For Indian investors looking beyond traditional mutual funds, Portfolio Management Services (PMS) present a tailored alternative. However, navigating this space requires a clear understanding of its distinct features, costs, and regulatory landscape compared to more common investment vehicles.
Core Structure and Customization in PMS
A Portfolio Management Service operates on a fundamentally different principle than a mutual fund or an Alternative Investment Fund (AIF). While mutual funds pool money from numerous investors into a common scheme, a PMS is designed to manage a portfolio specifically for an individual client.
In practice, however, creating a completely unique portfolio for every investor is operationally challenging. Therefore, most PMS providers run a model portfolio which is then replicated for all clients with only marginal variations. This means your PMS investment, while personalized in mandate, often mirrors a strategy applied to other investors with similar profiles.
Critical Financial Considerations: Tax, Liquidity, and Cost
Taxation is a major differentiator. A PMS is a 'pass-through' vehicle for tax purposes. This means you, the investor, directly own the underlying stocks and bonds. Consequently, you are directly liable for capital gains tax based on your holding period.
For instance, gains from listed equity shares held for less than a year are taxed at 20% (plus surcharge and cess), while long-term holdings (over one year) attract a 12.5% tax. For listed bonds, short-term gains are taxed as per your income slab, and long-term gains at 12.5%. In contrast, mutual funds are tax-free trusts; tax is levied only when the investor redeems units.
Liquidity in a PMS depends on selling securities in the market, subject to applicable taxes and any lock-in periods or exit loads specified in the agreement.
Regarding costs, apart from a fixed management fee, many PMS structures include a profit-sharing component. After achieving a predefined annual return or 'hurdle rate' (e.g., 12%), additional profits may be shared between the investor and the provider in an agreed ratio, such as 80:20. Transaction brokerage charges are usually separate.
Flexibility, Ticket Size, and Regulatory Framework
PMS regulations offer more flexibility than mutual funds, as they cater to a niche audience. Unlike mutual funds, which are capped at a 10% exposure to a single instrument, a PMS can run highly concentrated portfolios. This allows for aggressive bets but also increases risk.
The most significant entry barrier is the minimum ticket size. The regulatory minimum for a PMS investment is ₹50 lakh, though providers can demand more. This amount can be deployed across different asset classes or strategies offered by the same provider, allowing for internal diversification even at the minimum threshold.
Investors must weigh these aspects against other options like discretionary PMS (manager makes decisions), advisory PMS (you execute based on advice), mutual funds, and AIFs to find the best fit for their financial goals and risk appetite.
