A Portfolio management service (PMS) is a wealth management service offered by financial institutions to HNI Investors who want to invest in different asset classes, primarily equities and bonds. They are customised financial advisory services where investors get the benefit of higher returns as compared to traditional mutual funds due to the PMS fund manager’s flexibility in investment decisions.
While a PMS offers several benefits such as customised portfolio management, easier access to the fund manager, greater flexibility in choosing assets to invest in and better returns; there are few points that must be noted before signing a PMS agreement:
- Portfolio investment strategy
The basic advantage of a PMS is to offer avenues for investment in niche asset classes which have high growth potential and which would not have been possible with traditional mutual fund investments. As such, every PMS has its own investment strategy and model for portfolio allocation. These may not always match ever one of the PMS investors’ requirements. In order to define a customised investment portfolio.
- Portfolio risk and concentration
While mutual funds typically invest in a broad spectrum of a diversified portfolio of equities and bonds, PMS runs a more concentrated portfolio of about say, 20-25 stocks and a few bonds. This concentrated portfolio increases the potential for higher returns from the PMS fund, but it also increases the underlying risk. Standard deviation for PMS portfolios are typically 65% – 70% higher than that of mutual funds.
- Fees and charges
While the expense ratios for mutual funds range between 2.5% and 3.25%; the fee for a PMS includes a fixed component along with a performance fee by way of profit share. This variable component decreases the overall ‘alpha’ return from the portfolio for the investor.
- Transparency and disclosures
While mutual funds are required to disclose performance history, top portfolio composition etc transparently by the regulator, there are few such requirements mandated for PMS funds also.
While PMS schemes offer a wide range of attractive features and promises for returns, they also have certain risks which only sophisticated wealthy individuals can tolerate. Even these investors must carefully consider their options before taking an investment decision.