What is Portfolio Management Services or PMS?

Portfolio Management Services account is an investment option available to retail or HNI investor where in Fund manager manages the stock portfolio (10-20 Stocks) designed to meet specific investment objectives.

As per SEBI guidelines the minimum corpus required to invest is Rs. 25 lacs, either a sum of up to Rs 25 lac or stocks worth this much or combination of cheque and stock totalling to 25 lac will also do. There are two types of PMS: Discretionary and Non-Discretionary. In discretionary, the fund manager takes investment decisions on behalf of the investor. In non-discretionary, the fund manager suggests investment ideas, while the decision is taken by the client. When you choose for a PMS scheme, a bank account and demat account are separately opened in investors name and stocks are bought in investors demat account with the help of Power of Attorney given by investor for operating his bank and demat account.

A PMS offers several benefits such as customised portfolio management, easier access to the fund manager, greater flexibility in choosing assets to invest in and better returns.

Fee Structures in PMS Schemes

The most common structure in PMS is fixed fee model and most of the PMS like Motilal Oswal PMS, Sundaram PMS operates on fixed fee model.

Very few PMS company’s offer performance-based fee structure, this means that until and unless they deliver returns more than the specified hurdle rate, they don’t become eligible for fees. For example, if the hurdle rate is 12% and Performance fees: 15% of all returns in excess of the hurdle rate. If the PMS delivered 20% return then performance fees would be 15% of 8% (return made over and above hurdle rate.)

The different PMS fees structure available are as follows:

Illustration I : 

Fixed fees of 2.5% of Net Asset Value

The assumptions for the illustration are as follows:

  1. Size of sample portfolio: Rs. 25,00,000
  2. Period: 1 year
  3. Upfront fees: Nil
  4. Performance fees: Nil
  5. Fixed fees: 2.5% of the daily average NAV
  6. Frequency of fee charging: Quarterly

Illustration 2: Fixed fees of 1% of Net Asset Value Plus Variable Fee of 15% on all returns in excess of 12% subject to a high watermark.

The assumptions for the illustration are as follows:

  1. Size of sample portfolio: Rs. 25,00,000
  2. Period: 1 year
  3. Upfront fees: Nil
  4. Hurdle rate: 12%
  5. Performance fees: 15% of all returns in excess of the hurdle rate (subject to a high watermark)
  6. Fixed fees: 1% of the daily NAV
  7. Frequency of fee charging: Yearly for variable fees & quarterly for fixed fees

Illustration III:

Variable fees of 20% on all returns in excess of 10% subject to a high watermark

  1. The assumptions for the illustration are as follow:
  2. Size of sample portfolio: Rs. 25,00,000
  3. Period: 1 year
  4. Upfront fees: Nil
  5. Hurdle rate: 10%
  6. Performance fees: 20% of all returns in excess of the hurdle rate (subject to a high watermark)
  7. Fixed fees: 1% Nil

* This is for illustrative purposes only. In reality, brokerage, custody charges and DP charges will be extra as applicable.

* For illustrative purposes only. In reality, fixed fees might be charged each quarter based on the average daily NAV in that quarter (rather than on the year ending NAV)

At Moat wealth Advisors, we recommend performance-based fee structure PMS like UNIFI CAPITAL, MARCELLUS INVESTMENT MANAGERS and 2POINT2CAPITAL because in performance-based model there is Alignment of interestwhich means that PMS company’s skin is in the game and until and unless they deliver returns more than hurdle rate, they don’t become eligible for performance fees.

Feel free to contact us in case you need more information on PMS.

Happy investing.

 

 

 

 

 

 



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