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Portfolio Management Services or PMS are similar to mutual funds.  However, they are offered only to High Networth Individuals or people having a large amount of surplus money. Most financial institutions promise customisation for your investments and say you will get higher returns when compared to other investments. This may not always be true. Here’s why PMS is not for all.

The difference between PMS and mutual funds

PMS are investment services that are based on your return expectations, financial requirements and risk profile. The services are provided for a fee. PMS are presently offered by independent brokerages, banks, mutual fund houses and other financial institutions.

Mutual funds are investments offered by Asset Management Companies (AMC). You need to choose the mutual fund based on your financial requirements and risk profile. There might or might not be a cost for investing in mutual funds.

Minimum investment

The Securities Exchange Board of India (SEBI) has increased the minimum investment for PMS from Rs 25 lakhs to Rs 50 lakhs. It’s just Rs 500 for most mutual funds and in some cases Rs 100 only.

Customisation

Mutual funds cannot be customised as per the needs of the investors. Even though PMS offers customisation, typically firms will offer this only to those who have a very large investible corpus of Rs 1 crore or more.

 Most of the PMS firms including banks offer discretionary PMS services. Here, you will be given a few model portfolios. You need to choose a particular portfolio. The portfolio models will be different in terms of their style of investing. You need to take a look at the past performance of the portfolios.

Terms of investment

Note that PMS is an agreement between you and the service provider. So, the onus is on you to ensure that the terms are in your best interest. If you are investing in mutual funds, the terms are the same for all funds as it will be according to guidelines given by SEBI.

Charges

PMS charges are much higher than that of mutual funds as it provides more customised offering compared to a mutual fund. SEBI hasn’t set any limits for charges for PMS so far. According to SEBI, “a portfolio manager shall charge a fee as per the agreement with the client for rendering portfolio management services. The fee so charged may be a fixed amount or a return-based fee or a combination of both.” So, the cost structure might be ambiguous.

You will find that the charges are usually in two formats. One is the fixed fee model while the other is the profit-sharing model. Some could offer a combination of both. PMS firms will also charge you fund management fees. This will be apart from the depository charges, and GST. For instance, ASK Investment Managers Ltd. charges a fixed fee of 2.5% per year or you can pay 1.5% and opt for a profit-sharing model where ASK will get 20% of the gains if the returns are over 10%.

So, PMS charges can be as high as 3-5% of your investment. You can invest in a mutual fund with under 1% if you choose direct plans. Even if you use an advisor, there are mutual funds with the expense ratio as low as 0.5% of your investment.

Smaller industry

Consider this: The PMS industry is said to be worth Rs. 48,000 crores while the mutual fund industry is worth more than Rs. 27 lakh crores. The PMS industry is minuscule when compared to the mutual fund industry. So, the number of PMS products are also much lesser than the mutual funds that are available for you to invest.

Transparency

PMS firms need to tell you which securities were bought, which were sold and what profits were made. You can also know exactly at what price these investments were made. However, this is at the discretion of the firm. Some firms provide these statements every month while other give quarterly statements. Also updating your investment portfolio will differ from firm to firm. Some firms may update your latest portfolio statements on a daily basis while others might update only once in 15 days. With mutual funds, the NAV will be declared every day and you can get it from any of the financial institutions’ websites.

The returns

As you know, PMS is a high-risk product. The returns will become visible only in the long run. Historical data shows that genuine PMS products can only give you only slightly higher returns than mutual funds. You must understand that it’s not guaranteed you will get phenomenal returns using PMS. Note that according to SEBI guidelines, PMS firms cannot promise even indicative returns, let alone guaranteed returns.

There are a number of things that PMS firms will tell you but you should be proactive and ask them questions instead of blindly believing everything they say.

Lock-in period

PMS products usually have no lock in period. However, most of them have an exit load if you decide to close the account within a year. The average charge could be anywhere between 1.5% and 3%. Most PMS firms will not allow you withdraw partially. With open-ended funds, you can withdraw your money any time. There are funds with no exit loads.

Taxation

Most PMS companies hold stocks in your own demat or account only. So the taxation is like any other equity investment – short term capital gains tax of 15% and long term capital gains tax of 10% for returns exceeding Rs 1 lakh a year.

For equity mutual funds too, the taxation is similar with long term capital gains only 10% if the gains are over Rs. 1 lakh, and short term capital gains tax of 15%.

Ideally, you should opt for PMS only if you have a corpus of at least more than Rs 1 crore, and you can keep it away for five years or more. It is substantially different from the standard mutual funds. For any other investors with lower corpus, mutual funds are more convenient and easier to invest in.