How to select the right portfolio management service

Aditya runs his own IT consultancy and has made decent profits over the past couple of years. He is keen to invest a considerable part of that money—around Rs 1.5 crore—for his retirement. He has approached his financial adviser, who after considering the large ticket size involved, introduced Aditya to the concept of portfolio management services (PMS). The adviser says it is a customised solution for high net-worth individuals (HNIs) who opt for it for greater flexibility with their money and higher returns. Aditya is convinced about its benefits, but is it the right product for him?

Portfolio management service (PMS) is provided by professional money managers to informed investors and can be tailored to meet specific investment objectives. PMS providers invest directly in securities through focused portfolios. Unlike mutual funds, the investors’ assets here are not pooled into one large fund. So, Aditya’s account will be kept separate and operated according to his investment mandate in a discretionary PMS, where an investment manager takes all decisions in-sync with investor’s goals.

This structure allows the fund managers to take concentrated calls on their high-conviction stocks without too many regulatory and operational constraints prevalent in a mutual fund portfolio. It may generate a higher return for Aditya as the fund manager will have greater flexibility to choose or hold stocks and capitalise on the market opportunities in the smaller and newer companies that may have the potential for high growth. This may lead to a higher risk, which may be best mitigated through a long-term investment horizon. This will be a good option for Aditya, since he is willing to set this corpus aside for his retirement.
He will also benefit from the higher transparency and regular reporting compared to a mutual fund. Stocks will be bought and sold in his name and held in his demat accounts, with the help of a power of attorney, which means he will be aware of all the activities in real time. Also, as a PMS investor, Aditya can opt for a direct interaction with fund managers if need arises.

With the benefits of PMS, comes the responsibility of decision making. It will be better if he is more involved. While evaluating a PMS provider, it will be important for him to understand the fund’s philosophy before making a decision. Aditya should exercise due diligence, choose a good company with a considerably long track record, fund management style and philosophy.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)