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Here Is What You Need To Know If You Are Considering A PMS Investment

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Here Is What You Need To Know If You Are Considering A PMS Investment
Deepika Asthana - 05 June 2020

The investment climate is in a constant state of flux with the risk-return relationship changing frequently. In such an environment, investors are often on the lookout for investment products that can give them a higher yield while adhering to their risk boundaries. An investment product that has caught the fancy of investors, especially high networth individuals (HNIs), is PMS or portfolio management services. PMS is simply a service offered by fund managers to tactfully manage your investment portfolio.

Types of Portfolio Management Services in India

Discretionary PMS

In this type, the portfolio manager is given complete discretion in the management of the portfolio. He has complete authority for the buying and selling of stocks.

Non-discretionary PMS

In this type, the investor can be as involved as he wants in the management of the portfolio. Though this method gives more liberties to the investor, it defies the purpose of PMS as the professional portfolio manager, despite knowledge and aptitude, has to consult the investor before taking crucial investment decisions.

If you are going to invest in an equity PMS, then there are a few things that you must keep in mind:

1. Most of these portfolios are concentrated in nature with the fund manager holding a maximum of 15 to 20 stocks. The idea is to allocate capital to a few high-conviction ideas in order to generate above average returns. This gives you an opportunity to generate alpha for your portfolio. However, at the same time, it is important to understand that the lack of diversification can also lead to concentration risk. Since the investments are spread across only select stocks, adverse developments in even a couple of stocks can have a sharp negative skew on the portfolio.
2. The fees charged by PMS providers is generally not fixed and needs to be negotiated. Most PMS providers will offer a combination of fixed management fees and profit sharing over a threshold rate. The normal range of the fixed management fees is 2 to 2.5 per cent. An investor may also need to pay an exit load if he/she redeems the PMS investment before the minimum investment period defined while availing the service. Further, the investor might also incur brokerage charges each time a security is bought or sold.
3. Taxation – every time a security is sold, the resultant capital gains will be subject to tax.

PMS can definitely give HNI investors an opportunity to generate alpha. However, just as ‘all mutual fund investments are subject to market risks’, even PMS investments are subject to risks. It is important to be aware of these risks before investing in PMS.

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