INVESTMENT: PMS has risks and rewards

As investors amass a good amount of money, they tend to aspire for higher returns from their investments. It often prompts them to consider Portfolio Management Services (PMS) offered by several registered entities, including the mutual funds companies.

The decision of investing in a PMS also gets triggered once an investor achieves a sizable amount of money invested in their MF portfolio. There is a tendency for them to seek something more than what their existing investment portfolio is offering, in terms of returns. Since PMS is a more concentrated stock portfolio, it carries a higher risk-return attribute and can get them the extra returns they are aspiring for.

Now the million-dollar question is where to invest? Should investors be content with their MF investments or do they need to invest in a PMS? Though PMS has often resulted in dishing out great returns, as much as 25% to 40% or more, there are also many unwritten PMS disaster stories which are not known to many investors.

In fact, PMS was hugely successful in 2008. But following the 2008 stockmarket crash, the Securities and Exchange Board of India brought couple of stringent rules governing PMS. One of the most important one was raising the investment limit from a minimum of Rs 5 lakh to Rs 25 lakh.

So, what should you do as a retail investor should be analysed based on your investment objective because both the PMS and the MF investments are governed by SEBI and offer market linked returns, yet they differ in style.

There are many parameters to consider before taking the decision. For example the cost involved in managing a MF or PMS differs. You pay higher fees to a PMS manager than a MF scheme. You also pay a cut from the profit that a PMS manager will generate for you. The said charges are anywhere between 2% and more as upfront fees and a profit sharing ratio in the range of 20% or more.

If your decision to invest in a PMS is based on a thoughtful planning, that allows you to aspire for a higher return than a MF portfolio and is linked to your overall financial goals, then PMS may work for you. The main reason is the risk-reward pattern that comes with any PMS. It is custom-made and personalised, thereby offers higher risk-return. Once that is clear, you can have different options of model portfolios to choose from. You can negotiate the overall fee structure as well, which is not possible in your MF investments.

But as an HNI investor or someone wanting more than the regular MF returns, I would strongly suggest you to first set your priorities clear, decide what makes you happy or what excites you with respect to the return you expect from your investments. If you are happy getting 12-15% annualised returns from your investments, then you may very well avoid the PMS and simply invest in a well-diversified MF portfolio.

If, on the other hand, the only reason you want to try out PMS is merely because your total corpus in MFs has gone up then you need to re-think. Do your math first and decide accordingly. You may even simply buy some blue-ship stocks and invest in a good quality small- and mid-cap MF. Your focus should always be on simplifying your life and enjoying your hard-earned money. So choose smartly.

The writer is chief gardener, at Money Plant Consultancy