a 10% share of profit per annum.

After 3 months, the amount grows to Rs. 30, 00,000.  The portfolio of the client will automatically deduct Rs. 15,000 as management fees on the last day of the quarter.

At the end of the year, the amount grew to Rs. 34,00,000. In addition to the quarterly management fee, the portfolio of the client will also deduct Rs. 90,000 (i.e. 10% of the yearly profit of Rs. 9, 00,000 on the starting value of Rs. 25,00,000).

While the fees may seem a lot, it is only because the portfolio generated over 36% return in the year. If the portfolio did not generate any profit then the portfolio manager would only make his management fees.

However, if an investor in non discretionary PMS invests Rs. 25 lacs and after 3 months, the amount grew to Rs. 28 lacs, then also the portfolio manager will charge on the profit generated based on the terms on which such a client availed the service.

Read More on PMS Fee/ Commission Structures 

  • Selecting Non Discretionary PMS Scheme

In discretionary PMS Scheme, it may happen that the portfolio managers may indulge in doing undue and unnecessary churning of the investor’s portfolio to earn more commission income. This may cause some additional expenses and short term capital gain to the investor.

With non discretionary option, the role of the portfolio manager is just to act as an investment counselor. The portfolio manager only provides the client with investment ideas while the final choice and the timing of the investment rests solely with the client.

  • Selecting Registered Investment Advisors

To manage your portfolio, you can also take the services of various SEBI registered investment advisors. These advisors will help you create a portfolio of stocks, mutual funds depending upon you risk-return profile and financial goals you have for you and for your family.

Investment advisors generally work on 2 models – fixed fee model and remunerative model.

Under Fixed Fee Model – Advisors charge fixed fee (monthly/quarterly/annually) for managing/advising on your portfolio. This also include rebalancing of your existing portfolio and

Under Remunerative Model or Profit Sharing Model – lower flat fee +some percentage of returns generated. The latter is charged for the returns generated in excess of a pre-determined rate.

[3] Past Performance to Predict Future Performance

Many investors base their investing decision only on the basis of past performance. But investors cannot really be blamed. Historical returns are so trumpeted in advertisement and fund’s fact sheet that investors consider past performance as a reasonable guide in selecting PMS schemes.

Point to note is that past performance will ONLY enable you to assess the historical returns of the PMS scheme over various time frames, but to know how the scheme may perform in the future, a lot more research and analysis is required.

 “Past performance is not a reliable indicator of future performance so don’t be excited by last year’s high returns. But past performance can help you assess a scheme’s volatility over time.”

[4] PMS Schemes vs. Direct Stock Investing

Further before selecting a PMS scheme, an important question you should ask yourself before starting investing is “Why not directly invest in stocks?” There are many advantages that you have when you are directly investing in stocks:

  • No minimum investment amount.
  • Save on fund management commission
  • Select and create your own portfolio
  • Shuffle your portfolio, which means that if any of your stock is not performing well, you can immediately sell that and opt for a better performing stock
  • Similarly, if any of your stock has met its target, you are free to book profit and reinvest your money.

Read More – Portfolio Management Schemes (PMS) vs. Mutual Funds – Better Investing Option?