Portfolio Management Services (PMS): Meaning, Types & How to Open an Account

Investing isn’t always straightforward, and it’s easy to feel overwhelmed when trying to match your financial goals with the right investments. Missteps can lock funds or lead to losses, particularly during market downturns. 

For those seeking specialised assistance, Portfolio Management Services (PMS) offers a structured approach to managing investments. In this blog, we will delve into the PMS account’s meaning and explore how to open one.

What is a PMS account?

A PMS account, is a specialised investment service geared towards individuals looking to have their portfolios managed by professionals. In this service, a portfolio manager oversees a diverse array of investments including stocks, fixed income assets, and other securities tailored to meet specific financial goals.

The minimum investment required for a PMS account is ₹50 lakh. This establishes the account as aimed primarily at High Net Worth Individuals (HNIs) who prefer not to manage their daily investment decisions. A dedicated manager uses extensive research and strategies to aim for the best possible returns, adjusting the portfolio in response to market changes and individual financial goals.

The key difference between PMS and managed accounts is the level of customisation and control. While both offer professional management of investments, PMS provides a more customised service, often with direct ownership of securities, unlike managed accounts, which may pool resources from multiple investors like mutual funds.  

Where to get a PMS scheme?

In order to provide PMS services to individuals, organisations are required to register with Securities and Exchange Board of India (SEBI). In a recent update, SEBI has further enhanced oversight by making it mandatory for all PMS providers to also register with the Association of Portfolio Managers in India (APMI), a move aimed at promoting better governance and transparency in the management of portfolios.

To access a scheme, investors can approach either directly through PMS providers or through wealth management firms and authorised distributors. Each method has its own set of considerations.

PMS providers, as mandated by the SEBI, offer direct plans. This allows investors to engage with the provider directly without intermediaries, potentially reducing associated costs.

Alternatively, wealth management firms and distributors are available for those who prefer assistance in navigating the selection of a PMS. These firms can provide insights into various PMS providers’ track records and investment styles, as each provider manages portfolios based on specific strategies that may not be pooled as in mutual funds.

There are 426 registered PMS providers in India, each offering different management approaches and fee structures, including terms on profit-sharing and hurdle rates. Given the variety and complexity of choices, some investors might find value in consulting with a financial advisor to better understand which PMS aligns with their investment objectives.

Opening a PMS account

Opening a PMS account involves several steps, beginning with the setup of a dedicated demat account. This account is crucial as it holds the securities you own, all under your legal name. You cannot use an existing demat account for this; a new one must be specifically opened for PMS activities to ensure clear demarcation and management of assets.

Alongside the demat account, you’ll also need to open a separate bank account. This account is used to manage the cash flows associated with your investments, such as receiving dividends or other gains.

The setup process includes filling the PMS account opening form, signing a series of documents, primarily your agreement with the PMS provider which details the fees, services, and other legalities, and a Power of Attorney (POA). The POA is crucial as it authorises the portfolio manager to buy and sell securities on your behalf. Typically, completing all paperwork and setting up the accounts can take anywhere from 3 to 30 days, depending on the efficiency of the PMS provider.

It’s important to note that despite granting managerial control through POA, you retain full access to your accounts, allowing you to monitor and verify the status of your investments at any time. This setup helps ensure that while your portfolio is professionally managed, you maintain oversight and control over your financial assets.

Charges of PMS account

The charges associated with a PMS account can significantly vary but typically include a combination of fixed and performance-based fees. Here’s a breakdown of the common charges:

1. Entry load: This is a one-time fee charged at the time of investment, ranging from 1% to 3% of the invested amount. It covers the cost of setting up the investment and administrative expenses.
2. Management fee: This recurring charge is assessed quarterly and varies from 1% to 3% of the assets under management. It compensates the portfolio managers for their expertise in handling the investments.
3. Profit sharing: Some PMS accounts include a performance fee, calculated as a percentage of the profits earned by the portfolio. This aligns the interests of the manager with the investor, as the manager earns more if the portfolio performs well.
4. Exit load: If an investor decides to withdraw from the PMS before a specified period, typically 1 to 3 years, an exit load of 1-3% may be applied.

Types of Portfolio Management Services (PMS)

Portfolio Management Services (PMS) are classified into different types based on investment objectives, management styles, and investor preferences. Here are the most common types:

1. Discretionary PMS: In this type, the portfolio manager has full authority to make investment decisions on behalf of the client. The investor entrusts the manager to handle stock selection, timing, and execution without prior approval for each trade.
Ideal for: Investors who want a hands-off approach and trust the fund manager’s expertise.

2. Non-Discretionary PMS: Here, the portfolio manager offers recommendations, but the final investment decision lies with the client. The manager executes trades only after receiving the client’s consent.
Ideal for: Investors who want to stay actively involved in investment decisions.

3. Advisory PMS
\: Under this model, the PMS provider only suggests investment strategies and stock ideas. The client is responsible for executing trades through their own trading account.
Ideal for: Experienced investors who need expert guidance but prefer independent execution.

Benefits of Portfolio Management Services (PMS)

Opting for PMS offers several advantages, especially for high-net-worth individuals (HNIs) seeking personalized investment strategies. Below are the key benefits:

1. Professional Expertise: PMS accounts are managed by seasoned professionals who analyze markets, manage risk, and make informed decisions to grow wealth strategically.

2. Customization and Personalization: Unlike mutual funds, PMS offers a more tailored approach where portfolios are designed to align with the investor’s risk appetite, goals, and preferences.

3. Diversification: PMS portfolios are typically diversified across sectors and asset classes to manage risk and capture growth opportunities effectively.

4. Transparency and Control: Investors receive detailed reports, performance updates, and insights about portfolio changes. In certain models, they also have control over decision-making.

5. Better Tax Efficiency: Since investments are made in the investor’s name, PMS offers better control over capital gains and tax planning compared to pooled structures like mutual funds.

6. Higher Return Potential: With focused stock selection and active management, PMS has the potential to generate higher returns than traditional investment vehicles—although risks are also proportionate.

7. Personalized Relationship Management: PMS clients often receive personalized service and dedicated relationship managers who provide timely updates and assistance.

How do Portfolio Management Services (PMS) Work?

Portfolio Management Services (PMS) are professional investment management services offered by financial institutions and portfolio managers to manage the investments of clients. The primary goal of PMS is to provide investors with a customized portfolio that aligns with their financial goals, risk tolerance, and investment preferences. Here’s how PMS works:

1. Understanding Client’s Needs: The first step involves understanding the client’s financial goals, risk appetite, investment horizon, and preferences. A personalized strategy is then created based on this detailed assessment, ensuring that the investments are tailored to the individual’s specific objectives.
2. Asset Allocation: Once the financial goals are understood, the PMS provider allocates assets across various asset classes such as equities, debt, commodities, real estate, and alternative investments. The allocation is based on the client’s risk profile and market conditions.
3. Active Management: The portfolio manager actively manages the portfolio by regularly monitoring the market and adjusting the asset allocation based on market trends, economic conditions, and the client’s goals. This includes buying and selling stocks, bonds, or other investments to maximize returns.
4. Performance Monitoring and Reporting: The portfolio manager provides regular updates to clients regarding the performance of their portfolio. These reports highlight the portfolio’s returns, any adjustments made, and recommendations for future actions. The aim is to ensure transparency and maintain a healthy relationship between the investor and the portfolio manager.
5. Tax Optimization: PMS providers often focus on optimizing the tax liabilities of investors by strategically managing capital gains and using tax-efficient investment options. This helps investors maximize their after-tax returns.

Objectives of Portfolio Management

The primary objectives of Portfolio Management Services (PMS) are designed to meet the financial needs of clients by employing various strategies to optimize returns while managing risk. Below are the key objectives of PMS:

1. Maximizing Returns: The primary objective of any PMS is to maximize the returns on the investment portfolio by strategically allocating capital to high-performing assets. This includes selecting stocks, bonds, or other financial instruments that have the potential for higher returns.
2. Risk Management: Another significant objective is to manage risk. Portfolio managers use diversification, asset allocation, and other risk management techniques to reduce exposure to market volatility and safeguard the investor’s capital.
3. Meeting Specific Financial Goals: PMS helps clients achieve specific financial goals such as funding education, purchasing property, retirement planning, or building wealth for future generations. The portfolio is tailored to ensure it aligns with these goals and delivers the required financial outcome.
4. Liquidity Management: A well-structured PMS also ensures that clients have access to sufficient liquidity when needed. Depending on the client’s goals, the portfolio manager ensures that a portion of the portfolio is liquid and accessible to meet any immediate financial needs.
5. Tax Efficiency: Portfolio managers work to optimize the tax liabilities of investors by employing strategies like capital gain tax management, tax-free bonds, and other tools. This helps in reducing the tax burden on the investor and enhancing the net returns.
6. Customizing for Client’s Preferences: PMS allows for customization based on an investor’s preferences and financial situation. Whether the client prefers ethical investing, socially responsible investments, or a specific sector, the portfolio manager adapts the strategy to meet these individual preferences.

What Features to Look for in a PMS?

When selecting a Portfolio Management Service (PMS), it is crucial to choose one that meets your financial goals, risk appetite, and investment preferences. Here are some key features to look for:

Regulatory Compliance: Ensure that the PMS provider is registered with SEBI (Securities and Exchange Board of India) and complies with all regulations and standards set by regulatory authorities. This ensures that your investments are protected and managed in accordance with legal norms.
Bottomline

Customization and Personalization: A good PMS should offer a high level of customization. The portfolio manager should design an investment strategy tailored to your specific financial goals, risk profile, and preferences. Customization is essential for achieving your unique investment objectives.

Experienced and Skilled Portfolio Managers: Look for PMS providers with a team of experienced and skilled portfolio managers who have a proven track record of managing investments effectively. Experienced managers understand market dynamics and can make informed decisions to maximize returns and manage risk.

Transparency and Reporting: Ensure that the PMS provider offers transparent communication and regular reporting. You should receive periodic performance updates, including details on the asset allocation, returns, and changes made to the portfolio. Transparent reporting builds trust and keeps you informed about your investment performance.

Diverse Investment Options: A well-rounded PMS should offer a diverse range of investment options, including equities, debt instruments, mutual funds, ETFs, and other alternative investments. This allows for better risk diversification and the ability to invest in various sectors or asset classes, based on your preferences.

Risk Management Techniques: The PMS provider should have effective risk management strategies in place. This includes diversification, asset allocation, hedging, and regular portfolio adjustments to mitigate risk and protect your investments from market volatility.

Performance-Based Fees: Look for PMS providers that charge performance-based fees instead of fixed fees. Performance-based fees align the interests of the portfolio manager with those of the investor. The manager gets compensated based on the returns generated, motivating them to work towards maximizing profits.

Liquidity and Access: While PMS investments are often designed for the long term, it’s essential to ensure that you have access to liquidity when needed. Some PMS providers offer flexibility in terms of withdrawing funds, which can be important in case of urgent financial needs.

While PMS accounts offer a tailored approach to investment management, it’s important to fully understand the risks and costs involved. Before committing to a PMS, carefully consider your financial goals, the terms of engagement, and the expertise of the portfolio managers to ensure alignment with your investment objectives.

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