Investing in PMS? Here's all you need to know

What is the Portfolio Management Service? Who can avail of the PMS?

- PVSN Murty, Amalapuram

A Portfolio Management Service is a platform created especially for HNIs (high net-worth individuals) to provide customised solutions per the client's financial and investment needs. The Securities and Exchange Board of India (SEBI) regulates portfolio management services in India under PMS Regulations. However, SEBI does not certify the adequacy or accuracy of the contents of the disclosure documents of the PMS. A portfolio manager is a body corporate. PMS providers, pursuant to a contract with a client, advises or administers and undertakes the management of a portfolio of securities on behalf of their clients. The PMS provider is required to have a minimum net worth of Rs 5 crore.

The minimum requirement of funds or securities that can be deposited by the client with the portfolio management services while opening the PMS account is Rs 50 lakh or securities having a minimum worth of Rs 50 lakh. The minimum requirement of funds or securities from the client was Rs 25 lakh until January 20, 2020. However, clients on-boarded by the portfolio manager prior to January 21, 2020 must comply with the requirement of new minimum investment norms and top up their PMS accounts to make it Rs 50 lakh in funds or securities.

The clients of PMS are allowed to withdraw partial amounts from their portfolio, as per the terms of the agreement between the PMS company and clients. Yet, the value of the investment in the portfolio after such withdrawal shall not be less than the applicable minimum investment amount of Rs 50 lakh. However, the clients are not required to top up their PMS accounts if the portfolio value falls below the minimum investment amount of Rs 50 lakh. No PMS can offer indicative or guaranteed returns. Portfolio management services cannot impose a lock-in on the portfolios or investment of a client. But, PMS can levy applicable exit load from the clients for an early exit, as laid down in the clientele agreement, subject to the provision of SEBI. All charges, including the performance-linked fee and fixed management fee, are calculated on an annual basis. There are two types of portfolio management services: Discretionary Portfolio Management Service (DPMS) and Non-discretionary Portfolio Management Service (NDPMS). A discretionary portfolio manager independently manages the funds and securities of each client in accordance with the client's needs. Under the non-discretionary PMS, the portfolio manager manages the funds in accordance with the directions of their clients.

Under Discretionary PMS, portfolio managers of PMS companies are allowed to invest funds of their clients in the securities, money market instruments, and units of mutual funds as specified by the board from time to time. The securities must be listed or traded on a recognised stock exchange. The investment in units of mutual funds must be through the direct plan. PMS companies can't invest the funds of clients availing discretionary in unlisted bonds, which are traded over the counter, but settled and reported to the stock exchanges. Under non-discretionary PMS, portfolio managers of PMS companies are permitted to invest up to 25 per cent of the AUM of a client in unlisted securities. The unlisted securities, including units of AIFs (alternative investment funds), REITs (Real Estate Investment Trusts), InvITs (Infrastructure Investment Trusts), debt securities, shares, warrants, etc., which are not listed on any recognised stock exchanges in India. In addition to the above, portfolio managers can invest in all securities permitted under discretionary portfolio management.

PMS are convenient as the portfolio is managed by professionals. PMS is a customised service after the risk profiling and financial goals of the clients. Transfer of control of assets and higher assumption of risk is the flip side of subscribing to PMS. The returns predominantly depend on the competence of the portfolio manager. The PMS-providing company ties up with a Depository Participant (DP). If the client has a Demat account with the prescribed DP, the same Demat account can be continued for the PMS. In most cases, clients are required to open a new Demat account to avail of and maintain the portfolio management services.

SEBI has made several changes to existing policies which will come into effect from April 1, 2023. Investors of the portfolio management services can know the specific situations in which the orders will be placed for an individual investor, including the amount pooled from the trading account of the portfolio manager. Portfolio managers must place certain margins or collaterals in executing certain transactions. In such cases, the PMS providing company will provide details of how margins will be segregated amongst various clients. As a result, PMS investors will now know the situations in which deviation from the allotment of securities as intended is allowed. The PMS providing companies with AUM (assets under management) of Rs 1,000 crore or more under discretionary and non-discretionary services must have an automated system with minimal manual intervention to ensure adequate funds and securities management. The PMS companies are also mandated to maintain time stamping concerning order placement, order execution, trade allocation, and audit trail of all activities related to the management of funds has to be maintained.

(The author is a Sebi-licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV, etc)