What is a PMS account and how to start one?

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.

Bottomline

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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