Your Questions Answered: What are portfolio management services and how are they different from mutual funds?

Q. I am a 32-year-old health professional, working at a private hospital in Chandigarh. My wife is also a health professional and is working with a government hospital in Chandigarh. Lately, we have been approached by a number of portfolio managers offering us to manage our equity portfolio. I am unsure about what are portfolio management services (PMS) and how they are different from mutual funds.

Vikramjeet Singh Chandiok, Chandigarh, Punjab

Portfolio Management Services or PMS are services offered by Portfolio Managers (PMs) -who are registered with the Securities and Exchange Board of India (SEBI), essentially PMs offer to manage portfolios of stocks, fixed income, debt, cash, structured products, and other individual securities on your behalf to meet your specific investment needs.

When you invest through PMS instead of a mutual fund, you own individual securities instead of units of the fund. You have the freedom and flexibility to make your portfolio fit your specific investment goals. A single PM may be managing hundreds of investment accounts however, investment in each account will be tailored to meet the individual needs of the concerned client.

PMS can be divided into two broad categories

Discretionary: With these services, the PM is the one who decides what investments to make and when to make them on the client’s behalf.

Non-Discretionary: Under these plans, the PM does nothing more than suggest investments. The investor is the only one who can decide which securities to invest in and at what time. The PM will, however, execute the trade on behalf of the client.

Benefits of availing PMS

Professional Management: PMs offer professional portfolio management with the goal of providing consistent long-term performance while keeping risk in check.

Pro-Active Management: It's important to remember that many securities, specifically stocks, need to be constantly watched and churned from time to time to get the best results.

Risk Control: Portfolio managers at any company are supported by a research team whose job it is to set up the client's investment strategy and give the PM provider real-time information to back it up.

Convenience: The client by availing PMS gets a service that is tailored just for them by the PM in line with the client’s individual investment goals. The PMS provider handles all the administrative and substantive parts of the client's portfolio and sends regular reports on the general status and performance of the portfolio.

Flexibility:The Portfolio Manager has a fair amount of freedom when it comes to holding cash (which, based on the market, can go up to 100%). He can build a reasonable level of concentration in the investors' portfolios by putting a lot of money into opportunities that look good.

Transparency: Investors will get statements and news from the PMs on a regular basis. With web-based access, a client can get all the information he needs about his money with just one click. Your account statements will tell you everything you need to know about the stocks you own and how many shares of each you have. It will usually also have:

• The value of the assets you own at the moment.
• How much each security cost.
• Information of what happened with the account, such as purchases, sales, and dividends that were paid out or put back in.
• Your portfolio's asset mix.
• Performance of your portfolio against a benchmark.

Advice tailored to you

PMs help their clients reach their financial goals by giving them investment advice that is made just for them. For example, if you have a high-risk appetite, the PM will tailor your account to reflect your risk appetite.

Why should you avail PMS?

PMS should ideally be availed by individuals who meet the criterion below:

• Individuals who have a high net worth.
• Individuals who are inexperienced in the financial market.
• Individuals who do not have sufficient time to manage their investments.
• Individuals who are unsure about how to deal with a volatile market.
• Individuals who want to spread out their investments so that they can make money from multiple asset classes, such as stocks, bonds, shares, etc.

PMS Fees

Different PMS have different fee structures. The fee structure also often depends on the category of PM you have hired, typically discretionary PMs have a different fee structure than non-discretionary PMs. Below is a non-exhaustive list of different kinds of fees which are charged by PMs:

Entry Load: Most PMS plans charge an entry load, which can be anywhere from 1% to 3%. The only time you pay these PMS fees is when you avail of the PMS for the first time.

Management Fees:This is a recurring cost. After all, someone has to take care of your investments. In the case of PMS, the fees for managing a portfolio will be higher than that for a mutual fund. Every PMS plan charges its customer fund management fees. These fees can range from 1% at the low end to 3% at the high end, with a lot of differences between different PMS providers.

Profit-Sharing:This is a unique aspect of the PMS fee. Some of the more established names in the market do take a part of the profits made for the client. This is in addition to the management fees. Most of the time profit sharing kicks in only after a certain threshold is breached. For instance, the PMS can say that there will be no profit sharing until 10% of the investment is returned. But if the profit was more than 10%, it would be split 80:20 between the client and the PMS.

Exit Load: It is charged if the customer leaves the PMS before a certain amount of time, usually between 1 and 2 years. If a client stays in the PMS for more than 2 years, there is usually no exit load. This cost has caused a lot of debate in recent years.

Third Party’s Fee: In addition to the above fees, PMS service providers charge customers extra fees for services like custodial fees paid to the custodian, Demat fees, and Demat moving fees paid to NSDL or CDSL. PMS also bills the client for audit fees, and in many cases, the client is also charged for trading or transaction fees and statutory fees.

Conclusion

PMS is tailored investment services servicing a niche client base. Their performance historically has varied from one PM to another PM. Middle-class individuals who do not wish to pay high amounts of fees can opt for mutual funds which provide many benefits which are identical to the benefits offered by PMS - such as professional management of investments.

Kuvera is a free direct mutual fund investing platform.

Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.