Portfolio Management Services

Portfolio Management Services (PMS) is a facility offered by a portfolio manager with the intent to achieve the required rate of return. Can you avail it?

Sunita Rao, CFA

Chartered Financial Analyst | International Commercial Arbitrator | Fellowship in Life Insurance | AIF | PMS | Mutual Funds |

What is Portfolio Management Service?


Portfolio Management Service (PMS) is a facility offered by a portfolio manager with the intent to achieve the required rate of return within the desired level of Risk. An investment portfolio can be a mix of stocks, fixed income, commodities, real estate, other structured products, and cash. A portfolio manager is a licensed investment professional who specializes in analyzing the investment objectives of the investor and has a vast knowledge of the various instruments in the market. The portfolio manager is better positioned to make informed decisions for investments in securities as opposed to a layman. 

PMS is a customized service offered to High Net-worth Individuals (HNI) clients. The service is tailored as per the investor’s return requirements and the ability and willingness to assume the risk. An Investment Policy Statement (IPS) is drafted by a PMS to understand the financial position and needs of the client. The portfolio manager ensures that the return requirements coincide with the risk profile. Before executing the optimum portfolio, PMS also studies the various constraints such as time horizon, tax applicability, liquidity, and other unique considerations of the client. 


What are the types of Portfolio Management Services?

  1. Active Portfolio Management: This form of portfolio management aims at beating the performance of a market index such as Nifty. An active portfolio manager will take different positions than that of the tracking index, actively buy and sell securities as per institutional research to create more returns than the index. However, to generate an excess return, the strategy undertakes a higher level of risk.
  2. Passive Portfolio Management: Such a PMS strategy aims to mimic the performance of an index by investing in the same securities with similar weights. This is known as indexing or index investing. The transaction costs, resulting from securities turnover, are low as compared to active management as the portfolio churning is at a minimum. However, incurring transaction costs leads to an overall return being lower than the tracking index. The returns of the portfolio are pegged to the market returns. Therefore, the variance in returns is low.
  3. Discretionary Portfolio Management: The portfolio manager is given complete control of the portfolio and is free to adopt any strategy which is suitable to the IPS. Such PMS demand higher involvement for decision making justifying higher fees associated with discretionary portfolio management. This is the best option for clients with limited time and knowledge of investing
  4. Non-discretionary Portfolio Management: The PMS will only suggest investment ideas while the investor will be responsible for choosing the recommendation and timing. This employs PMS in an advisory capacity as the final call rests with the investor instead of the portfolio manager. 

The portfolio management process is the means through which the portfolio manager defines the investment objectives of the investor, translates them into achievable goals, allocates assets to achieve those goals, monitor the returns and rebalance the portfolio for any mismatch in the risk and return profile of the portfolio. The 3 steps of the portfolio management process are:

  1. Planning: Planning the first step of portfolio management and involves the making of the Investor Policy Statement (IPS). Investor policy statement defines the willingness and the ability to take risk from the investors point of view. It also sets the objectives of the investors in terms of their risk and return keeping in mind the IPS of the individuals.
  2. Execution: Execution is the second step and involves allocation of the investment corpus to various asset classes and various products within the asset classes to match the risk-return profile stated in the IPS.
  3. Feedback: In the third and final step of portfolio management, the portfolio manager monitors the performance of the portfolio and makes changes to the assets wherever they are falling short of their expected returns. Rebalancing of the portfolio might be done to achieve better returns or the portfolio might stay as it is if it is performing as per expectation.

Which is better, Portfolio Management or Mutual Funds (MFs)?

The following attributes distinguish between PMS and MF:

  1. Customization: PMS offers a higher degree of customization tailored specifically to the goals of an investor. Mutual funds, on the other hand, offer customization to the extent of the classification and diversity of the fund.
  2. Engagement: PMS is personalized promoting a dialogue between the portfolio manager and investor. An investor can convey any changes in the risk profile or personal situations to maximize returns. MFs offer low engagement with the investor limited to fact sheets. Portfolio managers for PMS are also directly accountable to the investors.
  3. Fee structures: MFs charge a fixed fee attributed to the entry and exit of investments as well as annual expenses for maintenance (known as the expense ratio). PMS demands a share in the profit over a particular rate of return (known as hurdle rate) in addition to the annual maintenance fee. The alignment of incentives is highly preferred in the case of PMS so that the portfolio manager takes responsible decisions in an attempt to attain supernormal returns. 
  4. Asset ownership: Under PMS, the investor retains direct ownership of shares of the company. However, MFs offer units in the form of investment. 
  5. Investment size: MFs entertain any amount of capital. However, PMS demand a capital investment which must be over the minimum limit of Rs 50,00,000

Is PMS a good investment?

Pros of investing in PMS:

  • Professional oversight (control and monitoring)
  • Risk profiling
  • Convenient execution of trades
  • Customized service

Cons of investing in PMS:

  • Higher assumption of risk
  • Transfer of control of assets
  • Competence of the portfolio manager

For an investor with limited time and knowledge and high capital base, PMS is a suitable option given the investment management institution is reputed and offers transparency of operations. PMS also helps in better realization of diversification benefits than aimlessly investing in any number of securities. The returns and the performance of the portfolio are highly dependent on the accuracy of the security analysis done by the portfolio manager and hence are highly dependent on the competency of the
investment management institution.

What features to look for in a PMS? 


PMSs have model portfolios that they furnish when soliciting clients. The PMS model portfolio may be assessed for a track record of company selection and overall performance against the market index.

The performance of the portfolio is solely dependent on the manager’s ability to outperform the market. Therefore, a crucial aspect of selecting PMS is conducting due diligence of the portfolio manager. A portfolio manager’s educational background and experience ultimately point to the competency and expertise that they bring to the fund. 

The investment strategy is another parameter that can give PMS an upper hand over other schemes available in the market. It makes sense for the investor to understand the strategy before committing funds. If the strategies are complex, the viability of such strategies over the long-term should be outlined transparently.

The fee arrangement of the PMS based on the performance of the manager should serve a win-win situation. The profit-sharing of returns is typically 20 percent. Fees charged for the management of the fund should not be over industry standards, which is in the range of 1 to 3 percent. A hurdle rate clause ensures profit sharing with the manager only if the performance of the fund beats the minimum required hurdle rate. 

Customer support and transparency are valued by investors, especially for discretionary portfolios. PMSes appraising portfolio performance frequently benefits from customer engagement and establish a long-standing agreement.

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Originally published Sept 12, 2022

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