Portfolio Management Service (PMS) is a unique and customised fund management service provided normally to high net worth (HNW) and Ultra high net worth (UHNW) investors. The costs in a PMS are higher than in mutual funds but that is because there is a greater customization in PMS compared to mutual funds which normally give you a blanket portfolio that is created at a macro level. So, what are the benefits of PMS and which better; mutual funds or PMS? Before we understand PMS, let us also understand the importance of portfolio management.

PMS can be discretionary or non-discretionary. In a discretionary PMS the fund manager has the discretion to take a view and also execute transaction on behalf of the PMS client based on their best judgement. In a non-discretionary PMS the fund manager will not execute transactions without the explicit approval of the client. The process flow for the same is clearly laid out in the PMS agreement. The biggest advantage of PMS is that it is backed by an expert fund management team with a research team to back them up. As an investor opting for PMS services you must first ensure that the PMS Service is registered with SEBI and the requisite statutory formalities are complied with. So, what are the major advantages that PMS provides?

You can create a portfolio with the benefit of discretion

As mentioned earlier, a PMS client has two options. They can either choose to opt for a discretionary PMS where the fund manager is given a free hand. Alternatively, they opt for a non-discretionary PMS where all transactions have to be approved by the client. The beauty of PMS is that it creates a unique portfolio for you since your needs and your risk appetite are also unique. That is unlike a mutual fund which creates a single macro portfolio under a scheme and all fund holders just get a share of that. That is why PMS is more suited to HNWs and UHNWs where the size of the portfolio can actually justify this level of customization.

The portfolio is customized to your risk appetite

Let us remember that even mutual funds are customized for your risk appetite. For example you can choose equity diversified funds, sector funds, debt funds, balanced funds and MIPs based on your unique needs. But the mutual fund does not go beyond that. A PMS is unique in a variety of ways. Firstly, it creates a unique portfolio for you which are entirely suited to your needs. Secondly, the portfolio mix is customized to your investment and liquidity needs over a period of time, which is what makes it unique. Thirdly, PMS also offers you add on services like realty services, will services and therefore become a more complete offering.

There is transparency of portfolio, performance and reporting

Under the SEBI regulations of PMS, all such funds are required to make a transparent disclosure of all transactions, the costs and the portfolio to the clients on a continuous basis. The portfolio value must also be benchmarked to the market prices on a regular basis and the investors must be able to see the outperformance or the underperformance over a period of time. The PMS is also required to report the portfolio performance against various relevant benchmarks so that the investors can take a judicious decision in each of the cases.

Use technology to enhance your portfolio performance

There is no regulation on this front but in a competitive PMS market most of the reputed PMS services provide efficient use of technology for their customers. For example, every customer has a unique customer login to view their portfolio and benchmark with the index at any point of time. Additionally, the secured section also offers them value added research and explanatory notes about their portfolio that helps them to take a more informed decision. More importantly, PMS services are also building in advanced use of robotics and artificial intelligence to help clients work through their portfolio much better and also use these facilities to create a financial plan.

Backed by high level of expertise and investment research

This is, perhaps, the unique selling point of PMS services. Most of the top PMS companies are backed by in-depth fundamental research that covers macros, sectors and specific companies. There are also specialists for macros, equities, debt, realty, structured products etc. PMS companies also specialize in advising clients how to diversify their portfolios effectively and reduce their risk in the process. Research alone is not sufficient. These PMS services also bring fund management expertise which enables them to decide when to buy and when to sell shares.

Diversify across equity, debt, REITS, structures etc..

A very major advantage of PMS over mutual fund is that it offers a much larger area of diversification. For example, mutual funds have too many restrictions in terms of asset classes they can invest in and diverging from their core mutual fund intent. PMS is a lot more flexible. Investors have a wider choice of products like real estate trusts, commodities, gold ETFs, foreign assets, structured products etc. These not only enhance returns but also reduce risk as many of them enjoy low correlation with equities.

Of course, PMS also has certain downsides. Unlike mutual funds, PMS funds are not registered as trusts. As a result, a PMS is required to pay capital gains tax on the assets depending on the holding period. This makes PMS less tax efficient compared to mutual funds where the MF gets a pass-through benefit. Also the documentation is a lot more rigid and rigorous in PMS compared to mutual funds. But, PMS is surely a product that makes sense to HNWs and UHNWs.