PMS vs Mutual Funds: What’s the difference after SEBI’s rule changes on portfolio services

Updated: Mar 04, 2020 2:18 PM

PMS is usually offered as an investment solution to high net worth investors. With greater flexibility and higher customisation, PMS aims to generate alpha over the relevant index.

Sameer Kaul, MD and CEO – TrustPlutus wealth management services.
  • By Sameer Kaul

Personalised attention comes at a cost. But does this cost lead to wealth creation or wealth destruction. Many of you may have noticed, that as your wealth increases (represented by your bank balance or investment portfolio), you are soon upgraded to a ‘privileged’, ‘preferred’ or ‘priority’ customer with a designated ‘wealth manager’ or ‘relationship
manager’. It is the same case with Portfolio Management Services (PMS).

PMS is usually offered as an investment solution to high net worth investors. With greater flexibility and higher customisation, PMS aims to generate alpha over the relevant index. While mutual funds pool assets from several investors, under PMS each account is managed separately and can be customized to suit a client’s investment mandate.

An example to illustrate why PMS is more efficient than Mutual Funds:

Let us say that a MF and PMS each has a 10 stock portfolio. Now when the market corrects and few of investors redeem the MF, it will have a negative impact for the investors who stay put in the portfolio as the MF has to honour the redemption. On the other side, let us say you invest when market corrects in a MF, your inflow will benefit all investors in the MF.

However, in a PMS the redemption in one account will not affect other investors as each investor portfolio is held in a different Demat account. On the contrary, it will positively impact the investor’s portfolio if they add stocks to their investment when market is down. PMS is a highly beneficial service to investors who are either very busy with their own businesses or who lack the technical expertise in investments. Customization of investments is the most sought-after feature of PMS. It enables active management of portfolios in which an investor can decide on the type of shares (market capitalization/sector wise) or asset classes he wants to invest in.

In terms of transparency, mutual funds are well regulated and particularly transparent. One can get all information about mutual funds right from the portfolio disclosures to the commission earned by distributors. The performance data is available on a daily basis, making mutual funds easier to track.

While PMS’ do need to make timely disclosures to clients, the same is not freely available to the public. However, this is changing with new platforms like PMS Bazaar sharing a wide range of information on the PMS’ available in India, including discretionary and non- discretionary investment options.

The Securities and Exchange Board of India (SEBI) has recently announced certain changes to the regulatory framework with regard to the Portfolio Management Services industry which will come into effect from 1st May, 2020. Portfolio managers shall not charge any upfront fees, either directly or indirectly to the clients. As a result, the provision to levy ‘Set Up Fee’ on investors in PMS products will cease to exist. Also, PMS Managers shall charge brokerage at actuals to clients and operating expenses (excluding brokerage and fees charged by PMS Managers) shall not exceed 0.50% p.a. of the client’s average daily AUM. The regulator has also standardized the exit load norms as well as capped the maximum charges for all transactions in a financial year.

The regulator has also paved the way for introduction of direct plans in such schemes. Portfolio Managers shall provide an option to clients to be on-boarded directly and this shall be prominently disclosed in the disclosure documents, marketing material and on the website of the managers. At the time of on-boarding of clients directly, no charges except statutory charges shall be levied.

In order to increase supervision of distributors of PMS products, the regulator has directed that only those who have a valid AMFI Registration Number or have cleared the NISM-Series-V-A exam can distribute PMS products. Also, the fees paid by PMS Managers to distributors needs to be on a trail basis and should be disclosed to prospective clients. The information about Investment Approaches offered by Portfolio Managers shall be uniform across all types of regulatory reporting, client reporting, disclosure documents, marketing materials and any such document which refer to services offered by Portfolio Managers.

While PMS will continue to be an investment solution targeted at high net worth investors due to higher minimum ticket size and will provide a higher degree of customization as compared to mutual funds, the changes announced by the regulator will bring about the much needed standardization and transparency in the PMS industry. In the past there have been instances of customers being over charged, allegations of mis-selling as some asset managers may have given hefty upfront incentives to encourage asset gathering of their funds. An all trail commission structure for distributors will bring both MFs and PMS’ at par in terms of method of compensating distributors and will correct the anomaly of selling a certain type of investment product only to earn an upfront revenue. The introduction of direct plans will also bring about an evenness between MFs and PMS’ and help investors who avail of advisory services to ensure that the advisor is not earning revenues from both the investor and product manufacturer. This will not just help bring down the cost of investment for the investors but will also help in the growth of the advisory industry.

  • Sameer Kaul is MD and CEO, TrustPlutus wealth management services. Views expressed are the author’s own.

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