THE RISE OF PORTFOLIO MANAGEMENT SERVICES IN INDIA

- Tanya James (Senior Columnist)

Constructive regulatory intervention and the financialization of savings in India have spurred the country’s Portfolio Management Services industry. Once thought to be a niche segment of the asset management sector, PMS has grown tremendously over the last 5 years by over 400 per cent with continued outperformance in July of this year owing to their investment in fast-moving sectors. Transparency at the PMS level, standardised NAV based returns for all PMS, higher yields, and choice of fee structure have contributed to the same. According to a recent report by Knight Frank India Reports, the population of High Net Worth Individuals (HNIs) is predicted to grow by 75% in the next five years, taking the tally to an impressive 6.11 lakhs from 3.5 lakhs by 2025. Similarly, Ultra HNIs are expected to rise by 63% to 11.198 individuals from 6884 in the next five years. Since Portfolio Management Services are generally targeted towards uber rich clientele or investors with a high-risk appetite, the significance of this increasingly popular category of services is noteworthy.

Portfolio Management Services (PMS) entail an investment portfolio in stocks, fixed income, debt, cash, structured products and other individual securities, managed by a professional portfolio manager that can flexibly be tailored to meet specific investment objectives. The minimum investment size required in PMS is Rs 50 lakh – as increased by the SEBI (Securities and Exchange Board of India) recently from Rs 25 lakh. PMS is carried out with the intent of allocating funds for maximum returns, reducing risk, tax planning, diversification and managing adverse conditions in accordance with one’s risk appetite, and provide a solid alternative to equity mutual funds. While many investors successfully manage their portfolios, many others lack knowledge or time and choose to leave it in the hands of experts equipped with the right skill set and backed by years of experience to attain their investment objectives. Thus, portfolio managers are also an important factor to consider when looking at fund investments.

Over 300 asset managers provide portfolio management services in India, collectively managing a mind-boggling AUM of Rs 13.28 lakh crores. Almost 90 per cent of PMS schemes beat Nifty in July, and as per data compiled by PMS Bazaar, the top gainers in this segment delivered 13-15% returns for the previous month with smallcap stocks being all the rage lately. However, since most of these strategies are catered towards delivering long-term returns, the performance in such a short tenure is not very remarkable. Some popular PMS strategies include Growth Funds, Small and Microcap, Long Horizon Funds, etc. Some of India’s most renowned PMS Houses that nearly everyone is aware of include Motilal Oswal PMS, Kotak PMS, ICICI Prudential PMS, ASK PMS, and Invesco PMS among others. These PMS Houses generally provide two styles of portfolio management services - Discretionary and Non-Discretionary. As the word discretionary suggests, the portfolio/fund manager has complete autonomy over the client’s investment decisions and implements whichever strategy they deem right. Some of the major advantages of Discretionary Services are no stress for the client for decision making, convenient execution of trades, customised services and professional oversight of the investment portfolio, although it is characterised by higher fee charges. In Non-Discretionary management services, the fund manager only formulates suggestions and strategies for decision making, with the ultimate decision solely laying with the client. In such cases, the portfolio manager can be called a financial advisor of sorts and only provides the pros and cons of particular investment strategies and doesn’t execute them without the client’s approval. While this type of PMS is beneficial for those who want access to expertise without loosening the reins over their investments, a drawback includes costs to the client because of quick changes in their portfolio due to their prior approval.

Although strikingly dissimilar, many find themselves confused between PMS and mutual funds. Some major differences are that mutual funds require a minimum investment of Rs 5000, while for PMS it is Rs 50 lakhs and mutual funds use pooled accounts for funds and securities while PMS uses a separate bank account and Demat for each client. Thus under PMS, the investor retains direct ownership of shares of the corporate. However, mutual funds offer units in the form of investment. Some essential features to look for before investing in a Portfolio management service include conducting due diligence of the portfolio manager since the performance of the portfolio is based on his/her ability to outperform the market, the investment strategies of the PMS, the track record of the PMS, fee arrangements, transparency, customer service and engagement available to the clients.

SEBI is working towards bringing the PMS industry at par with the Mutual Fund industry in terms of investor friendliness by implementing a fresh set of guidelines in this segment. It is the responsibility of the regulatory body to ensure consistency and transparency in the reporting framework, adjusting fee structures for various schemes and preventing misappropriation of funds.