Explainer on Portfolio Management Services (PMS): Features, Types, Charges, Taxation, and Risks

If you have accumulated significant wealth during your career and wish to seek professional help in managing the funds, then Portfolio Management Services (PMS) can prove helpful to you. 

Today’s blog will focus on individuals who wish to gain more profound knowledge of Portfolio Management Services (PMS).

Portfolio Management Services Overview

Portfolio management services, or PMS, is a financial service offered by financial institutions. This service primarily focuses on investing investors’ funds with a larger portfolio than the average individual. Such investors can invest their money in this service, and a team of qualified fund managers will allocate it to various asset classes based on their investment goals. 

Typically, investors allocate a portion of their portfolio to equity but cannot manage it effectively due to a lack of professional knowledge. This is where PMS comes in; with a minimum investment of 50 Lakhs, your entire investment amount will be given to a portfolio management company, and their team of seasoned professionals will allocate it among various asset classes based on market and economic conditions. In exchange, they will charge a fee for their services. 

The first announcement of the SEBI regulation for PMS dates back to 1993. All Portfolio Management Companies are required to adhere to the compliance standards established by SEBI.

Minimum Investment Amount

Over time, PMS’s minimum investment amount has undergone modifications. The PMS legislation was first established in 1993, with a minimum investment value of 5 lakh. In 2012, the minimum investment amount was raised to 25 lakh; in November 2019, it was further increased to 50 lakh. 

Features of PMS

1. Investment in PMS provides customized solutions as per investors’ objectives.

2. The fund managers have vast experience in managing funds

3. PMS fund managers generally diversify the investment across different asset classes, ultimately lowering the risk.  

4. Reports like transactions, profit and loss, etc., will be sent periodically to investors, and they can also check the same on the online platform provided by PMS companies.

5. PMS is a product with a minimum ticket value of 50 lakhs, which is generally suitable for HNI investors.

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Types of PMS

A financial institution offers a variety of portfolio management services, including 

1. Discretionary Portfolio Management– The portfolio managers make all investment-related decisions under this category of portfolio management services on the client’s behalf. Before making any investments, the fund management is at liberty and is not required to confer with the investor. The majority of the clients choose this type of service. 

2. Non-discretionary Portfolio Management– The fund manager must obtain the client’s confirmation before investing in this kind of service. The client receives financial advice from PMS’s investment team but ultimately decides whether or not to act on the advice. 

3. Advisory Services – In this arrangement, a fund manager will merely offer advice to investors on various asset classes; the investor will decide whether to follow the fund manager’s recommendation. 

4. Active Portfolio Management – The ultimate goal of active portfolio management is to maximize investor return, which is accomplished by actively allocating funds to various asset classes. The fund management actively chooses the allocation of funds and where to invest them. 

5. Passive Portfolio Management – The fund manager uses this investment management technique to allocate the funds to stocks that track indexes and increase steadily over time.   

Charges of PMS

The charges of PMS can be classified into 3 different categories-

Fixed Charges

This is what every PMS charges as its main fee. This is an ongoing charge that depends on the average value of your investment and varies from 1% to 3%. The fee is due regardless of the fund manager’s performance ratings. This is the minimum amount that must be paid to the PMS firm regardless of the fund’s performance.

Below is the illustrative table of the same. 

Fees	2%
Investment Amount	50,00,000
Return on Portfolio	20%
Profit	10,00,000
Portfolio Value at the year-end	60,00,000
Fixed Charges 2%	1,20,000
Net Value of Portfolio after Fees Adjustment	58,80,000

Performance Based

The fund’s returns are used to determine these fees. The fund management will charge a fee based on the percentage of profit made above the minimum rate, also referred to as the hurdle rate.

We can better understand this by using an example. For example, if the hurdle rate is 8% the profit sharing ratio is 20% above the hurdle rate, and your investment of Rs. 50 lakh yields a 20% return on your portfolio, your total profit will be Rs. 10 lakh, of which Rs. 4 lakh is the minimum profit that needs to be delivered. The company will then charge a fee of 20% of the remaining profit of 6 lakhs.

Below is the illustrative table for the same.

Fees	Profit Sharing – 20% above 8% Hurdle Rate
Investment Amount	50,00,000
Return on Portfolio	20%
Profit	10,00,000
Value of Portfolio at the end of the year	60,00,000
Hurdle Rate 8%	4,00,000
Profit over hurdle rate	6,00,000
Profit Sharing 20% of 6,00,000	1,20,000
Net Value of Portfolio after Adjustment	58,80,000

Hybrid Fee Structure

This fee schedule combines a profit-sharing concept with a fixed fee. In this instance, the hurdle rate is typically higher than in a performance fee-based approach, and the fixed charge rate will be lower than in a fixed charge model. This is intended for PMS managers who wish to profit from both fee structures. 

Taxation

Equity Taxation – If a portfolio is heavily weighted toward the equities asset class, the tax rate on the profit amount will be 15% if the holdings are sold within a year, and the appropriate rate will be 10% above 1 lakh if the holdings are sold after the year. 

Non-Equity Taxation – The portfolio will be considered a short-term gain and included in the investor’s income at their slab rate if it is sold within three years and does not concentrate in the equity asset class. If the units are sold after three years, they will be considered a long-term gain and subject to a 20% tax with indexation benefit. 

Dividend Income –All dividend income earned on the investment will be included in the investor’s income and taxable as per their tax slab.

Exit Load – If you withdraw your money before a predetermined amount of time, PMS firms typically charge an exit load, ranging between 1 to 3%.

Risks

The risks investors should consider before investing in PMS are listed below. 

1.  Performance of Fund Manager – Evaluating the fund manager’s performance before investing is essential. Looking for a fund manager with a stable track record is usually advisable. 

2.  Market Risk – Due to the investment’s significant exposure to the equities asset class, there is a greater chance of losses and a rise in portfolio volatility. 

3.  Liquidity Risk – Because certain illiquid securities are difficult to sell, investing in them may affect your portfolio liquidity. 

4.  Regulatory Risk – As previously stated, the minimum ticket size for investing in PMS has increased from 25 lakhs to 50 lakhs in 2019. Future legislative changes of this nature could affect PMS’s investment strategies and tax consequences.

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Conclusion

We’ve gone over the benefits and risks of investing in PMS with you; this service is for high-net-worth individuals (HNIs) who understand the risks involved in this kind of investing. Suppose an investor is willing to assume the risk of this product and is seeking a better return. In that case, they should consider all the important characteristics before making a decision. 

Before making any investing decisions, we advise you to speak with your financial advisor to better understand your ability to accept risk. 

Frequently Asked Questions (FAQs)