Portfolio Management Services

What is Portfolio Management Services or PMS?

Portfolio Management Services account is an investment portfolio in Stocks, Debt and fixed income products managed by a professional money manager that can potentially be tailored to meet specific investment objectives. When you invest in PMS, you own individual securities unlike a mutual fund investor, who owns units of the entire fund. You have the freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of portfolios, your account may be unique. As per SEBI guidelines, only those entities who are registered with SEBI for providing PMS services can offer PMS to clients. There is no separate certification required for selling any PMS product. Portfolio Management Services are also provided by Asset Management Companies, equity broking firms & wealth management services.

There are two types of PMS

  1. Discretionary PMS – Where the investment is at discretion of the fund manager & client has no intervention in the investment process.
  2. Non-Discretionary PMS – Under this service, the portfolio manager only suggests the investment ideas. The choice as well as the timings of the investment decisions rest solely with the investor. However the execution of the trade is done by the portfolio manager.

The client may give a negative list of stocks in a discretionary PMS at the time of opening his account and the Fund Manager would ensure that those stocks are not bought in his portfolio. Majority of PMS providers in India offer Discretionary Services.

How can investor invest in a Portfolio Management Services (PMS)?

There are two ways in which an investor can invest in a Portfolio Management Services:

  1. Through Cheque payment
  2. Through transferring existing shares held by the customer to the PMS account. The Value of the portfolio transferred should be above the minimum investment criteria.

Beside this customer will need sign a few documents like– PMS agreement with the provider, Power of Attorney agreement, New demat account opening format (even if investor has a demat account he is required to open a new one) and documents like PAN, address proof and Identity proofs are mandatory. NRIs can invest in a PMS. The NRI needs to open a PIS account for investing in PMS. The documentation required for an NRI, however, is different from a resident Indian. A checklist of documents is provided by each PMS provider.

Working of a Portfolio Management Services (PMS)

Each PMS account is unique and the valuation and portfolio of each account may differ from one another. There is no NAV for a PMS scheme; however the customer will get the valuation of his portfolio on a daily basis from the PMS provider. Each PMS account is unique from one another. Every PMS scheme has a model portfolio and all the investments for a particular investor are done in the Portfolio Management Services on the basis of model portfolio of the scheme. However the portfolio may differ from investor to investor. This is because of:

  1. Entry of investors at different time.
  2. Difference in amount of investments by the investors
  3. Redemptions/additional purchase done by investor
  4. Market scenario – Eg If the model portfolio has investment in Infosys, and the current view of the Fund Manager on Infosys is “HOLD”(and not “BUY”), a new investor may not have Infosys in his portfolio.

Under PMS schemes the fund manager interaction also takes place. Generally, the PMS provider arranges for fund manager interaction on a quarterly/half yearly basis.

Portfolio Management Services (PMS) Charges

A PMS charges following fees. The charges are decided at the time of investment and are vetted by the investor.

Entry Load – PMS schemes may have an entry load of 3%. It is charged at the time of buying the PMS only.

Management Charges – Every Portfolio Management Services scheme charges Fund Management charges. Fund Management Charges may vary from 1% to 3% depending upon the PMS provider. It is charged on a quarterly basis to the PMS account.

Profit Sharing – Some PMS schemes also have profit sharing arrangements (in addition to the fixed fees), wherein the provider charges a certain amount of fees/profit over the stipulated return generated in the fund. For Eg PMS X has fixed charges of 2% plus a charge of 20% of fees for return generated above 15% in the year. In this case if the return generated in the year by the scheme is 25%, the fees charged by the PMS will be 2% + {(25%-15%)*20%}.

The Fees charged is different for every Portfolio Management Services provider and for every scheme. It is advisable for the investor to check the charges of the scheme.

Apart from the charges mentioned above, the PMS also charges the investors on following counts as all the investments are done in the name of the investor:

  • Custodian Fee
  • Demat Account opening charges
  • Audit charges
  • Transaction brokerage

Taxation for Portfolio Management Services (PMS)

Any income from Portfolio Management Services account is a business income. Unlike MF, PMS is not required to remain 65%+ invested in equity to get equity taxation benefit. Each Portfolio Management Services account is in the name of additional investor and so the tax treatment is done on an individual investor level.

Profit on the same can be considered as business income.(i.eslabwise). Profit can be considered as Capital gains. [STCG(15%) or LTCG(Taxfree)]. It depends on clients Chartered Accountant or the assessing officer how he treats this Income. The PMS provider sends an audited statement at the end of the FY giving details of STCG and LTCG, it is on the client and his CA to decide to treat it as capital gain or business income.

How is PMS different from a Mutual Fund?

Both PMS and Mutual Funds are types of managed Funds. The difference to the investor in a Portfolio Management Services over a Mutual Fund is:

  • Concentrated Portfolio.
  • Concentrated Portfolio.
  • Investors directly own the stocks, rather than the fund owning the stocks.
  • Difference in taxation