8 points to remember while investing in a Portfolio Management Services (PMS)

Here are 8 points to remember while investing in a Portfolio Management Services (PMS):

7 points to remember while investing in a Portfolio Management Services (PMS)

Portfolio management services (PMS) is an investment service offered by professional money managers to investors who want to invest exclusively in equities.


These managers tailor the investor’s portfolio to meet their specific investment objectives. In the last decade, PMS has evolved to become one of the most preferred investments havens among the High Net-worth Individuals (HNIs).

You might come across numerous PMS providers claiming to render higher returns. However, before selecting an appropriate PMS, you need to keep a few criteria in mind:

7 points to remember while investing in a Portfolio Management Services (PMS)

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Investment Horizon

Investment horizon outlines the period for which you would like to stay invested. Primarily, the horizon can be short/medium/long term.

Usually, when it’s about equities, the long-term horizon is always preferred over short-term. It’s because in the long run equity returns tend to exhibit mean reversion.

It means that the probability of earning average returns increases significantly due to smoothening of short-term hiccups.

Each PMS operates on a pre-determined strategy having an investment horizon. It might be as short as a few months to as long as 20 years.

While evaluating PMS, you need to be directed by your goals. For a medium-term goal, you need to opt a PMS which operates on medium-term strategies.

A mismatch in the tenure may create an impediment in the achievement of goals in a timely fashion.

Stock Selection

On an average, PMS tends to hold 15-20 shares in its model portfolio. They will have a stock selection strategy to arrive at a few promising stocks out of a whole universe of stocks. The stock picking strategy can be value/growth/blend.

Some stocks may turn out to be leaders while others may remain laggards. If the number of laggards is higher vis-a-vis achievers, the average portfolio returns might fall.

Moreover, it implies the overall cost of investment.

The portfolio manager buys/sells stocks to keep the returns in line with expectation. If he frequently trades to correct wrong bets, it will increase the cost of operations; ultimately lowering your returns.

Before arriving at a PMS, it becomes crucial to look at their stock selection and past performance of the stocks. Go for a PMS which has a history of selecting multi-bagger stocks rather than laggards.

Also read: portfolio management service (pms) vs mutual funds

Portfolio Strategy & Performance

The basic premise of availing PMS over other havens like mutual funds lies in its investment strategy. They come up with innovative approaches aimed at exploring niche segments or areas which have enormous growth potential.

Based on this, each PMS develops a model portfolio made up of promising stocks. When you go for shortlisting a PMS, the performance of this model portfolio becomes a guideline.

You can compare the performance of a model portfolio with the selected benchmark. It helps to ascertain the potential of the model portfolio.

An ideal portfolio is one who beats the benchmark during bull runs; and which loses less than the benchmark during a bear run. Financial ratios like alpha and beta help you to judge this potential of a portfolio.

A model portfolio which gives higher alpha at a lower beta is the one you may go for.

Minimum Investment

Each PMS notifies a minimum ticket size that you need to invest in participating in the PMS. The most common ticket size is Rs 25 lakh.

Some PMS may set the minimum ticket size at higher levels like Rs 50 lakh or even Rs 1 crore.

Higher the ticket size higher the risk involved. It all depends on your risk appetite regarding the amount that you want to commit at a particular time.

It will, however, be advisable to go for a PMS which offers the lowest ticket size for investment.

Lock-in Period

Lock-in Period refers to the time during which you aren’t allowed to redeem your investments from the fund.

It is anti-thetic to liquidity concept. A longer lock-in period would make it difficult to withdraw money in case of emergencies.

There are PMS which don’t have a lock-in period at all. You would be better off to invest your money in such a PMS.

However, if you want to shortlist from PMSs which have a lock-in period, then choose the one with the shortest lock-in period.

Entry/Exit loads

Entry load refers to the charge levied at the time of beginning investment. An entry load lowers the amount of money going into asset allocation.

Similarly, the exit load is levied at the time of redemption of investment before the specified dates. It is deducted from the fund value before redeeming the investment.

Hence, the presence of entry/exit load increases the expense ratio of the portfolio and lowers the final take-home returns.

While most of the PMS have done away with entry load, there are still many which charge exit load. To prevent your returns from getting hurt, choose a PMS which levies low/no exit load.

Fee Structure

Most PMS would offer a choice between the fee structure, i.e. a fixed-flat fee on the value of a portfolio or a variable fee.

Variable fee is composed of two parts, i.e. a lower flat fee in the range of 1% to 2.5%, and profit-sharing fee.

The profit-sharing fee is charged when returns generated by the portfolio exceed a pre-decided hurdle rate. It may range between 15%-20% of the profits generated.

A hurdle rate is the minimum amount of profit that a PMS needs to earn before it can charge a profit-sharing fee. The risk-free rate of say 5% to 6% acts as the hurdle rate in most of the cases.

You may choose the fee-structure offered by the PMS provider as per your convenience. However, make sure you understand the particular fee-structure entirely that is provided by your PMS.

Brokerage & Turnover Ratio

Turnover ratio is the frequency of trading activity in a portfolio. Each buying/selling of shares involves brokerage, custodian and other charges.

These are charged over and above the fund management fees. A higher turnover ratio, thus, drains the returns via increased expenses. While selecting a PMS, go for one with a lower turnover ratio.


Final Words

PMS may be worth giving a try if you are seeking higher exposure in equities. To crack a fair deal, make sure your PMS provider is transparent about his investment policies. Moreover, you understand the terms and conditions carefully before investing.

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