From the DNA
A few days back, I was consulted by a friend on two portfolio management services (PMS) products. One was what is termed a quant-based PMS, while the other had no definite asset allocation, though it claimed to be an equity PMS. As I studied the products, I realised a few home truths about the category:
l PMS is supposed to be meant for high net-worth individuals (HNIs). By definition, this is supposed to imply that from an asset allocation perspective, only that portion of investible surplus allocated to high-risk categories needs be invested in this. However, the minimum investment amount permitted by Sebi is Rs 5 lakh (which, according to many, is too low and will not restrict it to HNIs)
l PMS is meant to provide a lot more freedom to both investors as well as fund managers with wider objectives. This is in sharp contrast to more conservative approaches adopted by mutual-fund managers
l Sebi does not regulate PMS as tightly as mutual funds with regard to disclosures and other standard requirements
l Sebi also does not specify charges that can be levied by PMS providers. It expects customers to exercise their discretion in entering into agreements with service providers
Thus, it is quite apparent that the entire spirit of the PMS is one of freedom for both the investor and the portfolio manager and that it pre-supposes a high degree of financial knowledge on the part of the investor. It is not a product for the risk averse, nor is it for those who cannot strike a good bargain with the service providers. Knowledge of the market and access to information will be very useful for an investor to make the most of a PMS.
However, the PMS is not being pitched as a product to those who have the extra cash. It is now being sold as a product similar to a mutual fund.
The product seems to have become the toast of financial advisers and distributors. It isn't hard to see why — at a time when selling mutual fund schemes has become less lucrative, the lure of the higher upfront commissions on PMS products seems too tough to resist.
In August 2008, Sebi came out with PMS regulations with the intention that portfolio managers should manage PMS activities in a manner which does not partake the character of a mutual fund. Whether this is indeed the case, is a matter of debate.
So if you have decided that PMS is for you, find below a primer to help you make a good decision:
l Check the past performance of the fund manager against the stated benchmark. (Unfortunately, I could not find any performance details on websites of service providers). This should be available on request. Demand the same from your distributor
l The service is likely to have upfront fees along with annual management fees with or without a profit-sharing arrangement. Compare this and understand the net yield in various return scenarios
l Expenses in PMS are bound to be higher than those in mutual funds, as Sebi does not permit pooling and the portfolio churn rate is high. Compare this with expenses of equity mutual funds (1.75-2.5% pa for diversified funds and 0.75-1.5% pa for index funds)
l PMS is also likely to have an incidence of higher taxes since short term capital gains will apply for sale of shares by portfolio managers despite the investor staying invested. Hence there could also be a lot of paperwork involved
l A PMS can be either discretionary or non-discretionary in nature. Under non-discretionary PMS, the portfolio manager makes recommendations to the client and investment decisions are at the client's discretion while under the discretionary service, the portfolio manager has a greater degree of freedom and can take investment decisions without explicit approval from the client.
Choose what suits your knowledge and on how much you wish to control the portfolio
If you are ready to step into this world, please do so carefully and as they say in Catholic wedding services, "It is therefore, not to be entered into unadvisedly, but reverently, discreetly and in the fear of God".