Long term investing into equity can be done in two ways – one is via systematic investment planning of mutual funds and another is via direct trading by an individual investor.
The former is a safe and boring way to invest money in the stock market while the latter involves direct involvement by the investor with the added advantage of pulsating rush of blood originating from gains and losses that arise as the indices move like a pendulum.
There exists another way called Portfolio Management Services or PMS. This is where a professional designs a portfolio for you and invests your money to generate profits. Does the concept make sense and are there any best ones in India ?
How does it work ?
When you sign up for PMS, a portfolio manager is assigned to you. Based on your risk appetite and financial needs, a portfolio of stocks is designed for you. These stocks are traded on the stock exchange with the intent of generating profits for the investor.
The stocks are held in your name in your DEMAT account and the portfolio manager has a power of attorney to operate the account.
There is a discretionary portfolio manager and a non- discretionary portfolio manager.
The discretionary portfolio manager individually and independently manages the funds of each client in accordance with the needs of the client.
The non-discretionary portfolio manager manages the funds in accordance with the directions of the client.
In India, these are offered by stock broking houses, independent PMS managers and even Asset Management Companies (AMCs).
When you invest in a PMS, you are considered a fat client so you have complete access to the PMS provider who will cater to a one to one interaction, monthly statements, calls and good treatment. You don’t get these when you invest in a mutual fund, do you ?
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The average fund size for a PMS portfolio is Rs 5 lakh.
A PMS portfolio is meant to beat the stock market by an average 5-7% and this can easily result into a annual return of 18% – 20%. If this were not to be the case, investors would park their monies with mutual funds which anyway return an average 15% over a long period of time.
A good PMS portfolio manager is difficult to choose. A lot of PMS by reputed firms brought disgrace to the industry when they made massive losses in 2008 and subsequently after that which led to implementation of new SEBI guidelines.
You need to ensure that the PMS is run by robust processes and not at the whims and fancies of an individual.
Process and philosophy are the most important ingredients of a PMS.
Investors should check data to ensure that historically the PMS has outperformed the market both on the upside and downside. Avoid those PMS providers who have a conflict of interest as quite a few do.
Make sure that the PMS provider is registered with SEBI (check on their website) – there are around 250 that are registered and some 750 that are not !
Fees of a PMS can be fixed or variable. In the fixed fees model, a charge between 1.5% – 3% can be charges on the assets being managed. In the variable fees model, fees of approximately 15% – 20% on profits generated are levied. Understating of how the fees is being levied is important as it can drain your corpus significantly.
Some PMS schemes charge an entry load of 3% which is applicable only at the time of entry into the PMS. There are other charges like brokerage charges, audit charges, fund management charges among others.
Who is PMS for ?
I strongly advocate that ordinary medium class investors do not invest in PMS. If your Rs 5 lakhs gets eroded and you feel like having a heart attack, PMS is not meant for you.
However, even a small investor can have a huge stock portfolio. Firstly, we advocate that direct stock trading is not everyone’s cup of tea and even a long term buy and hold strategy never earned everyone riches as small investors bought at the wrong time.
So better stick to mutual funds. But if you made a pact with the devil that you need to subscribe to PMS, then ensure you can sleep well if you lost all of that money. If not, PMS is not for you.
PMS according to me is meant for those who consider the loss of capital a small blip on their savings radar. They don’t get bothered much and move on in life with another PMS provider !
The top portfolio management services in India might have returned decent amounts to investors but remember that there have been notorious ones as well – it only takes one big loss for a small retail investor to go down the drain on his life’s hard earned money.
To conclude, small retail investors should avoid PMS while high net worth individuals can explore as it provides a customized investment opportunity by professionals.
Do check the SEBI guidelines for PMS and address if you want to lodge a complaint by going here.