A senior multinational company executive was approached by his personal banker, who handles his investments. A recent property sale had brought in a bounty and he had funds lying in his account. He was approached to allocate part of the surplus for investing into Portfolio Management Services, more popularly known as PMS. The senior executive is among the few breed of investors, who do a thorough due diligence of the product, before investing in the same. And once the decision is made, there is no looking back.
PMS is a product wherein, a brokerage house or an asset management company or an approved financial entity, on a certain pre-determined corpus (in excess of Rs 5 lakh), invest in direct equity and try to deliver returns in excess of the market returns. The USP being, the experienced fund manager, because of his insights into the market, will be able to deliver the promises.
The cost structure of the product includes an upfront fees of 2?5% of the corpus, asset management fees of 2% every year which is paid quarterly. Moreover there is a hurdle rate of 10-12% which is the minimum rate for which the investor need not share the profits with the fund manager. Over and above the hurdle rate, one could share profit 20-30% of the excess return, with the fund manager and an exit load of 1-2% is levied if one withdraws before the lock?in period which is typically for 12 to 18 months.
Unlike a mutual fund, a typical PMS has certain advantages like there is no sectoral limits on investments. There is no single stock limits for investments and there is price advantage on volatility in equities
However, the pros has its cons too. Frequent churning by fund managers increases the brokerage income of the inhouse broking house, incidence of debatable stocks in the portfolio as PMS is not subjected to the kind of regulation which a mutual fund is subjected to. Moreover, an investor entering later into a PMS scheme gets a totally different portfolio as compared to the early entrants and to meet the quarterly/ yearly hurdle rates, investment is done with a short-term horizon.
In fact, prior to the bull run in 2005-06, the the minimum ticket size for a PMS scheme was Rs 50 lakh to 1 crore. However, with the bull run, the size was reduced to as low as Rs 5 lakh. The corpus for the investment could be brought in either through transfer of funds or through transfer of existing equity portfolio. The average returns delivered by mutual funds in the diversified equity category over the last three to five years have been over 18%, which a majority of the PMS schemes run by the various financial houses have not been able to emulate. So, one would recommend an investment in PMS, only if your networth (excluding property) is in excess of Rs 5 crore and after vetting the performance of the fund manager over the last three to five years.
* The writer is founder and managing partner, Zeus WealthWays