PMS is managed by a professional portfolio/fund manager. Portfolio composition can be customized to meet client’s specific financial goals. Only entities registered with SEBI for providing PMS services, can offer PMS to clients. Currently in India PMS is offered primarily by asset management companies (AMCs) and brokerage houses.
In PMS, an Investor and Portfolio manager sign an agreement giving details of theme and objective of the portfolio, investment strategy, and other key points.
PMS composition ranges across asset classes i.e. Equity, Debt, Cash, and Structured Products with multiple options under each asset class. The PMS providers offer various thematic strategies ranging from large, small & mid cap, flexi cap, focused products etc. to suit the specific needs of the investors.
Like Mutual Funds, there is no NAV for a PMS; however, customer can get the valuation of portfolio from the PMS provider on a daily basis. Every PMS scheme has a model portfolio and the investments are done by the fund manager in line with the model portfolio.
As per SEBI guideline, the minimum amount to be invested by an investor in PMS should be Rs. 25 lakh or through share transfers as held by the customer to the PMS account. The Value of the share transferred should be above the minimum investment criteria.
Portfolio handling in PMS can be discretionary or on non-discretionary basis.
In Discretionary PMS, investment decisions viz. choice and timings, are at the sole discretion of the fund manager through power of attorney obtained from the client to manage his/her demat account; wherein, the client has no say in the investment process.
In a Non-Discretionary PMS, the portfolio manager merely suggests the investment ideas; the choice as well as the timings of the investment decisions rest solely with the Investor. However, the execution of the trade is done by the portfolio manager.
Most of PMS providers in India offer Discretionary Services.
Under PMS schemes the fund manager interaction also takes place. Generally, the PMS provider arranges for fund manager interaction on a quarterly/half yearly basis.
The charge structure is decided at the time of investment, and may vary for different PMS providers and basis scheme offered. Investor should check the charges before signing an agreement.
Entry Load: 2-3.5% is charged at the time of buying the PMS.
Fund Management Charges: FMC charges may range from 1% to 3%. It is charged on quarterly basis to the PMS account.
Profit Sharing (above Hurdle Rate):
Some PMS have profit sharing arrangements over and above annual fees. Most PMS having such arrangement generally charge 2% annual fee and 20% profit beyond a hurdle rate.
The hurdle rate determines the level at which profit-sharing would take place. For example, a 15% huddle rate means the PMS provider will get 20% profit above 15%.
In above example, say PMS generates profit of 22%. Here PMS provider would get % profit on fund value as:
= (22%-15%)*20%
Therefore, Profit to PMS= 1.4% of the fund value
Apart from the above charges, the PMS also charges the investors on Custodian Fee, Demat Account opening charges, Audit charges, and Transaction brokerage.
A MF scheme has restrictions upon it by it’s offer document as to the what extent it can invest in equities and debt. The PMS is restricted by the mandate imposed upon it by the investor or by the internal policy of the PMS provider.
The tax liability for a PMS investor would remain the same as if the investor is investing in capital market directly. The portfolio manager ideally provides audited statement of accounts at the end of the financial year to aid the investor in assessing his/ her tax liabilities; the investor should consult his tax advisor for the same.
NRIs can also invest in a PMS. They need to open a PIS account for investing in PMS. However, the document required for an NRI would be differing from a resident Indian.