Don’t Invest in PMS just because You have Rs 50 lakh spare

(Update – November 2019: PMS minimum investment size has been increased to Rs 50 lakh by SEBI)

The minimum ticket size for PMS investments is Rs 50 lakh. But that doesn’t mean that whosoever has Rs 50 lakh to invest should go ahead and invest in PMS.

Let me tell you why.

The Portfolio Management Service or PMS had long been perceived as some sort of exotic investment product, which offered high returns to sophisticated investors.

But what most people forget is that PMS schemes, by design, are high-risk products which are focused on enhancing returns for investors by taking (and not surprisingly) very high concentrated risks at times.

Sometimes it works and results are phenomenal (If you search for the returns delivered by best portfolio management services in India in good years, you will understand just how much). But at other times, it doesn’t and the results are horrific. And it is during those bad times that PMS investors experience the obvious-but-often-forgotten downside of high-risk taking.

PMS falls on the higher end of the risk spectrum. And due to its concentrated portfolio and the high inherent risk, it is best suited for investors with prior market knowledge and understanding.

Also, there is a perception that PMS offers a great degree of customization to its investors. And this is considered by many as one of the key benefits of Portfolio Management Services apart from the perception of a high-return-promise. But this isn’t the case for every PMS or for every PMS investor. Most PMS offer standardized model portfolios for smaller clients (those who invest Rs 50 lakh). Once a client is on-boarded, the manager will try to replicate the client portfolio to as close to the model portfolio as possible. But the real customization is available only to the larger clients – who can invest atleast a few crores in the PMS. If the client account size is big enough, the PMS manager will give proportionately large attention to the creation of a customized portfolio (broadly in line with PMS model portfolio or strategy if need be) to cater to the client needs. Remember, Such levels of customization is not available for smaller PMS clients.

And as I said earlier, PMS is a high-risk product. Unlike MFs which are tightly regulated by SEBI, the PMS is very less regulated and hence, allows fund managers to take a lot of risks. This can also be seen as extra flexibility available to PMS managers. But this no doubt increases the risk too as the fund manager has a free hand. So for less experienced clients, such a level of risk-taking isn’t even required. 

Let me tell you something interesting.

Have you noticed that – PMS, which were earlier considered only for the rich and the sophisticated, are now being pushed by agents, distributors and banks much more aggressively to everyone capable of sparing Rs 50 lakh!

Why is it so?

I will tell you.

SEBI, the regulator has been steadily curbing the commissions on the sale of mutual funds. So the distributors get attracted to the relatively high upfront commissions given to them by PMS operators. So the distributors, in order to protect their income are hard-selling clients to opt for these high-upfront-commission PMS schemes in spite of knowing that they might be unsuitable for them. And they ‘may’ mis-sell PMS schemes by making rosy claims about PMS returns. Read this interesting article on Performance misselling by PMS Distributors.

So now you know why PMS was gaining popularity in recent times.

And it is for the same reason why at times, conflict of interest in mutual funds being pushed by mutual fund distributors comes into the discussion, as their commission income depends on the schemes they sell. It is for this reason that direct plans of mutual funds have come into existence. But those are best for DIY investors or those who are taking investment advice from Fee-Only SEBI registered Investment Advisors.

The regulator has set a minimum investment limit of Rs 50 lakh in PMS to keep it out of reach of small investors, since the risks are high in PMS

And till the limit is still at Rs 50 lakh, please understand that just because you have Rs 50 lakh to invest in equity doesn’t mean that you are 100% suited to invest in PMS.

Just because you can doesn’t mean you should.

PMS is suitable for high net worth (affluent) HNI and institutional investors with a suitably large investment portfolio. There is no perfect threshold figure here but let’s say that unless you have a few crores to invest, you shouldn’t even think about PMS.

And since the product is high-risk, its best to keep exposure limited to a small percentage of the overall portfolio if you eventually do invest in it.

So for example – Let’s say your overall portfolio is Rs 10 Cr. Now based on some goal-based analysis, it is found that your ideal asset allocation should be 50:50 equity debt. So that means Rs 5 Cr for equity and the other Rs 5 Cr for debt. Now out of the Rs 5 Cr for equity, it’s best to limit the PMS exposure to 10-20% here for most large and aggressive investors too.

Why?

Because just because you are investing in equity doesn’t mean that you go straight full to the highest risk component. You divide the equity corpus between various levels of risk. Right? That’s how a prudent portfolio is built.

It is also suited for more sophisticated clients having large portfolios who wish to invest in themes that aren’t easily available through mutual fund portfolios. In such cases, the PMS manager can create tailor-made solutions for larger clients.

Is PMS for Me?

Or let’s ask…

Should you include PMS in your portfolio?

I will put this very plainly here.

Based on the little experience I have and things I understand (or atleast feel that I understand…), most Indians are better off NOT investing in PMS. When it comes to equity investing, most are better suited for the Mutual Funds.

To know more, read this detailed article on Differences between PMS Vs Mutual Funds.

And before you leave, here are few points to remember

• PMS is a high-risk equity product which is suitable for sophisticated investors who know what high-risk concentrated equity portfolio investing really is. PMS is not suitable for small investors.
• Just because you have Rs 50 lakh (minimum required) to invest doesn’t mean that you are suitable to be a PMS investor
• If your agent, bank is pushing you to buy it then remember that he gets good commission and may not be advising you as per your needs or product suitability.
• For most of you, it’s better to stick with Goal-based Investing and take the simple and powerful route of Proper Full Financial Planning.