Things You Must Know Before Investing In PMS

The investment market primarily revolves around two concerns, namely risk and return. As the risk-return relationship constantly fluctuates, investors try to get a hold on investment products that can guarantee a higher yield in a safe financial climate. 

Although investors need to extensively analyse the risk/return parameters before investing in any security, availing professional advice can help them in making a profitable decision. Expert money managers offer professional advice in the arena of Portfolio Management Services, one of India’s top investment avenues. 

Investors willing to avail customised, professional advice may choose a portfolio manager through platforms like KredX, an online marketplace. 

PMS Investment – An Overview 

Portfolio Management Services is a customised investment solution geared towards providing a potent alpha compared with benchmark indices. PMS providers offer standardised products, which work in line with their client’s goals. An investment portfolio under PMS can include diversified instruments like equity shares, derivatives, cash, fixed income instruments, etc. 

Since PMS is an investment management service, an investor/client and the PMS provider operates under a legal agreement – Investment Policy Statement-IPS – which reflects the nature of the provided service, investor’s objective and risk profile, investment strategy and other essential details.   

Note: Securities Exchange Board of India (SEBI) is the regulatory body of PMS. In 2019, SEBI issued a new regulation where the minimum investment was set at Rs. 50 lakhs (applicable for investors from 2020 onwards).

When a client decides to invest, they transfer the money/stocks to a PMS account. Thereafter, the fund manager creates a portfolio of stocks based on the client’s investment goal. This portfolio is then maintained under a DEMAT account, opened either in the client or fund manager’s name and can be transferred back whenever the client decides to close their account. 

• About Portfolio Manager 

A portfolio manager is a person or group of people who enter into a contract with an investor and advises, directs, or executes investments on behalf of an investor. 

The activities of PMS Managers primarily include managing a client’s assets, executing investment strategies, and handling day-to-day portfolio management.  

• Fees Associated 

Under the SEBI regulations 2020 (for Portfolio Manager), the fund manager can charge a fee (either a fixed amount or performance-based fees or a fee combining both) as per the agreement for managing a PMS investment profile.

Types Of Portfolio Management Services

Discretionary PMS

• The client allows the portfolio manager to undertake investment or trading decisions on his behalf. 
• The portfolio manager conducts the entire investment procedure where the client is not involved. 

• However, the client may prepare a list of negative stocks/industries, which the manager needs to avoid. 

Non-Discretionary PMS

• The portfolio manager plays the role of an investment counsellor. 
• Unlike Discretionary PMS, the manager provides ideas, but the ultimate investment decision or timings rest with the investor. 
• It is the fund manager who executes the trading. 

Advisory PMS

• The fund manager only offers investment advice to clients.
• The investor takes the ultimate decision and executes the trading.

Factors To Consider Before Investing In PMS

• Risks Involved: Like any other investment option, PMS investment also comes with certain risks. Investors should weigh in market risks, interest rate risks, and inflation risks, among others, beforehand. 
• Major Costs: PMS investment comes with various costs like management fees, profit sharing/performance fees, entry/exit loads and other charges like brokerage, custody, accounting, etc. Investors need to account for these costs before arriving at any decision. 

• Past Performance: Scrutinising the past performance of PMS managers also helps investors gain comprehensive knowledge about how much returns they’ve generated historically and select a suitable one accordingly. 

• Transparency: Investors should have a clear knowledge of the investment philosophy and decision-making process. Also, they must select a PMS provider that maintains utmost clarity (in terms of expense ratio) with regular updates. 

• Investment Strategy:  Before investing, the client must understand fund strategies employed by a PMS provider, and whether it adheres to his/her investment goal. Once an investor clarifies this ground, he/she must know whether the portfolio manager follows the strategy consistently and utilises a proper index to benchmark performance. Investors should know the intended approach of a fund manager, i.e., large-cap, mid-cap, and small-cap. 

• Quality Of The Portfolio Manager: The quality of a Portfolio manager plays a crucial role in PMS investment. Investors can start by assessing the qualifications, experience of the Portfolio Managers. In this regard, one can select to invest through KredX as they work with SEBI registered fund managers. 

Bottom Line

PMS can provide investors with a transparent and tailor-made portfolio that helps them realise returns and assume risk per their objectives and aptitude. However, investors must analyse the essential factors of PMS investment and select the right PMS provider wisely to ensure higher profitability.