Portfolio Management Services in India: Definition, Types, Elements and Objectives

Portfolio Management Services, also known as PMS in short, refers to an investment service where skilled portfolio managers and stock market professionals manage investor’s portfolios, depending on the investor's individual risk appetite. Let's delve deeper into PMS in this article.

Key Highlights:

• PMS can be customised according to the investor’s risk appetite.
• SEBI changed the minimum investment value to 50 Lakhs.
• Portfolio Management Services charges vary from 0.5% to 3%
• Exit load is capped at 3%, 2%, 1%, and 0% for the years 1, 2, 3, and 4+, respectively.
• Broking charges are capped at 0.50% per transaction.

What is a portfolio management service?

Portfolio management services, or PMS, are personalised investment solutions to help investors attain their financial goals. They construct investment portfolios across various options, and portfolio managers oversee these portfolios. These services help investors maximise returns over time by focusing on the time horizon, risk profile and investment objectives.

Many High-Net-Worth Individuals (HNIs) prefer PMS as tailor-made portfolios are constructed after considering investment horizon, risk tolerance, liquidity, and taxation. 

Moreover, entities offering PMS services must be registered with SEBI, eliminating fraud and malpractices. These services are popular among HNIs, HUFs, partnership firms, NRIs, Association of Persons, Sole Proprietorships, etc.

Minimum Investment for PMS:

PMS initially started with a minimum ticket size of Rs 5 lakh in 1993 and subsequently increased it to Rs 25 lakh. Moreover, SEBI further hiked the PMS ticket size to Rs 50 lakh in November 2019. As of now, the PMS ticket size starts from 50Lakhs.

What are the types of Portfolio Management Services in India?

In India, PMS are classified into three main types based on the investment control method and further divided into categories based on asset types.

PMS Based on Investment Control

In the Investment control method, PMS are classified into Advisory, Discretionary, and Non-Discretionary Portfolio Management

Discretionary Portfolio Management:

The Discretionary PMS portfolio manager has complete control over the portfolio and can adopt any strategy to achieve investment objectives.

Investment Decisions are entirely at the portfolio manager’s discretion, and the investors don’t have much of a say in investment decisions.

Non-Discretionary Portfolio Management:

Under Non-Discretionary PMS, the portfolio manager has control over the portfolio, where investors decide whether to take up these investment ideas, while the execution of trades rests with the portfolio manager.

Advisory Portfolio Management: 

In Advisory PMS, the portfolio manager provides investment advice only and has no control over the portfolio, the investor must execute transactions independently.

PMS Based on Asset Class:

PMS in the asset class are divided into four main types: Equity, Debt, Hybrid, and Multi-Asset PMS. Below is a detailed explanation of each PMS 

Equity PMS: 

Equity PMS focuses on investing in stocks and can be further categorised by market capitalisation (large-cap, mid-cap, small-cap) or investment strategy (value, growth, or thematic).

Debt PMS: 

Debt PMS invests in fixed-income instruments, such as bonds and government securities, as well as other available debt instruments.

Hybrid PMS: 

Hybrid PMS combines different asset classes, including equities and debt.

Multi-Asset PMS: 

Multi-Asset PMS manages portfolios across multiple asset classes, including equities, debt, and other investments. 

What are the objectives of Portfolio Management?

Capital appreciation: Many investors opt for PMS to earn higher returns from a professionally managed portfolio. The focus remains on risk-adjusted returns from investments.

Regular income: Many people opt for PMS to get a steady income. The main objective of the portfolio manager is the protection of capital and consistent benefits from investments.

Liquidity: Many investors opt for PMS to convert their investments into cash as soon as possible. They need to have money to start a business. In such cases, the portfolio manager builds customised portfolios to cater to client’s liquidity needs.

Tax Planning: PMS focuses on tax planning to increase the after-tax return of investments. It helps to construct a portfolio after looking into the tax efficiency of investments. In simple terms, PMS offers the twin advantages of capital appreciation and higher after-tax returns from investments.

What are the key elements of portfolio management?

Asset Allocation:

The portfolio manager focuses on asset allocation, the investment strategy that balances risk and returns. It involves spreading investments across the asset classes of stocks, fixed income securities, cash, commodities and real estate. 

Asset Allocation makes sure that a sharp fall in one asset class does not impact the overall portfolio performance.

Diversification:

Diversification is a technique of allocating capital across a variety of investments. While asset allocation focuses on the percentage of stocks, bonds and cash in your portfolio, diversification involves spreading assets across asset classes within these buckets. 

Portfolio managers of PMS use the diversification strategy to enhance the portfolio’s risk-adjusted returns.

Rebalancing:

PMS Portfolio Managers focus on rebalancing the portfolio to align with investors’ financial goals and risk tolerance based on the market condition.

Conclusion:

Portfolio management services offer a robust and customisable investment solution for HNI investors with personalised strategies, making it a viable option for wealth creation with transparency and control over their investments.