What are Portfolio Management Services? Know their Benefits & Importance

Among the many investment funds available in India, mutual funds are among the most well-known. However, many of us may also have come across Portfolio Management Services (PMS) that are offered to Indian investors by leading financial institutions.

PMS is a professional investment service offered by wealth management companies, where a finance professional manages your portfolio of investments on your behalf, usually in a customised way based on your financial goals and risk appetite.

While both mutual funds and PMS are essentially investment avenues, they differ significantly in their structure, management approach, and investor suitability. In this article, we will discuss what PMS is the differences between mutual funds and PMS, the types of PMS available, its benefits and risks as well as why you might want to opt for PMS.

Table of contents

1. What are portfolio management services (PMS)?
2. How do Portfolio Management Services (PMS) work?
3. Types of portfolio management services
4. Objectives of portfolio management services
5. Benefits of portfolio management services
6. Risks associated with PMS
7. Why should you opt for portfolio management services?
8. Portfolio management services for high net worth individuals (HNIs)
9. Regulatory framework for PMS in India
10. Fees and charges for portfolio management services
11. Steps of Portfolio Management Services Process

What are portfolio management services (PMS)?

The PMS full form is Portfolio Management Services. Unlike mutual funds , PMS investments are personalised, and the investment strategy is based on an individual investor’s objectives, risk tolerance, and investment horizons. Thus, as the PMS meaning implies, investment portfolios are highly customised. PMS investments start with a minimum of Rs. 50 lakhs. Hence, Portfolio Management Services can be suitable for institutions and high net worth individuals.

Since PMS investment involves a personalised approach for each investor, fund managers and AMCs may also charge a higher expense fee. It is thus important for investors to understand what PMS means in order to determine how they could make use of it in their investments.

Both mutual funds and PMS are mandated by SEBI to ensure timely disclosures of holdings, performance reports, and regulatory and management changes.

How do Portfolio Management Services (PMS) work?

Unlike mutual funds, where money is pooled from multiple investors, PMS offers customized management based on each client's specific financial goals and needs. Here's an overview of how PMS works:

Client profiling and agreement: The process begins with the portfolio manager assessing the client's financial goals, risk tolerance, and investment horizon. Based on this, a personalized investment strategy is created. A formal agreement is signed, outlining terms such as investment objectives, fees, and reporting frequency.

Portfolio construction: The portfolio manager constructs a portfolio of securities (equity, debt, or a mix) tailored to the agreed strategy. The portfolio is actively managed with decisions based on market research and analysis.

Discretionary vs. non-discretionary PMS: PMS services are offered in two categories: discretionary and non-discretionary. In discretionary PMS, the manager makes investment decisions without client approval for each transaction. In non-discretionary PMS, the manager advises, but the client approves all transactions before execution.

Active portfolio management: The manager actively buys, sells, and rebalances the portfolio based on market conditions and client goals. Ongoing research is conducted to identify investment opportunities, with the aim of outperforming a specific benchmark.

Reporting and communication: Regular reports on portfolio performance, holdings, and significant transactions are provided. Portfolio managers maintain communication to update clients on market trends, strategy, and address any concerns.

Custodial services: A custodian, a separate entity from the portfolio manager, holds the securities in the client’s portfolio, ensuring security and transparency.

Fees: PMS providers charge management fees, performance fees (profit sharing), and custodian fees. These fees are clearly outlined in the agreement between the client and manager.

SEBI regulations: PMS services are regulated by SEBI, ensuring transparency and protecting investors. SEBI guidelines cover client eligibility, disclosure, and code of conduct.

Types of portfolio management services

Broadly, portfolio management services can be of the following types:

1. Discretionary portfolio management services
   In this type, the portfolio manager has full control over investment decisions. They manage the funds and assets on behalf of the client, making decisions based on the client’s investment objectives and risk tolerance.
2. Non-discretionary portfolio management services
   Here, the portfolio manager advises the client on investment decisions, but the final call rests with the client. The manager provides recommendations, and the client chooses whether to follow them.
3. Advisory portfolio management services
   Similar to non-discretionary portfolio management services, the portfolio manager only provides advice and suggestions on investments. However, in this case, the client not only decides which suggestions to follow but also executes the trades of transactions themselves. The manager does not have any authority to do so.
4. Passive portfolio management services
   This approach involves creating a portfolio that mirrors a specific index or benchmark. The goal is to achieve similar returns to the index, with minimal active management. It focuses on long-term growth with lower costs and turnover.
5. Active portfolio management services
   Active management involves continuous monitoring and adjustment of the portfolio to try to outperform the market. The manager actively buys and sells assets to take advantage of market opportunities.

Objectives of portfolio management services

The objectives of portfolio management services (PMS) are designed to align with the financial goals and risk tolerance of individual investors. Here are four primary objectives:

1. Capital growth
   The primary goal of many portfolio management services is to potentially achieve long-term capital appreciation. This involves investing in assets that have the potential to grow in value over time. This is particularly important for investors looking to build wealth for future needs, such as retirement or education.
2. Risk management
   Effective portfolio management aims to mitigate risk through diversification and strategic asset allocation. By spreading investments across different asset classes or sectors, PMS seek to mitigate the impact of poor performance in any single investment. The goal is to achieve an optimised risk-return balance that aligns with the investor's risk tolerance.
3. Income generation
   For some investors, generating a steady stream of income is a key objective. Portfolio management services can focus on creating a portfolio that can potentially provide regular income through dividends or interest payments. This may be especially relevant for retirees or those seeking additional income sources without liquidating their investments.
4. Liquidity management
   Ensuring that the portfolio has sufficient liquidity to meet the investor’s short-term needs may be another important objective. Effective liquidity management helps in meeting unforeseen expenses and taking advantage of new investment opportunities. These objectives are tailored to match the individual needs and financial goals of each investor, ensuring a personalised approach to managing their investment portfolio.
5. Defining investment objectives
   The first step is to clearly define specific, measurable, achievable, relevant, and time-bound (SMART) investment goals. These may include retirement planning, funding children's education, or wealth creation. Your objectives will guide your investment strategy and asset allocation.

Benefits of portfolio management services

PMS can offer several advantages to investors, potentially helping them meet their investment needs efficiently and effectively. Here are some key benefits:

1. Professional expertise: PMS provides access to seasoned professionals with extensive knowledge and experience in investment management.
2. Customised investment solutions: PMS offers personalised and tailored investment strategies that align with an individual’s financial goals, risk tolerance, and investment horizons. Unlike mutual funds or other collective investment schemes, this can help account for an investor’s unique needs and preferences.
3. Diversification: Effective portfolio management services emphasise diversification across assets. Diversification is a key strategy to mitigate risk.
4. Regular monitoring and reporting: Portfolio managers monitor and review the investments regularly to ensure they with the investor’s objectives. Investors receive detailed reports and updates on the performance and composition of their portfolios, providing transparency and enabling informed decision-making. Regular monitoring allows for timely adjustments in response to market changes, optimising return potential and mitigating risk.
5. Flexibility and control: Investors can work closely with their portfolio managers to ensure that the investment strategy aligns with their evolving financial goals and preferences.
6. Asset allocation: This involves distributing investments across various asset classes, such as equity, debt, and gold, based on your risk tolerance, financial goals, and investment horizon. Asset allocation is vital in determining portfolio returns and managing risk.
7. Performance evaluation: Regularly assessing the portfolio's performance is crucial. This involves tracking returns, comparing performance against benchmarks, and making adjustments when necessary.
8. Regular review and rebalancing: Over time, market conditions, financial circumstances, and investment objectives can change. It's important to review and rebalance your portfolio periodically. Rebalancing adjusts the asset allocation to maintain the desired risk level and align with goals. It may involve selling some investments and purchasing others.
9. Tax planning: Taxes can impact investment returns significantly. Portfolio management should consider tax implications and include strategies to minimize tax liability. This includes choosing tax-efficient investments and understanding the taxation of equity versus debt mutual funds.

Risks associated with PMS

Along with its potential benefits, PMS also carries certain risks that investors should consider before investing. These include:

• Market risk: Exposure to market fluctuations and macroeconomic changes can impact portfolio performance.
• Concentration risk: Focused portfolios may amplify risks if certain investments underperform.
• Liquidity risk: Investments in less liquid assets, such as small-cap stocks, may face challenges during unfavourable market conditions.
• Managerial risk: Portfolio performance depends significantly on the skill and expertise of the portfolio manager.

Risks associated with PMS

While PMS offers a more personalised approach than mutual funds, it is important for investors to understand the related risks before committing capital.

• Market risk: PMS portfolios are exposed to general market fluctuations, similar to other market-linked investments.
• Concentration risk: PMS portfolios may at times focus on select stocks or sectors based on the manager’s conviction. While this can enhance the potential for returns if those picks perform well, it may also raise the likelihood of losses if they underperform or face negative events.
• Managerial risk: The success of a PMS may depend significantly on the fund manager’s judgement and expertise. Sub-optimal decisions may affect overall performance.
• Underperformance risk: Although PMS aims to deliver potential returns above benchmark indices, this is not assured. Market volatility or unfavourable economic conditions can lead to lower-than-expected results, even with experienced managers.
• Liquidity risk: Some investments may be less liquid, which means it may be difficult to convert them to cash quickly or at a favourable price during stressed market conditions.

Why should you opt for portfolio management services?

Portfolio Management Services may cater to affluent investors seeking personalised strategies beyond standardised mutual fund products. Here are some reasons you may want to opt for PMS:

• Tailored HNI approach: PMS may suit investors who meet the SEBI minimum investment requirement of ₹50 lakh and prefer a customised portfolio aligned with their goals, risk profile, and preferences.
• Custom strategy and flexibility: PMS portfolios can be more concentrated and may follow differentiated strategies compared to diversified mutual funds, which may appeal to investors with higher risk appetite.
• Professional management: Stock selection, portfolio rebalancing, and monitoring are handled by professional fund managers, which can make it a more hands-off option for investors.
• Broader investment universe: Depending on the mandate, PMS may offer greater flexibility in portfolio construction, concentration levels, and security selection than mutual fund schemes.
• Research-backed insights: Investors may benefit from the portfolio manager’s research process, periodic reviews, and reporting.

Portfolio management services for high net worth individuals (HNIs)

Owing to their high minimum investment requirements, portfolio management services (PMS) cater to high-net-worth individuals creating potential long-term wealth creation along with professional management, customised portfolios and diversification. Here are some reasons why PMS may be suitable for HNI investors:

• Higher entry threshold matches HNI capacity: The SEBI-mandated ₹50 lakh minimum investment aligns with the surplus wealth typical of HNI investors.
• Tailored strategies for unique goals: Unlike standardised schemes, PMS can accommodate specific needs like succession planning, philanthropy-linked investments, or global diversification (where permitted).
• Dedicated research access: HNIs often value access to proprietary research and investment calls not easily available through mutual funds.

Key considerations

• Costs are higher than mutual funds because of active management, reporting, and personalised service.
• Performance depends on the manager’s expertise, which can lead to outcomes varying widely across PMS providers.
• Liquidity is lower: Exiting positions may take longer and could involve costs.
• Risk tolerance is crucial: Portfolios may be concentrated, which amplifies both upside and downside potential.

For HNIs who want a hands-on, personalised approach to wealth management, PMS may serve as a bridge between do-it-yourself investing and standardised pooled vehicles like mutual funds. However, they should weigh the higher costs and risks against the potential for tailored strategies and active wealth creation.

Regulatory framework for PMS in India

In India, Portfolio Management Services (PMS) operate under the regulatory oversight of the Securities and Exchange Board of India (SEBI) through the SEBI (Portfolio Managers) Regulations, 2020. These rules are designed to promote transparency, safeguard investor interests, and ensure professional conduct in the PMS space.

Key elements of the regulatory framework for PMS

Registration and eligibility:

• Mandatory SEBI registration: Any entity intending to offer PMS must obtain registration from SEBI.
• Minimum net worth requirement: To ensure financial capability, SEBI requires portfolio managers to maintain a net worth of at least ₹5 crores. This was increased from ₹2 crores as part of the 2020 updates.
• Qualified personnel: PMS providers must appoint appropriately qualified professionals, including a Principal Officer with experience in the securities market and a Compliance Officer responsible for regulatory adherence.
• Minimum investment: SEBI requires each PMS client to invest at least ₹50 lakhs. This higher threshold, up from ₹25 lakhs, seeks to ensure that only investors who have the financial capacity to manage risks associated with PMS to invest.

Disclosure obligations:

Detailed disclosure document: Before entering into an agreement, the portfolio manager must provide a disclosure document that includes:

• The investment approach and strategy.
• Types of securities considered.
• Associated risks.
• All fees and charges (including management and performance fees, and exit loads).
• Performance of the portfolio manager.
• Any potential conflicts of interest.

Fees and charges for portfolio management services

PMS fees generally include management fees and performance fees, along with other charges.

• Management fees: Usually, a fixed percentage of assets under management, charged annually.
• Performance fees: Paid on profits above a pre-defined benchmark or hurdle rate.
• Other expenses: Custodian, brokerage, and administrative costs may apply.

Fee structures vary across PMS providers and investment strategies, so investors should carefully review the terms to understand the overall cost and its impact on net returns.

Steps of Portfolio Management Services Process

PMS providers may broadly follow these simple steps to manage your investments:

1. Consultation: The investor discusses their goals, risk tolerance, and finances with the PMS manager to define their investment profile.
2. Strategy creation: The manager then designs a custom investment plan suited to the investor’s needs.
3. Investment: The portfolio manager deploys your funds into selected stocks, bonds, or other assets.
4. Monitoring: Managers regularly track performance and adjust the portfolio as needed.
5. Reporting: Manages will also send periodic updates on returns, holdings, and strategy progress to keep the investors updated.
6. Review: Managers may evaluate and refine the plan annually or when your goals change.

Conclusion

PMS and mutual funds are both suitable investment vehicles for different investor needs. Mutual funds offer a standardised, relatively low-cost investment option that is suitable for investors who want a diversified portfolio. PMS investment, on the other hand, offers a highly personalised investment strategy tailored to an individual's specific needs and goals, albeit with higher management costs and a higher investment amount.

FAQs

How are portfolio management services different from mutual funds?

Mutual funds are more accessible, with lower entry points and standardised management. SIPs in mutual funds can start at just Rs. 500. Investors can use a SIP mutual fund calculator for help with planning their investments. PMS provides greater flexibility and control alongside professional management but require a higher minimum investment amount.

What is the minimum investment amount for PMS?

SEBI guidelines dictate that the minimum investment amount for PMS is Rs. 50 lakh.

Can I invest in both PMS and mutual funds?

Yes, investors can invest in both PMS and mutual funds. In fact, many investors use a combination of both as part of a well-rounded financial plan.

How do I start my investments in PMS?

You can compare different PMS providers and choose one based on factors such as past performance, investment strategy, and the fund manager’s experience, or consult a financial advisor for guidance. Once selected, visit the provider’s website to understand the application process, as it may vary across companies.

Past performance may or may not be sustained in future.

Are PMS investments risky?

Yes, a PMS investment carries all the risks associated with market-based investments. Moreover, since PMS portfolios are often more concentrated than mutual funds, they may hold a smaller number of stocks or securities. This concentration can lead to higher volatility and increased risk.

Is PMS better than mutual funds?

Neither is inherently "better". They are different investment vehicles designed for different types of investors and serve different purposes. The more suitable choice for you depends on your individual financial situation, goals, and risk tolerance.

What is a portfolio manager?

A portfolio manager is a financial expert who manages investments on behalf of individuals or institutions, aiming to meet financial goals while managing risk. They develop tailored strategies based on clients’ needs, execute investment decisions, monitor performance, and communicate regularly.

Who can invest in PMS?

Portfolio Management Services (PMS) are designed for investors with substantial financial resources and higher risk tolerance. Investors must meet a Rs 50 lakh minimum investment threshold, and the service is also available to institutions.

Does compounding happen in PMS?

Yes, compounding can happen in Portfolio Management Services (PMS) if the portfolio manager reinvests the potential capital gains, dividends, and interest earned from stocks or other assets. A compound interest calculator can help estimate potential long-term growth if reinvestment is consistently practiced.

Can I use a lumpsum calculator to estimate returns from PMS?

Yes, while PMS returns vary based on strategy and market conditions, a lumpsum calculator could give you a rough estimate of potential growth over time.

How much fees do PMS charge?

Portfolio Management Services in India typically charge investors in two main ways:

• Management fee: an annual charge on your assets under management, usually around 1% – 3% per year of the portfolio’s value, depending on the provider and strategy.
• Performance fee: a share of profits above a specified threshold (eg: 10 % – 20 % of gains beyond a hurdle rate).

In addition to these, some PMS may have entry/exit charges, brokerage, custodian costs etc. so the total cost can vary by provider and fee structure.

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