Portfolio Management Service (PMS)
Here in this section let us discuss some common FAQs about PMS:
Costs associated with PMS
In a PMS, the fee, usually a percentage of the investor's portfolio, is decided by bilateral negotiations between the investor or the client and the PMS manager. This is different once again from mutual funds where SEBI has specified maximum expense ratios for different categories of mutual funds.
Tax structure associated with PMS
In a PMS, whenever there is any kind of realized gain in a portfolio, clients are liable for tax. For example, in a year if the PMS manager has made a capital gain of ₹5 lakhs on a portfolio of ₹50 lakhs, the client will have to pay a tax on that gain even if he or she has not redeemed any money from the PMS. Once again, this is different from a mutual fund where the clients are only liable to tax when they redeem money from the mutual fund. The tax rate will depend on how long the PMS manager has held security in question. If he has held it for less than one year, then short-term capital gains tax (STCG) of 15 percent will be applicable. If he has held it for longer than one year, long-term capital gains tax (LTCG) of 10 percent will be applicable. Also, gains up to ₹1 lakh per year are exempt from tax. In the case of dividends, the dividend distribution tax is deducted by the company before paying out dividends to the investor. Therefore, dividends are tax-free in investors’ hands.
Who should be looking at PMS?
Only investors with a high-risk appetite because PMS is a highly risky product. Also, for somebody who is a high net worth investor for example if you have a portfolio of ₹1 crore, you should perhaps not be looking at PMS which has a minimum investment amount of ₹50 lakhs.
How do you choose a PMS manager?
Unfortunately, unlike mutual funds, PMS products do not have publicly disclosed net asset values and portfolios. So, you have no transparent way of knowing the past track record of different PMS products. Your best bet is to go with a trusted name in the financial services industry.
Does PMS make sense to you? How does it work? What is the regulatory framework that governs it?
The answer to these questions can be explained through an example. Suppose, I have ₹50 lakhs in cash but I am not interested in buying property right now. I am looking at PMS but-
(a) Is it high risk?
(b) That statement that goes with mutual funds that mutual funds are subject to market risk- does this statement hold true for PMS as well?
(c) Should I do it or should I not?
There are two ways to look at this. One is equities as an investment class vs. real estate.
The second is within equity is PMS an attractive investment opportunity or not?
For a client when the first decision is to be made whether he wants to come into equities or go to real estate, the most important thing to note is that there is liquidity which one gets in equities which is something one doesn’t get in real estate. Also, time horizons involved in investing and taking out money can be quite elongated in equities as compared to real estate. Then, if we switch to the other question of whether PMS as an asset class is a good asset class or not. There are certain risks that are inherent in equities. Those risks are also prevalent in PMS. Within PMS typically you will find PMS providers concentrating their positions and then building portfolios which is very different from how mutual fund providers manage their portfolios, those are quite diversified. So a client coming into PMS’ has to be mindful of that one factor that concentrated portfolios may at times have high volatility and if one is able to bear that volatility and hold on for a period of two to three years; concentration also helps one in generating higher returns. So, that trade-off is something that an investor has to be mindful of before coming into PMS’.
Is PMS right for you? Is it risky for a salaried employee to go in for PMS?
Because typically 25 to 30 lakhs is a saving that a salaried person has done for a large span of time and then he or she wonders whether the concentrated risk is really your cup of tea. Who can? Or Who should go for PMS?
PMS comes with the inherent risk of equity. So, once you are into the equity market, it is very clear that you are taking that risk whereas the trade-off is you would be getting good returns. In the case of salaried people, they are more risk-averse; so it depends upon what kind of risk appetite you have. People normally come into PMS who have a longer investment horizon and a higher risk appetite. If somebody is very risk-averse, then the first thing is that equity is not a class for him at all but if he is coming within equities then probably mutual funds will be safer because of diversification. So, in PMS by nature, one is actually doing concentrated portfolios, having a small number of stocks, and taking larger positions. Hence accordingly risk goes up. Basically, if one wants a diversified portfolio, then probably, the mutual fund would be a good choice but if one wants better returns then of course PMS.
Any thumb rule with regards to investing in PMS?
If one has ₹70 lakhs to 1 crore portfolio, a 25 percent position in equities in PMS is quite reasonable and not overstretching yourself. The second thing is that in PMS, if one is not worried about one’s 100 rupees going down to 98 or 95 rupees because of volatility, then the promise of substantial returns over a long period of time like that of three to five years and your time horizon is that much, would pull one towards PMS and to that extent, PMS becomes quite a lucrative investment opportunity for whoever is looking to invest in equity.