Guide to Investing in Portfolio Management Schemes

Managing equity investments could to be quite a herculean task, considering the busy lives we lead. From gaining knowledge on market performance, its sentiments, company profiles etc… to continuous monitoring; it demands time on a daily or weekly basis. So how do you capitalize on the equity portfolio, if you lack the time or inclination to meet these demands? The answer lies in the business of Portfolio Management Schemes. These schemes invest your money on your behalf in equities and other securities. Are such schemes beneficial in generating positive returns? Here is a peak into it.

Portfolio Management Scheme (PMS) – A Specialized Investment Vehicle

  • So what is PMS?

Offered by equity broking and wealth management firms, a PMS is a scheme in which your portfolio is professionally managed and administered by a portfolio manager. He invests your money, on your behalf, in stocks, debt and fixed income products. The account maintained under a Portfolio Management Scheme is unique and your portfolio could be tailor made to address your specific preferences and investment objectives.

  • How does it work?

In a Portfolio Management Scheme, you pay up upfront a certain lump sum amount. Using this lump sum amount, the portfolio manager constructs a portfolio as per your financial goals. He would administer and regularly churn your portfolio, capitalizing on market opportunities, to generate profitable returns. PMS’ does not have a NAV. The valuation of your portfolio is done either daily or weekly on the basis of the performance of the underlying investments. Many firms offer a web access to PMS clients, to view their portfolio performance, generate reports and statements.


How Do You Benefit From a PMS?

  • Hassle Free investing– A PMS reduces hassles relating to administration of an equity portfolio, as these would be offloaded to the portfolio manager.
  • Personalized Investment Advice – Portfolio Management Schemes are managed by expert fund managers who offer sound and strategic investment advisory services, customized to meet your goals.
  • Professional Management – Fund managers use professional money management strategies to make the most of the stock market. They make informed decisions of all the activities undertaken in your portfolio, unlike what happens in mutual funds, where you are seldom aware of what happens.

Charges for Portfolio Management Services

  • Entry load– Generally around 3%, charged at the time of buying the PMS.
  • Fund management charges–Fund management charges vary between 1% to 3% depending upon the PMS provider.
  • Profit agreement– Some fund houses have a profit sharing agreement on their PMS schemes. In such cases a certain percentage of the profit generated in the fund is to be paid to them.
  • Miscellaneous charges– Other charges include custodian fees, demat account opening charges, brokerage charges.

Discretionary and Non Discretionary PMS

PMS providers offer two types of schemes – Discretionary and the Non Discretionary scheme. In the Discretionary PMS, you would have to give your money in favour of your fund manager, who in turn would administer and invest it to generate returns. He would make all the decisions on your behalf, after understanding your financial preferences and goals. In Non-Discretionary services, the portfolio manager is more of a counselor than an administrator. You are thus free to accept or reject his advice. OF course he helps you out with the paper work, but the final decisions are generally left to you.

The Tax Angle

Each trade of the PMS is an independent trade and it is subject to both long term capital gains tax and short term capital gains tax. Also, Securities Transaction Tax would be applicable too.

Choosing the Right Portfolio Management Scheme

With numerous such providers how do you go about choosing what suits you the best? Here are few simple tips.

  • Provider should be registered

The company offering you a PMS must be registered to provide such facility. Investing with unauthorized firms is risky, even if they have professional managers, generating considerably high returns. The schemes being offered must be registered too.

  • Understanding the scheme offered

Brokers and firms offer different types of schemes, some which invest exclusively in equities, some in derivatives, fixed incomes or in a mix of both. Read the fine print of the scheme to understand where you money is going to be invested in before you sign on the dotted line.

  • Nature of transactions

What you must remember is that every transaction that you undertake involves a brokerage. So frequent and constant churning in your portfolio could bring in high brokerage charges, even if you are making a loss. Discuss clearly with your portfolio manager, your time frame for investment and personal preferences.

  • Past performance analysis

The most common yardstick for any investment is the past performance. Also check on the background of the broker or the firm, the portfolio manager’s expertise as well as the past performance of the scheme. Of course this doesn’t guarantee you a risk free investment, but it definitely helps you understand what you could expect from the scheme.

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