It is well said, the higher the risk, the higher is the return. If you are an individual with a higher net worth (HNI) then, PMS(Portfolio Management Services) is the way to go for those captivating returns. So, if you decide to play big, then this article is for you. In this article, you will find detailed information on How PMS(Portfolio Management Services) works? So, let’s start by understanding what is PMS(Portfolio Management Services)? What does it mean?
PMS (Portfolio Management Services) is an investment portfolio account that deals in stocks, fixed income, debt, cash, structured products, and other individual securities. It is a professional service managed by highly qualified and experienced portfolio managers. These portfolio managers manage the above services on behalf of clients. A research team backs them up. They provide useful and necessary insights for the managers in these services. Here you have the freedom and flexibility to tailor services. They are made following your investment objectives. But these services are for individuals who have an appetite for high-risk.
The catch here is that the minimum investment required to avail of the PMS scheme is about 50lacs. This is by the SEBI guidelines. Yet, they can differ ( can be above 50 lacs) based on different service providers. The minimum balance requirements for investment differs for different stocks and services.
Since it is an external service, Why should you consider it suitable for your financial goals?
A lot of investors try to manage their equity portfolios to have higher returns by taking huge risks. But these huge risks often involve various parameters to be analyzed. Only then can you get to a conclusion. This might involve areas where you do not have the expertise to manage that stock portfolio. Hence, it can lead to losses if not mended properly. Thus, it is always good to have a portfolio manager to provide help to achieve your goals.
Types Of PMS Services Based On The Extent Of Authority You Provide
In a discretionary portfolio, you provide the service provider the authority to make decisions on your behalf. The service provider enacts the decisions before consulting the client. They will keep you updated about the various decision made. They would also give you time to time report on the progress of the goals.
In this type of portfolio, the managers suggest investment ideas to their clients. These ideas are based on the client’s motives and goals, considering their risk appetite. Then the client looks into these insights and decides whether to go ahead with that idea. The time of implementation and the amount is determined solely by the client. As soon as the client takes the decision, it is on the managers to carry out the execution process.
Herein, portfolio managers only suggest investment ideas to the client. These investment plans are based on your plans. But then, the whole choice and execution of the ideas rest with the client. And all the related steps are to be taken by the client itself. Only the manager can ask to help in this matter, but he has no control over the investments.
Working On PMS And How An Investor Invests In PMS?
If a person chooses a PMS scheme, a Demat and a bank account are opened in your name. All the future transactions are made from these accounts in your name. Accordingly, The dividends earned from the investment are credited to this bank account. Similarly, the shares earned are transferred to the Demat account. Hereby, this implies that you hold all your stocks independently. Individuals’ sentiments and behavior remain isolated from one another in these investments. Portfolio managers will provide you a daily evaluation statement of your portfolio.
2 methods can make investments. One is by cheque and another by transferring the existing shares that the client has in the Demat account. Besides this, the customer has to sign documents that include a power of attorney, Pan Card, address proof, etc.
How Much This Proficient Service Would Cost?
PMS has a high maintenance cost as compared to any other investment services. These charges are decided before investing that are to borne by the client. It has entry cost, maintenance cost as well as a profit-sharing cost in the investment. They are different for different advisors depending upon experience.
- Entry Cost: When you avail of such services, you are charged an entry cost or a setup cost. This cost varies from 1 to 3% of the total investment made on the stocks. It is a one time cost that is applied while opening a new account.
- Management Charges: These are regarded as funds management charges. They are levied by the PMS provider that varies from 1-3% depending upon the PMS provider. They are slashed from the account every quarter.
- Profit-Sharing Fees: Also, there can be a profit-sharing agreement between the client and the service provider. This is decided before signing in the PMS services. Then this charge is levied based on the agreement signed between the manager and the client. This fee is based on what PMS calls it a hurdle-rate. It is a rate decided under which if a portfolio provides a profit percentage above the agreement percentage. The profit above that rate belongs to the manager, and the client has to provide it to the manager.
- Other fees: The client has to borne extra changes as the investments are made into his/her name, some of which are:
- Custodian fee for the stocks
- Charges of opening a new Demat account
- Auditing charges of the statements
- And Transactional brokerage.
Advantages Of PMS
i. Professional Management and continuous monitoring: The portfolio’s stocks and debts are monitored rigorously by a team of professionals. They look into it, and the actions are taken based on the predictions of the analytics.
ii. There are high chances to overtake the benchmark figures in the long run. Other types of investments can’t guarantee this.
iii. You get to invest in various stock classes such as debt, equity, gold, and mutual funds market.
iv.They are practically no limit to the amount of investment that a person can make.
v. Hassle-free operation and Risk control: The portfolio manager performs all the administrative work. They provide clients with periodic reports. Reports signify the status of the portfolio and performance. All the actions taken are well researched, so the risk is less.
Disadvantages Of PMS
i. As per Sebi guidelines, the minimum investment required for a PMS Service is 50lacs. Furthermore, additional charges would make this amount to reach 53lacs. Thus, small investors would not be able to avail of the PMS services.
ii. Since there are very high risks and we depend on PMS to deliver results. But if the plan does work well, then the losses are to be borne solely by the client, which can be huge.
iii. There is a long document procedure included in setting and maintaining the PMS services. It includes opening a new Demat, trading, as well as a bank account. This requires separate documentation and verification, which can be a headache.
iv. There is a high set up and maintenance cost to avail a PMS service.
It always remains in the back of our mind that how our PMS gains would be taxed. So we should look into the taxation scheme of PMS gains.
There have always been debates and discussions about how the PMS gains are to be taxed. Whether they should be regarded as Capital gains or business incomes, it has been made formal and clear that these gains would be regarded as normal Capital gains. They would be subjected to equity taxation rules, which means that any short-term capital gains, which are the gains earned in less than a year, are subjected to 15% taxation. Any long-term gains earned for more than a year Are taxed 10% without indexation benefits.
Now it might get you thinking that PMS is like a mutual fund investment. Wherein you can invest yourself. You would not have to pay any taxes and fees that could be a huge difference in the earnings.
Differences Between Mutual Fund And PMS Services
These both are types of managed funds, but the difference that stood up between them are:
1. Under the PMS scheme, individual portfolios are independent and isolated from other investment behavior. Whereas, in mutual funds, the total of the investors affect the performances of the various funds
2. There is no cap on the investment of listed stock in PMS. But the client can’t invest more than 25% in AUM in unlisted equity shares. In mutual funds, a capping of 10% is present on the single stock purchase.
3. There are no standard Terms of publication and working of data in PMS. But this not the case with Mutual funds. Every detail is published for the public.
4. They are a high entry load and subsequent fees charged in PMS services. Whereas in mutual funds, there are no entry fees and maintenance fees.
5. A minimum investment required in PMS is over 50 lacs, but a mutual fund requires only a few thousand. This makes mutual funds investment to go on for an ordinary individual.
1. What type of PMS services are offered by companies in India?
In India, the majority of the portfolio managers provide discretionary Services only. Moreover, this service providing companies offer model-based services. They are somewhat planned already by them. These standard models are followed with a bit of change/alterations. These changes are done for the clients based on their preferences.
2. Can an NRI invest in the PMS scheme?
Yes, an NRI can surely invest in the PMS, but he/she needs to open a PIS account to do the same. But the NRIs have to provide documentation that is different from that of an Indian resident.
3. What happens when a client already possesses a Demat account?
Under the PMS agreement, you will have to give your trading and bank account power of attorney to your portfolio manager. Under this, you will have to open a new Demat account, trading account, and bank account to avail of services. This is required as they would be able to manage the service more efficiently. As they would have a detailed analysis from the beginning.
4. What are the modes by which we can invest in PMS schemes?
The client can invest in PMS schemes with cash or with the balance in their bank accounts. Apart from these, the clients can also use an existing portfolio of stocks, bonds, or mutual funds. Yet, the portfolio manager may sell these existing stocks. The manager might want to earn new fresh investments for the portfolio.
5. What is the structure of the PMS schemes, and how does the investor/client look into the investments made?
When you opt for a PMS service, a new bank account and a delay account are opened in your name. So, all the investments are made into your name. And any dividend/income earned is directly credited to your bank account. As far as your control is concerned, a power of attorney lies with the portfolio manager. The manager performs all the operations. To have an update on the proceeding, you can also login to your account. The service provider would give you the username and password of the portfolio. The manager is obliged to provide you a heads up on progress at least every 6 months.
7. Is there any risk related to the PMS investment?
Every investment made has a risk that can be huge or small. This depends upon the investments you make, considering your goals. With the type of investments made in PMS, the risk is quite high than the normal.
High returns often need high risks. These high risks can be mended to give to the expected returns. But only if you have the right experts and guidance for it. And PMS services are just the right solution for it. Motilal Oswal PMS, Ask PMS, and many such service providers have been marked as industry best. They are one of the best PMS Service providers that have delivered quantitative results. PMS schemes were regarded as worthless by many people years ago. But today, it is the right choice for you if you are an individual who has High net worth value.