Should you invest in a PMS? Here's all you need to know

PMS is an investment service where investors get the ability to tailor a portfolio as per their investment needs and financial targets. It offers investors control over the choice of portfolio they want. It is mostly an investment choice for big investors who have a large capital.

PMS offers greater flexibility to an investor for his money and better returns but at a higher risk too. Experienced portfolio managers manage the portfolio on behalf of a client and are backed by a quality research team.

Types of PMS

Discretionary PMS: In this type, the manager has complete control and discretion for the management of the portfolio. He has the authority to buy and sell stocks on behalf of a client.

Non-discretionary PMS: In this, the investor is more involved in the management of his portfolio. The manager has to consult the client before buying or selling stocks.

How does it work?

Mostly a PMS is concentrated on a limited number of stocks around 15-20. The basic idea is to invest in a few high-conviction ideas and generate greater returns. The value of an investment in each stock is higher and hence the return is proportional. However, one must also note that due to the lack of diversification, in case of an adverse event, the risk and quantum of loss are also more.

Fee

Fees charged by PMS managers are not regulated or fixed and are negotiated between the investors and managers. Usually, PMS managers ask for fees for management as well as profit sharing and that is mostly higher than the threshold rate. Normally, the range for the fixed management fees is 2-3 percent of the portfolio. The manager might also charge extra for the profit made. Some PMS schemes charge as much as 15 percent for profits above ₹50 lakh.

An investor may also be asked to pay an exit fee if he/she withdraws the investment before the minimum investment period is over as defined during the start of the PMS. Also, brokerage charges may be incurred every time a stock is bought or sold. Extra charges like audit fees, stamp duty, may also be levied on the investor.

Who should invest?

Investors who have a large corpus set aside for investment can go for investing in such schemes. It is advised for people with a high-risk appetite and for the long term. Also, investors who have a good working knowledge of the markets and are experienced would better understand the scheme. He/she will also be able to advise and consult with fund managers on the kind of portfolio they are looking for.

But should you invest?

If you do not have a large amount of capital to spare, then investing in mutual funds is a better option. Also, mutual funds are better regulated hence safer.

Suppose if you have retired with a corpus of ₹50 lakh, PMS may not be the best investment option for you since it has a higher risk and can as easily incur losses.

Also one must note that not more than 10 percent of your total portfolio should be put in PMS, so you must have other assets and investments to trim the losses in case.

PMS Performance

The data for PMS schemes are only available since 2013, so there aren’t even 10 years of data to properly analyse before investing and generally have midcaps and small caps portfolios.

However, some PMS schemes have really performed well despite the risks. In 2020, around 67 percent PMS schemes outperformed benchmark Nifty.

Some PMS schemes that rose the most include Equirus Securities' Long Horizon Fund, Sageone's Small and Microcap fund, Kotak's Pharma fund, Moneylife's MAS Growth fund, and Accuracap's Picopower fund. All these funds surged over 50 percent in 2020.