Top 3 reasons to invest in PMS (Portfolio Management Services)
Updated: 20 hours ago
January 1993 marked the beginning of Portfolio Management Services in India when the SEBI (Portfolio Managers) Regulations, 1993 was first issued. Currently, the PMS AUM has crossed over ₹40 lakh crores with 500+ PMS houses in operation, as per the latest data from APMI. PMS is an aggressive investment avenue beyond traditional mutual funds and is more suited to wealthy investors which we shall discuss below. What is driving the growth of PMS? What use cases is PMS most compelling for as an investment avenue?
The joy of direct ownership
The securities in the portfolio are directly held in the investor's own demat account in a PMS and managed professionally by a team of seasoned Portfolio Managers. The portfolio holdings remain transparent at all times. Also, periodic, comprehensive reports are provided to investors, thereby keeping the investor informed and meeting regulatory compliance requirements. PMS is a great alternative that DIY stock investors can consider to overcome the many challenges that they face. As the portfolio size of a DIY investor grows, the time and effort spent in stock picking rises. It becomes increasingly difficult to study the quarterly financial statements released by all companies, keep track of overall portfolio performance, monitor for negative events and react in time. Many DIY investors may even skip the research process and invest based on random tips due to lack of time. They may not even be aware of the actual return their portfolio is making over time. Professional management in a PMS brings in systematic, well-defined investment policies, thorough research-backed stock picking, active monitoring, regular rebalancing and detailed performance reporting. As mandated by SEBI, PMS investments are available for a minimum ticket size of ₹50 lakhs per investor per PMS house. For Accredited Investors, the minimum starts at ₹10 lakhs.
Capturing small and micro cap growth
There are many companies in the SME segment and beyond, that offer a high return potential, but which are outside the scope of mutual funds because of the typical mutual fund's large size. On the other hand, as the size of PMS funds are usually much smaller, investments in the SME segment become viable in a way that can positively impact the overall returns. PMS strategies take high conviction, concentrated bets that are likely to deliver outsized returns over a 5+ years time horizon. When investing in such SME companies, continuous monitoring becomes important to ensure that the companies are not showing signs of underperforming and this is where the active management provided by PMS becomes important. The high minimum ticket size criteria of ₹50L per investor, will likely keep PMS fund sizes relatively smaller compared to mutual funds and help retain their competitive advantage. This ticket size also ensures that PMS products are likely to be availed only by experienced investors who understand the nature of the volatility of concentrated portfolios, and who have a net worth that is resilient enough to endure the occasional large drawdowns of such portfolios.
Tax-efficiency for US NRIs
Investing in Indian mutual funds is currently unviable for US NRIs because non US-domiciled mutual funds are subject to the stringent US PFIC tax regulations, where even unrealized gains are liable to be taxed at the rate of up to around 40% every year! Here, PMS offers a better alternative to invest in India as they are exempt from the PFIC regulations. For more information on this, it is recommended to consult your tax advisor in the US.
An important point for investors when investing in PMS
As the stocks are held directly in the investor's own demat account, every sell transaction that the Portfolio Manager executes to rebalance the portfolio is a taxable event (under capital gains) for the investor. This means that the investor has to pay special attention to the average annual portfolio churn of the PMS to get an idea of the post-tax return. If the portfolio churn within the year is 100% or above, the post-tax return will be around 20% less due to tax on Short Term Capital Gains (STCG). So, it is necessary to select a PMS that has consistently performed and given a long-term CAGR of at least 18% in order to increase the likelihood of comfortably beating the average mutual fund returns post-tax. The required tax reports would of course be shared with the investor by the PMS house to enable timely filing of the returns.
Next steps
Senior Corporate Executives and other HNIs are some of the biggest contributors to the economy and they deserve the best talent to manage their investments. There are a plethora of options available in the PMS space today. A careful evaluation is needed to select the right PMS products by looking at not only the recent returns, but also the consistency of those returns across the years. Additionally, the volatility relative to the peer group and a number of other important quantitative as well as qualitative factors such as Portfolio Manager's background and experience, investment strategy, processes followed, tax implications etc. need to be looked at. A knowledgeable Distributor will enable HNIs to not only navigate this space and optimize their investments in the best possible manner, but also effectively save their time and effort to engage more productively in their primary pursuits. To know more about PMS, what it offers and understand the suitability for your specific requirements, reach out to me at +91 7483255790 to set up a 1-to-1 no-pressure discussion.
Ishwar Mahadev Murgodi
APMI-registered PMS Distributor (APRN-10693)
