What is a PMS?

PMS or Portfolio Management Services is a licensed and professional investment service offered to cater to the objectives of niche segment of long term investors with minimum investment ticket size of Rs 50 lacs.

What is the minimum investment amount in a PMS?

Rs 50 lakhs.

Who is a Portfolio Manager?

A portfolio manager is a legal entity that, under the terms of a contract with a client, advises, directs, or conducts the management or administration of the client’s portfolio of securities, assets, or money (whether as a discretionary portfolio manager or otherwise). The portfolio manager must have a net worth of at least INR 5 crore.

Why should one invest in a PMS?

• Concentrated, and Focussed**
• Own businesses, and not units**
• You own your own portfolio**
• Most Transparent**
• Buy and hold, with low churn**

Clients on-boarded by the Portfolio Manager prior to January 21, 2020 were required to bring in minimum of INR 25 Lacs as their initial investment. What is the minimum amount that may be further invested (top-up)by such clients on or after January 21, 2020?

Clients of Portfolio Managers on-boarded before January 21, 2020 shall, in case of any top-up, comply with the requirement of new minimum investment amount and top up their accounts to minimum INR 50 Lacs.

How many types of PMSs are there?

PMSs are of two types- Discretionary PMSs & Non-Discretionary PMSs. In a discretionary PMS, the portfolio manager handles each client’s assets and securities separately and independently, according to the client’s needs- but takes decisions on his own. In the non-discretionary PMS, the portfolio manager manages the money according to the client’s instructions.

Who can invest in PMSs?

Individuals and Non-Individuals such as HUFs, partnerships firms, sole proprietorship firms and Body Corporate.

How are PMSs taxed in India?

Since under a PMS, investments are held directly in the investor’s name (and not via a trust like in a MF or AIF), the tax liability for the PMS investor is the same as the investor directly buying or selling shares/securities in his own name.

Income from shares purchased through PMS is taxable as Capital Gains- could be Long term or Short term in nature.

– Gains from stocks that are held for more than a year get treated as long term and are taxed @ 10% plus surcharges.
– For the holdings that traded within 1 year, treatment is short term, and are taxed @ 15% plus surcharges.
– For the income earned in form of dividends credited in the financial year, dividend distribution tax is already deducted at the source and in the hands of investor, these dividends tax-free. But, if total income from such dividends earned in a financial year is more than 10 lacs across all investments, then additional dividend income tax is also applicable.

Why should an investor select a PMS over a MF?

Unlike a mutual fund, PMS, gives access to ownership in the individual shares. PMS works on the concept of personal demat, whereas mutual funds offer units in the pooled portfolio. In PMSs, one investor’s behavioural reactions to market movements doesn’t impact other investor’s portfolios. PMS have for flexibilities with regards to allocation per business, per sector, cash calls. PMS are more focused, concentrated, and follow relatively lower churn, as funds do not flow in and out too often as in case of pooled structure like MF. PMS are more transparent in terms of activity, transactions, holdings, expenses, and so investor is more connected and informed about where the money is eventually invested.

Can NRIs invest in PMSs in India?

Off-course Yes, NRIs can invest in PMSs in India. Depending upon your country, PMSs have different TnCs for NRIs- to get a more details, regarding NRI Investments in Indian PMSs, please visit:

https://www.pmsaifworld.com/portfolio-management-services-pms-for-non-resident-indians-nris/#1595314104121-e9921f40-4bb4

https://www.pmsaifworld.com/portfolio-management-services-pms-for-non-resident-indians-nris/#1595314104121-e9921f40-4bb4

What are the fees / profit sharing structure in a PMS?

According to the SEBI (Portfolio Managers) Regulations, 2020, the portfolio manager must charge a fee for portfolio management services based on the agreement with the customer. The cost may be a set sum, a performance-based fee, or a combination of the two.

The agreement between the portfolio manager and the client must specify, among other things, the amount and manner of fees due by the client for each activity for which the portfolio manager provides services directly or indirectly.

Most PMS offer various fee options like fixed fees, variable fees or hybrid of both fixed and variable.

Where can the Portfolio Manager invest the clients’ money?

Under Discretionary Portfolio Management Service (DPMS), Portfolio Managers shall invest funds of his clients in the securities listed or traded on a recognized stock exchange, money market instruments, units of Mutual Funds through direct plan and other securities as specified by Board from time to time.

Under Non-Discretionary Portfolio Management Service (NDPMS), Portfolio Managers may invest up to 25% of the AUM of a client in unlisted securities, in addition to the securities permitted for discretionary portfolio management.

“Unlisted securities” for investment by Portfolio Managers shall include units of Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), debt securities, shares, warrants, etc. which are not listed on any recognized stock exchanges in India.

Can a client make a partial withdrawal from the PMS?

The customer may withdraw partial sums from his portfolio, if it follows the terms discussed in line with the provisions of the client’s agreement with the Portfolio Manager. The value of the portfolio’s investment following such withdrawal, however, must not be less than the required minimum investment amount.

Till what % is the fees negotiable?

Broadly, it can be reduced by 20% to 40%, depending upon the ticket size and the product.

What is better: Pure fixed fee structure or Variable fees?

This totally depends upon your expectation from the portfolio manager. If you are convinced that returns for next 1 year from your starting level are going to be most probably upwards of 15%-17%, then you should opt for fixed fees; but, if you are unsure and see 15%-17% as max possible returns, then go for variable fees.

Can I change the fee structure from time to time?

Yes, for an open ended PMS where performance fees is settled every year, fees option can be modified after every 1 year cycle, but not so in case of closed ended AIF or those PMSs where performance fees is charged at maturity while returning the money or after 3Y or 5Y, as the case maybe.

As a result of portfolio rebalancing & valuation, if the portfolio value drops below the minimum investment amount as announced by SEBI, is the client required to Top-up his account?

– No.

What are the restrictions on transaction charges?

Charges for all transactions through self or associates in a financial year (broking, Demat, custody, etc.) should be capped at 20% by value per associate (including self) per service. Such restrictions will apply to DEMAT services, custodian services, and other related services. Furthermore, any fees charged to self/associates must not be higher than those charged to non-associated for the identical service. In the case of Broking services, for example, the total amount paid to the associate Stock Broker during the year cannot exceed 20% of the total brokerage paid for trades on behalf of its clients.

If a Portfolio Manager has multiple associate Stock Brokers, each transaction through each associate Stock Broker is limited to 20% of the total brokerage paid for trades on behalf of the Portfolio Managers’ clients during the year.

How many non-associates can a Portfolio Manager work with?

The number of non-associated Stock Brokers, Depository Participants, or Custodians that a Portfolio Manager can work with is unrestricted. For example, the Portfolio Manager may use a single non-associated Stock Broker to execute 100 per cent of its customers’ trades.

How can one evaluate the performance of a Portfolio Manager?

The performance of a discretionary portfolio manager is calculated using time weighted rate of return (TWRR) method for the immediately preceding three years or period of operation, whichever is lesser.

SEBI Circular No. SEBI/HO/IMD/DF1/CIR/P/2020/26 dated February 13, 2020, inter- alia, provides information on reporting of performance by Portfolio Managers and also a client reporting format which includes information on the performance of the client account, portfolio manager and the appropriate benchmark.

How is TWRR calculated for the purpose of calculating performance of the portfolio manager?

The time-weighted rate of return (TWRR) breaks up the return on an investment portfolio into separate intervals, based on whether money was added or withdrawn from the fund.

What kind of reports can the client expect from the portfolio manager?

The portfolio manager shall furnish periodically a report to the client, as per the agreement, but not exceeding a period of three months and such report shall contain the following details, namely:

a) the composition and the value of the portfolio, description of securities and goods, number of securities, value of each security held in the portfolio, units of goods, value of goods, cash balance and aggregate value of the portfolio as on the date of report;

b) transactions undertaken during the period of report including date of transaction and details of purchases and sales;

c) beneficial interest received during that period in the form of interest, dividend, bonus shares, rights shares, etc;

d) expenses incurred in managing the portfolio of the client;

e) details of risk foreseen by the portfolio manager and the risk relating to the securities recommended by the portfolio manager for investment or disinvestment;

f) default in payment of coupons or any other default in payments in the underlying debt security and downgrading to default rating by the rating agencies, if any;

g) details of commission paid to distributor(s) for the particular client.

What is the Disclosure Document?

The portfolio manager provides to the client the Disclosure Document prior to entering into an agreement with the client. The Disclosure Document contains the quantum and manner of payment of fees payable by the client for each activity, portfolio risks, complete disclosures in respect of transactions with related parties, the performance of the portfolio manager and the audited financial statements of the portfolio manager for the immediately preceding three years.

How can an investor monitor the performance of his PMS investment?

Most PMSs provide online login access where one can easily see everything in the dashboard or can download performance reports.

Does SEBI approve of the individual decisions & services offered by portfolio managers?

No. SEBI does not approve any of the services offered by the Portfolio Manager. An investor has to invest in the services based on the terms and conditions laid out in the disclosure document and the agreement between the portfolio manager and the investor.

Does SEBI approve the disclosure document of the portfolio manager?

No. SEBI also does not certify the accuracy or adequacy of the contents of the Disclosure Document.

What are the rules governing the services of a Portfolio Manager?

The services of a Portfolio Manager are governed by the agreement between the portfolio manager and the investor. The agreement should cover the minimum details as specified in the SEBI Portfolio Manager Regulations. However, additional requirements can be specified by the Portfolio Manager in the agreement with the client. Hence, an investor is advised to read the agreement carefully before signing it.

Can a Portfolio Manager impose a lock-in on the investor?

Portfolio managers cannot impose a lock-in on the investment of their clients. However, a portfolio manager can charge applicable exit fees from the client for early exit, as laid down in the agreement subject to provision of SEBI Circular No. SEBI/HO/IMD/DF1/CIR/P/2020/26.

Are there guaranteed expected returns in a PMS?

No.

Where can an investor file their complaints?

Investors would find the name, address and telephone number of the investor relation officer of the portfolio manager (who attends to the investor queries and complaints) in the Disclosure Document. The grievance redressal and dispute mechanism is also mentioned in the Disclosure Document. In case of non redressal of the complaint by the Portfolio Manager, investors can approach SEBI for redressal of their complaints. Investors may lodge their complaints through SCORES (SEBI Complaints Redress System) or by sending their complaints on the address given below:

Office of Investor Assistance and Education,

Securities and Exchange Board of India,

SEBI Bhavan II

Plot No. C7, ‘G’ Block,

Bandra-Kurla Complex, Bandra (E),

Mumbai – 400 051

If a client has 1 Cr, he should invest in PMS or AIF? Why?

This is a very comprehensive decision which depends upon lots of other important facts and factors that differentiate PMS and AIF product structures, apart from ticket size. General answer to this question is AIF (assuming 1 cr is not less than 20-25% of one’s overall portfolio allocation), but, for a better, specific, and comprehensive discussion, pls book your appointment with our PMS & AIF specialists.

Can a person open a joint account in a PMS...if yes, then how many people together can do it?

Yes, a joint account can be opened in PMS. A maximum of 3 people can do it together.

How can an investor choose the best or the right suited PMS for his / her investment?

This is a very subjective matter. Each investor has his/her own set of risk appetite, time horizon, investment objective, and so on. Depending on such parameters, one can select the most suitable PMS for himself/herself. The best route in such a scenario would be to take professional advice & help. For a better, specific, and comprehensive discussion, pls book your appointment with our PMS & AIF specialists.

Do Not Simply Invest, Make Informed Decisions