What is PMS and it’s Benefits | Types & Difference between MF and PMS

Portfolio Management Services (PMS) is a specialized investment service provided to individuals or institutions by skilled portfolio managers. This service entails the management of a client’s investments across various securities such as stocks, bonds, and other assets, tailored to their specific financial objectives, risk tolerance, and investment timeline. In contrast to mutual funds, which aggregate investors’ capital into a shared portfolio, PMS delivers a more individualized approach. Each investor’s portfolio is specifically customized for them and is actively managed by professional fund managers. A significant advantage of PMS is the flexibility it offers in choosing investment strategies. Investors gain greater control over the structure of their portfolio and receive regular performance reports and updates.

When comparing Portfolio Management Services (PMS) to Mutual Funds (MF), the primary distinction is found in customization and ownership. Mutual funds serve as collective investment vehicles where numerous investors contribute capital to a shared fund that is overseen by a fund manager. Conversely, PMS allows for individual ownership of each security within the portfolio. Mutual funds are subject to more regulations, have lower minimum investment thresholds, and cater to retail investors. In contrast, PMS necessitates a higher minimum investment and is designed for investors seeking tailored portfolio solutions. While mutual funds provide simplicity and accessibility, PMS offers greater involvement and active management, which can potentially result in superior performance under specific market conditions.

What are Portfolio Management Services (PMS)?

Portfolio Management Services (PMS) are a form of professional financial services where portfolio manager provide service of managing investments for clients based on their investment objectives, risk tolerance, and financial aspirations. PMS can be differentiated from standard investment products, where PMS is very specific to a client, and is available mostly for high-net worth individuals (HNIs) and institutional clients. The portfolio manager that manages a PMS has discretion to make investment decisions, typically investing in equities, debt, or other asset classes in order to achieve superior risk-adjusted return. PMS in India is guided by the Securities and Exchange Board of India (SEBI) which has set a ₹50 lakh minimum investment limit in PMS making it more exclusive to high net worth investors (HNWI). PMS is provided under two main categories of services: discretionary or non-discretionary. In discretionary PMS, the portfolio manager will make all investment decisions without needing client approval for each purchase. In a non-discretionary service, the portfolio manager will provide recommendations but each investment decision must ultimately be made by the client.

Benefits of Portfolio Management Services

Professional Management and Expertise:

• Dedicated Portfolio Managers: PMS clients have the benefit of professional portfolio managers who are trained and possess considerable market experience and research. These professional portfolio managers manage their skill set and fund management technique to keep an eye on the portfolios and make decisions based on the fundamental analysis and the market.
• Active Management Strategy: While passive investment products use a passive investment strategy, PSTs usually will use an active investment strategy that potentially rebalances very often, giving them the opportunity to take action in the market and offer dynamic risk management.

Potential for Enhanced Returns:

• Focused Portfolio Approach: PMS portfolios normally have more of a focus than mutual funds. PMS portfolios commonly hold 15-30 stocks and mutual funds can have 40-50+ stocks. Concentration can lead to realized gains if the stock(s) you select do well.
• Opportunistic Investing: Portfolio managers can also react quickly to opportunities in the stock market or are investments that Cannot be accessed by mutual funds (e.g., unlisted equities, structured products).

Transparency and Control:

• Direct Ownership of Securities: PMS investors have direct ownership of securities in their demat accounts while mutual fund investors own units of a Fund. This provides greater transparency as they can track all the securities they own and the prices at which they were traded.
• Detailed Reporting: PMS providers do a great job of reporting, through regular statements, annual reports, and performance updates, as well as summaries of transactions by individual account. Many PMS providers even offer online portals for real-time tracking of investments and transactions.

Customization and Personalization:

• Personalized Investment Solutions: PMS provides personalized portfolios where it’s easy to customize each portfolio to meet the client’s goals, risk, and preferences. This ability to customize the portfolios allows for strategic asset allocation based on individual needs, instead of a more traditional one-size-fits-all approach.
• Flexible Portfolio Adjustment: Because portfolio managers have the flexibility to adjust portfolio holdings based on what they view as the best opportunities, they can take concentrated positions in high conviction ideas. In more regulated investment structures, this may be challenging.

Types of Portfolio Management Services

Discretionary Portfolio Management Services:

Discretionary Portfolio Management Services (Discretionary PMS) are investment services, which will allow you to give complete discretion to a professional portfolio manager who will then make all investment decisions on behalf of you as the investor. To put it simply, you would take the portfolio manager’s expertise and give them full control of your investment account to determine what securities to buy and sell, and when to buy and sell them, based on your financial goals and risk profile. Essentially, the portfolio manager won’t need to ask for permission for each individual transaction. This expedites the investment decision process and makes investment decisions faster and more efficient; especially in dynamic market condition.

• For Example: Suppose you invest ₹50 lakhs in a Discretionary PMS. You don’t have to choose the stocks or worry about timing the market. The portfolio manager will do everything—like investing in shares of top companies, switching between sectors, or booking profits—without asking you every time. This service is ideal for people who don’t have time or expertise to manage their own investments and want a professional to take care of everything.

Non-Discretionary Portfolio Management Services:

A Non-Discretionary Portfolio Management Service (Non-Discretionary PMS), where the portfolio manager gives advice on what to purchase/sell, but where the decisions are still made by the investor. In short, the portfolio manager will suggest the point at which an investor should invest, according to that investor’s profile and with respect to optimal market conditions, but they cannot act unless they receive “the order.” A Non-Discretionary PMS works well for individuals who both want expert guidance but still want to keep “their fingers on the pulse” of the investment decisions at all times.

• For Example: You invest ₹50 lakhs in a Non-Discretionary PMS. The manager may suggest investing in certain stocks or booking profits, but they will only do it after you say yes. You are always in control of what gets bought or sold. It’s ideal for investors who have some market knowledge and want to make the final call with professional support.

Advisory Portfolio Management Services:

Advisory PMS is a type of service which provides suggestions for investments by a professional advisor but does not directly invest your money. You will receive professional investment advice on what to buy, sell or hold. You will have to make the investment decisions and execute the transactions. It is suited to individuals who want professional guidance but want to keep full control of their investments.

• For Example: You have ₹25 lakhs to invest. The advisor tells you,
  • “You should consider investing in stocks like Infosys and HDFC Bank, and reduce your holding in XYZ stock because it’s risky now.”
• But the advisor won’t invest the money for you. You will have to log in to your trading account and place the orders yourself. So, you get the benefit of expert advice, but you handle the buying and selling on your own.

Key Differences Between PMS and Mutual Funds

Taxation Aspects:

• Tax Efficiency: Mutual funds are generally more tax efficient because investors only incur tax when they redeem their units, thereby tax is only incurred once per investment. PMS investors incur tax at each transaction level that realizes a gain .
• Tax Deferral Benefit: There is a tax deferral benefit to mutual fund structures because investors do not incur tax when the fund manager internally churns their investments, thus allowing investors growth on compounded pretax returns.

Investor Profile and Accessibility:

• Minimum Investment: PMS requires a minimum investment of ₹50 lakhs as mandated by SEBI, while mutual funds can be accessed with amounts as low as ₹100 through systematic investment plans (SIPs).
• End Investors: PMS mainly caters to high net worth individuals and institutional investors, while mutual funds aim to provide access to retail investors across all wealth bands.

Investment Approach:

• Customization Level: PMS provides the same exceptional level of customization advantage to investors with portfolios that can be designed around individual needs while mutual funds provide a standard type of portfolio and investors are in the same “mutual” fund and receive the same level of customization.
• Portfolio Concentration: PMS has more concentrated portfolios (15-30 stocks) than mutual funds which are generally more diversified (40-50+ stocks) and portfolios overlap when it comes to returns over time.

Investment Structure and Ownership:

• Pooled Account vs. Separate Account: Mutual funds pool money from various investors into a common fund, with the investors owning units of that fund. PMS will have an individual investment account for each client, so they own the securities directly.
• Demat Account Required: PMS has a dedicated demat account in the name of investors, while mutual funds do not require a demat account to be used (the fund can place into a demat account, but it is not required).

Cost Structure:

• Fee Structure: PMS usually involves management fees (1-2.5% of AUM) and performance fees (10-20% of profits) while mutual funds typically charge an expense ratio (0.5–2.5% of assets), which considers management fees and extra operational expenses.
• Added Fees: Investors in PMS also usually have other fees to bear, such as brokerage fees, transaction fees, and potential demat account fees, which are folded into the mutual fund fee in the expense ratio.

Conclusion

When trying to decide whether to undertake a PMS or mutual fund investment, consider your level of investment, your risk appetite, the amount of control you want, and the tax implications of your investment. If you are a high-net-worth individual and have significant amounts of wealth and customization is very important for your portfolio strategy, PMS could work for you. If you want simplicity and cost efficiency, mutual funds may be your best option. Some investors may consider both PMS and mutual funds for different goals. In your case, it depends on your financial situation, experience as an investor, and personal preferences regarding wealth management services. Consider speaking to your financial planner or advisor to help you better understand your options.

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