Portfolio Management Services - What is it ?

What is Portfolio Management Services?

A portfolio management service is personalized services or contract to let the expert professional manage your finances. These services are governed by the SEBI (Portfolio Managers) Regulations, 1993. The initial focus of these services was high net worth individuals or institutions however with the growing disposable income; many high salaried people also go in for this kind of services. As per the SEBI guidelines, the minimum investment required to start a PMS account is Rs. 25 Lakhs. 

The complete of existing Portfolio managers as mentioned in SEBI website as on date is http://www.sebi.gov.in/sebiweb/home/pmd_mb.jsp?listCode=P

How does it work?

A team of professionals performs extensive market research to provide a personalized solution to achieve investment objectives. The preferences or restrictions of investment avenues can be clarified by the client at the beginning of the contract.

          A. Portfolio Manager

A Portfolio Manager is appointed by the institution or corporate body to devise an investment plan for his client. Every portfolio manager can have multiple clients but his plan can be different for every one depending on their preferences. 

A Portfolio manager can either be either of following:-

a) Discretionary Portfolio Manager – he manages the fund independently in accordance with the needs of the client and as per his best professional expertise.

b)    Non-Discretionary Portfolio Manager - he manages the funds as per the clarifications and communication of the client.

Any person/company registered with SEBI as a portfolio manager after paying a registration fee of Rs 10 lakhs valid for period of three years. The capital requirement for the individual / firm remains to have minimum net worth of Rs 2 crore. 

B.  Fees

There is no prescribed scale or range of fees/percentage that can be levied for the PMS services. However, the contract shall clarify the same in contract suggesting whether it would be a fixed amount or percentage. The fees would be charged only for managing the funds.

C. Reports

 a)   Composition and value of portfolio as on date. Details of invested securities and asset type regarding maturities, credit rating, bonus or dividend/interest earned interim and percentage of total exposure in the particular security. Also, if any liquidated positions are maintained.

b)   Details of all buy /sell transactions in case of discretionary portfolios.

c)   Details of incurred expenses in managing the funds.

d)   All the risks foreseen by the manager and possible strategy to be adopted by him in that case.

The details would be made available at least once in six months. It needs to be produced earlier on requirement of clients. The same needs to be easily available online in email/website or via postal correspondence as requested by client. 

   

          D.  Disclosure agreement 

The Disclosure agreement contains the details about the breakup of fees to be levied on client, calculation of the all components in it, investment risks attached to the portfolio, any guaranteed returns if any, duties and reports to be delivered by the manager, past performance and the audited financial statements of the particular portfolio manager for the immediately preceding three years. Also, details of penalty applicable for early exit from the fund.

SEBI does not have any predefined format of disclosure report or list of applicable dos and don’ts for the Portfolio Managers. The client has to read well the contract before signing the same.

E. Lock in Period

There is no such defined lock in period for the PMS services. Further, if the investor intends to withdraw his money before maturity of contract he could attract a penalty on his fund value.

Our verdict

PMS services are useful for managing our funds incase if the owner has no time or understanding of the capital markets. Also, unlike like a small retail investor doesn’t mind holding high risk to his investment money. He is not scared of losing his invested capital. In past, many Portfolio Manager have given positive returns, but the actual performance has not been up to the mark. Further, there is no defined guideline controlling the manager from investing in particular asset class unless mentioned in particularly by the client at the beginning. In case of capital erosion, SEBI can only interfere or provide judgment if the contract rules are breached, which is a rare possibility.