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  • Kritika Chauhan

THE SUBTLETIES BEHIND VALUE MAXIMIZATION IN PMS FUNDS

WHAT IS PORTFOLIO MANAGEMENT SERVICES? (PMS)

A PMS fund is an investment service managed by a money manager with the help of which an investor can diversify their portfolio according to their personal preferences and risk appetite. There is a wide gamut of choices in which investments can be made thereby taking advantage of a truly diversified portfolio. The investment options include stocks, fixed income, debt, cash, structured products and other individual securities. This portfolio management service generally caters to the investment needs of High net worth individuals who are willing to invest and diversify portfolios with at least a capital of Rs.50 lakhs depending on the threshold set by portfolio management firms. In a typical mutual fund scheme, an individual is allocated units with a particular net asset value of a mutual fund scheme. However, the dynamics completely change in the case of PMS with individuals owning shares or bonds against their name.


TYPES OF PMS

Discretionary PMS:As can be easily guessed from the name, the decision rights and timing of the portfolio rests entirely with the portfolio manager and they take a call on how to diversify the portfolio to maximize gains.


Non-discretionary PMS:The portfolio manager only suggests investment ideas but the decision rights regarding the investment options and diversification of the portfolio rest solely with the investor. The portfolio manager only executes a trade on behalf of the investor.

The portfolio management services in India are mainly skewed toward the discretionary type.


FEES AND TAXATION

A portfolio management scheme helps an investor with a diversified portfolio and based on the corpus of the portfolio along with the realized gains, the manager charges a certain amount. Although SEBI prescribes a maximum annual limit of 2.25% of the entire portfolio amount in the case of equity funds and 2% for debt funds, PMS charges exorbitant fees onwards of 2-3% of the portfolio annually along with 15% of realized gains over Rs.50 lakhs. There are extra charges levied in the form of audit fees, brokerage, stamp duty, custodian, demat, etc. Thus, charges are much more compared to mutual funds although the returns may typically be much larger. The charges are inversely proportional to portfolio size.

An equity fund when sold after a year is taxed at the rate of 10% in the form of long-term capital gains tax. When shares are traded by fund managers, there is no tax implication for its investors. On the other hand, an investor in PMS is taxed every time for trading a stock in the diversified portfolio as the portfolio management scheme confers ownership rights.


LIMITED VISIBILITY OF PAST TRENDS

A PMS does not have a detailed historical precedence with regard to the performance of portfolio managers unlike that of mutual funds where we can get an in-depth analysis of past trends, returns, and portfolio distribution in one place. There are ready-made websites where all such relevant data for mutual funds are available in an organized and sequential manner. Hence, it becomes doubly important to do your due diligence while shortlisting portfolio managers concerning the kind of charges they levy, how much portfolio corpus they have handled in the past, the credential of the managers along with the broader mandate of aligning with your long-term goals.


SOME KEY BENEFITS OF INVESTING IN PMS

Flexibility: There are rules in place for equity mutual fund managers which prevent them from going overboard in terms of allocating stocks to the diversified portfolio. The maximum limit is 10% per stock in a portfolio. A PMS manager can take risky bets in anticipation of the future. There are no limitations concerning maximizing their opportunity in terms of investment options. It might become a double-edged sword when you play with too much risk but at the end of the day, it is the call of the manager and the value proposition he finds to be compelling enough.

Professional management with continuous monitoring: Since the PMS managers have greater skin in the game compared to mutual fund managers, they always are on the lookout for value maximization and the decision is backed by data on a real-time basis.

Transparency, customized advice and a certain degree of risk governance framework: An investor gets real-time information on the current value of securities owned, cost structure, activity in the account, diversified portfolio asset allocation, market commentary by managers, portfolio performance concerning benchmark and a risk governance framework in place.


THE FINAL PIECE OF ADVICE

There are multiple factors to be considered when deciding on investing your hard-earned money in portfolio management services. The risk-reward framework should always be your guiding light. If you are a risk-averse person, PMS is not for you. A substantial portfolio allocation needs to be done and thereby the due diligence behind selecting a manager becomes almost cast in stone. Transparency, real-time monitoring of performance, depth of analytical rigor along with an iron-willed mentality of value maximization are the key traits to be identified while selecting a PMS. If any of these criteria fail, it is better to realign your strategy and start afresh.

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