PMS stands for Portfolio Management Services.
In PMS, a separate demat account in the name of the investor is opened with a Power of Attorney in favour of the Fund Manager. The securities bought by the Fund Manager are deposited in this demat account.
Let’s compare Mutual Funds and PMS for a better understanding.
Mutual Funds are pooled investments. They are suitable for all retail investors. They are standardized for all. Securities owned by Mutual Funds are held in a pooled format. Profits and Losses are shared by all investors in proportion of their holdings. They are easy to enter and exit. Partial exit is possible.
Mutual Funds score over PMS in being more tax efficient. Let’s say the investor invests in a Mutual Fund, no matter how often a fund manager buys and sells securities within a fund, if the investor holds the Mutual Fund for over a year, then in the case of Equity funds, the investor will be liable to only 10% tax on profits made from the investment. In the same case, in a PMS, if a fund manager buys and sells securities within a year, then the investor is liable for short term capital gains tax, even though he may remain invested in the PMS for more than the duration of a year.
Most mutual funds have no lock-in periods and since partial withdrawal is possible, they provide more flexibility for investors. PMS may have lock-in periods and partial withdrawals are only possible such that the balance securities within the PMS remain above the threshold of 50 lakhs.
Mutual Funds have to adhere to strict guidelines adopted by SEBI to make their functioning easier to monitor. For instance, Large Cap funds can only invest in the top 100 available securities by market capitalization. There are many other rules that Mutual Funds must follow such as no scheme is allowed to take more than 10% exposure to a single stock. PMSes don’t need to follow such rigid rules and are therefore run more flexibly. PMS managers can exercise more freedom when choosing securities.
PMSs tend to be managed in a more agile manner than Mutual Funds. PMS managers frequently rebalance portfolios depending on run-ups or corrections in securities held in the PMS. For example, let’s say a PMS owns Reliance, Infosys and HDFC Bank. If Reliance has a sharp run-up the fund manager may book profits in Reliance and buy Infosys and HDFC Bank with the excess cash. Also, PMS managers keep an eye on quarterly results of the companies that they have invested in. They react faster than Mutual Fund managers to adverse news flow in a stock, because of their inherently smaller size which enables frequent rebalancing if required.
PMSs can create win-win for Investors and Fund managers because they can have Performance Driven structures. In fact, the charges of some PMSs are designed in a way that in case if performance is below a certain level, the investor does not bear any fees. This performance driven structure incentivizes PMS managers to strive for better performance. At the same time, this structure also can lead to higher risk taking. PMSs are certainly higher risk products as compared to Mutual Funds. Therefore, they are more suitable for Risk Taking investors with longer investment horizons.