When equity markets are doing well, relationship managers from brokerage houses and wealth management firms chase potential investors persuading them to subscribe for their Portfolio Management Service (PMS). They usually target High Net-Worth Individuals (HNIs) who can invest large amount of money at one go. Retail investors with decent investment potential are also on their radar. On the other hand, mutual fund houses float New Fund Offers (NFOs) inviting participation from across investor classes, retail, HNIs, companies etc.

Since it is easy to convince most of investors to put money in equities when markets are rising, marketers often make tall claims which are tough to stick to under turbulent market conditions. PersonalFN helps you compare both avenues against each other and choose the right one for your portfolio. So let's understand what they exactly have to offer.

Portfolio Management Services (PMS)

PMS is a type of wealth management service, usually offered to wealthy investors. With greater flexibility and higher customisation, PMS aim to generate superlative returns in comparison to other investment avenues focusing on the same asset class.

There are two types of portfolio management services (PMS):
 

• Discretionary PMS and
• Non-discretionary PMS
   

In discretionary portfolio management, the portfolio manager individually and independently manages the funds of each client. But in non-discretionary portfolio management, the portfolio manager manages the funds in accordance with the directions of the client. The portfolio manager cannot make buy-sell decisions at his own discretion; he has to refer to the client for every transaction.

What are the fees charged?

The fees charged to investors consist of three components – the upfront fee, the management fee and the performance fee. Some PMS might also have a fixed fee
 

• Entry Load - PMS schemes may have an entry load of around 2 % to 3 %. It is charged at the time of buying the PMS only.
   
• Management Charges - Every Portfolio Management Services scheme charges Fund Management charges. Fund Management Charges may vary from 1% to 3% depending upon the PMS provider. It is charged on a quarterly basis to the PMS account.
   
• Profit Sharing - Some PMS schemes also have profit sharing arrangements, wherein the provider charges a certain amount of fees/profit over the stipulated return generated in the fund.
   
• Fixed Fee - Some PMS schemes might have a fixed component in the place of the profit sharing component and charge investors a fixed monthly fee. This is not a percentage based fee and is decided before availing the PMS. It could depend on the size of the portfolio.
   

How are the profits shared?

The profits are shared on the basis of a high watermark principle which ensures that the manager does not get paid large sums for poor performance. So if the manager loses money over a period, he or she must get the fund above the high watermark before receiving a performance bonus. For example, say after reaching its peak a fund loses Rs. 1,00,000 in year one, and then makes Rs. 2,50,000 in year two. The manager therefore not only reached the high-water mark but exceeded it by Rs. 1,50,000 (Rs. 2,50,000 – Rs. 1,00,000), which is the amount on which the manager gets paid the bonus.

The performance of the portfolio is also calculated using the high watermark principle. So fund managers usually get paid a fixed percent of the share of profits above the hurdle rate based on the high watermark principle. The hurdle rate is the minimum rate of return the fund must achieve before the fund manager gets paid his share of the profits. For example if the hurdle rate is 10 % then the fund manager will only get paid performance fees in excess of the minimum 10 % hurdle rate

What is a mutual fund?

A mutual fund is a legal vehicle that enables a collective group of individuals to:
 

1. Pool their surplus funds and collectively invest in instruments / assets for a common investment objective.
2. Optimize the knowledge and experience of a fund manager, a capacity that individually they may not have
3. Benefit from the economies of scale which size enables and is not available on an individual basis.
    

While there are a number of sub categories within equity oriented mutual funds, a diversified mutual fund is the most common offering. Typically, a diversified mutual fund amply diversifies across stocks and sectors providing a chance to generate benchmark beating returns by active management.

What are the distinctions?

In India, majority of PMS are equity oriented in nature. Although PMS shares many traits with mutual funds; it certainly has 4 main distinctions.
 

• Unlike mutual funds; PMS create entry barriers by keeping minimum investment limit considerably above the reach of an average retail investor
• PMS services usually have a higher cost structure than that of mutual funds
• Mutual funds are more transparent but PMS offer more flexibility
• Mutual funds are more strictly regulated
   

PMS or mutual funds where should you invest?

Investors should make sure that their risk profile matches with that of the product being offered. Investing in equity markets is not a bad proposition but if one lacks the required aptitude to track the equity markets then it is wiser to adopt the indirect route to equity markets i.e., through mutual funds, which follow strict investment mandates (depending upon the type of scheme). However, while investing in mutual funds as well, one should adopt enough prudence and select winning mutual funds. And while you may get lured by performance track record exhibited by your mutual fund distributor / agent / relationship manager, remember there's more to selecting winning mutual funds, than mere performance. Both quantitative and qualitative aspects should be assessed to have the right funds in your portfolio, which suit your investment objective.

PersonalFN believes, given that, mutual funds are tightly regulated and are more cost effective; they remain one of the most suited ways of taking passive exposure to capital markets. PersonalFN provides unbiased mutual fund research services with and without customisation.

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Comments
shahidrararaza30@gmailcom May 03, 2019 Pilibhit
tugnaitpc@yahoo.com Nov 13, 2017 I am already invested fully in mf and I am retired. Is it the time to book profit even if it amounts to short term gain
pankaj.toyo@gmail.com Nov 20, 2019 Want to know more in detail for selecting mutual fund
bipinagandhi@yahoo.com Oct 22, 2019 SWP

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