Portfolio Management Service is a professional service offered to cater to the investment objectives of a niche segment of sophisticated long term investors. In simple words, a portfolio management service provides professional management of investments to create long term wealth. When one invests in a PMS, one owns individual securities, this is unlike a mutual fund investment, where one owns units of the fund. This is because, PMS works on the concept of personal demat, whereas mutual fund works on the philosophy of pooled stock portfolio across investors. PMS is meant to invest in the focused and concentrated basket of well-researched businesses.
Benefits of PMS?
- Professional Management: PMS provides professional management of portfolios with the objective of delivering consistent long-term performance using extensive research and valuation analysis to control the risks.
- No Behavioural flows: PMS is not meant for retail investors and follows 50 lacs as min investment ticket, so, portfolio manager gets long term rational flows. Unlike this mutual funds are prone to behavioral flows especially with the rising participation of young and retail investors in mutual funds. MFs follow a pooled stock portfolio concept and as retail flows rise with rising markets and fall with falling markets, the mutual fund manager is forced to buy more at higher market levels. Unlike this, in PMS, each investor owns individual shares in personal demat, and hence one investor’s behavioral reactions to market movements doesn’t impact other investors’ portfolios. (With regular flows coming in mutual funds from SIPs, nature of mutual fund portfolio, in general, is bound to get skewed towards large and giant companies)
- Focussed and Concentrated: In PMS, portfolios are more focussed and concentrated with 15 to 40 holdings, whereas Mutual funds follow a too diversified approach because these are products meant for masses. With regular flows coming in mutual funds from SIPs, the nature of the portfolio, in general, is bound to get skewed towards large companies and/or more number stocks. Though this helps mutual funds in reducing volatility to an extent, more doesn’t always mean low risk; in fact, exposure to more companies may increase the risk of buying less known. Also, high diversification beyond a point comes at a cost of limiting potential long term performance, making mutual funds no different than an index.
- Flexibility: The Portfolio Manager has a fair amount of flexibility in terms of holding cash. Theoretically, in the case of a PMS, its manager can go up to 100% in cash depending on the market conditions. Also, can create a reasonable concentration in holdings by investing disproportionate amounts in favor of compelling opportunities.
- Transparency: PMS provides comprehensive communications, performance reporting, and capital gain statements. Investors get regular statements and updates. Web-enabled access ensures that investor is just a click away from all information relating to the investment.
Taxation of PMS?
Income from shares purchased through PMS is taxable as Capital Gains. The nature of these gains could be short term or long term depending on the churn in the portfolio. Typically, PMS follows a low churn but it depends upon the portfolio strategy. So, 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 is 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 investors, 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.