The minimum ticket size for investing in PMS (Portfolio Management Service) is ₹50 lakh. And the reason for keeping this limit is that SEBI doesn’t want too many small investors to get into high-risk products like PMS, which is better suited for financially aware investors with larger portfolios.
Note – The PMS minimum investment threshold was hiked from ₹25 lakh to ₹50 lakh in 2019.
So, as you too may have understood, PMS is not for small retail investors. But does it mean that if you have ₹50 lakh to invest, then you should opt for PMS?
No, not at all.
PMS is a high-risk and high-return-potential product, which is not suitable for everyone. And I will explain why in a bit. HNIs consider investing in PMS because it promises customised portfolios and at times, offers the opportunity to invest in themes or strategies that are readily not available in public.
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Also, it is a high-entry barrier investment product (you need at least ₹50 lakh to gain entry) and hence, gives a perception of the investor being part of a ‘select few’ which in turn can be an ego booster for many.
I know my view here may make me seem like I am against PMS. That is not the case.PMS is a product not required or suitable for most investors. Even those who have ₹50 lakh to invest. Unfortunately, PMS sellers/distributors won’t tell you this because they are offered high upfront commissions to push the sales of PMSs resulting in mis-selling.
And what about the reality of high returns that is what most PMSs use as a pitch to sell themselves?
Most PMSs generally hold a concentrated portfolio (compared to mutual funds). And it is for this concentration that in good times, they will do quite well. But in bad times, they fall much more sharply than broader markets or mutual funds.
If we deep dive also, then large cap-oriented PMSs are not required at all. They generally tend to underperform as the investable universe of stocks in large caps is very small. So, most PMSs will have index-type portfolios and generate similar or even lower returns! And that in no way justifies the high-expenses of the PMS structure.
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In the case of midcap and smallcap PMS, these have the ability to do very well when markets start moving up after a correction. But even then, different fund managers of PMSs will have different return outcomes. So it becomes very difficult to pick good fund managers due to the lack of reliable performance data for PMS, which otherwise is available for products like MFs.
Another factor that most investors looking to invest in PMS don’t get is that the PMS returns that are marketed and the actual returns that one gets can vary a lot. Your investment portfolio’s return outcome will depend heavily on how much you put in and at what point of PMS’s investment cycle.
That was about the returns of PMS. And PMSs are notorious for high charges and expenses. And rightly so, you need to be careful about them. The fixed fee plus performance fee structure makes PMS costs very high and eats into portfolio returns. And remember that the higher the fee and PMS expenses, lower your in-hand returns will be.
When and how much to invest in PMS?
In my view PMS is a high-risk and low-regulation product. So, unless you have a few crores to invest in equities, don’t even think about going for PMS. And even when you invest, keep your exposure limited to 10-20% of the overall equity portfolio.
So, if ₹50 lakh is the minimum amount you can invest in equities, then using the above 10-20% logic, you should consider investing in equities only when your investable portfolio in equities (and not your overall portfolio) is close to ₹2.5-5 crore. Not before that.
And PMS should also complement your overall portfolio. If your PMS is giving your portfolio similar to mutual funds, then you don’t need that PMS. A different portfolio or different style/strategy offered by a PMS, which may not be easily available via the mutual fund route is what should be considered for PMS investment.
For most investors, simply invest in diversified equity funds for your equity exposure. You don’t need to think about PMS till the time you have about ₹2-2.5 crore worth of equities portfolio.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.