A professional money manager manages an investment portfolio that includes equities, fixed income, cash, debt-structured products, and other individual assets under the name Portfolio Management Services (PMS). Portfolio Management Service or PMS caters to the investment needs of investors, generally high net-worth individuals (HNIs) and institutions. Investors can rely on this tailor-made service to invest and earn competitive returns from different asset classes. PMS as tailor-made portfolios are constructed after considering investment horizon, risk tolerance, liquidity, and taxation.
TYPES OF PMS:
Active Portfolio Management: The portfolio manager actively manages the investment portfolio, and the research team picks the requisite securities. Resultantly, they put a significant share of resources in the trading of securities. Typically, they purchase stocks when they are undervalued and sell them off when their value increases.
Passive Portfolio Management: This particular type of portfolio management is concerned with a fixed profile that aligns perfectly with the current market trends. The managers are more likely to invest in index funds. The portfolio manager doesn’t churn the portfolio frequently compared to Active Portfolio Management.
Discretionary Portfolio Management: The Discretionary Portfolio Management Services portfolio manager has complete control over the portfolio and can adopt any strategy to achieve investment objectives. Investment Decisions are entirely at the portfolio manager’s discretion, and the clients don’t have much of a say in investment decisions.
Non-Discretionary Portfolio Management: Under this management, the managers provide advice on investment choices. However, clients decide whether to take up these investment ideas while the execution of trades rests with the portfolio manager.
MINIMUM INVESTMENT IN PMS: In November 2019, the price was further hiked to Rs. 50 lakhs. (Apart from cash, the client can also hand over an existing portfolio of stocks, bonds or mutual funds to a Portfolio Manager that could be revamped to suit his profile.)The categories of investors who can invest in PMS are Individual investors, HUF, Private and Public Limited Companies, NRIs, Association of Persons, etc.
TAX TREATMENT IN PMS:Accordingly, the taxation of PMS investments is as follows:
- Equity Capital Gains: 15% (ST – less than 1 year holding) / 10% (LT – greater than 1 year holding … 1 lakh exemption)
- Non-equity Capital Gains: Added to income (ST – less than 3 year holding) / 20% with indexation (LT – greater than 3 years holding)
- Equity Dividend Income: Added to income
- Interest Income: Added to income
KEY ELEMENTS OF PMS:
- Asset Allocation: Asset Allocation involves spreading investments across the asset classes of stocks, fixed income securities, cash, commodities and real estate. It makes sure that a sharp fall in one asset class does not impact the overall portfolio performance.
- Diversification: Diversification is a technique of allocating capital across a variety of investments. Diversification involves spreading assets across asset classes within these buckets. Portfolio managers of PMS use the diversification strategy to enhance the portfolio’s risk-adjusted returns.
- Rebalancing: PMS Portfolio Managers focus on rebalancing the portfolio to align with investors’ financial goals and risk tolerance.
CONS OF PMS
- High entry point: The minimum investment required for PMS is higher i.e. of Rs 50 lakhs which can be a barrier for smaller investors. It is aimed at HNIs, UHNIs and NRIs.
- Tax Implications: The tax implications on PMS portfolios are equivalent as those for investors who invest directly. If the stocks are held for greater than one year, long term capital gain tax @10% plus surcharges are levied. If the portfolio engages in short term trading activity, it might result in short term capital gains, which implies that the investor has to pay tax.
CONCLUSION Portfolio Management Services have evolved as an appealing investment route in India for high-net-worth individuals and institutions. PMS caters to individuals’ different financial goals and risk appetites by offering customized and professional investment solutions. PMS can be a powerful tool for long-term wealth growth in the dynamic Indian financial market by matching investments with tailored strategy. Portfolio management is concerned with designing investment strategies that will assist investors in achieving their financial objectives based on their investment horizon and risk profile.