PMS or Portfolio Management Service is a professional service where qualified and experienced portfolio managers backed by a research team manage equity portfolios on behalf of clients instead of clients managing it themselves. India being one of the oldest stock market ecosystems,the direct equity investing cult has been prevalent for decades and has especially taken deeper root since many marquee listings in the markets since late 1970s. There are a large number of investors who own equity portfolios in their demat accounts that they manage based either on their own experiences or with inputs from broking companies and equity advisors.
There are over 2.6 crore demat accounts and some of the largest listed companies have about 20 to 30 lakh shareholders each. While brokers provide equity research, advisory services and an operational platform; this usually needs the investors' involvement in investment discretion as well as operational aspects. More importantly, the onus of outcomes is shared between investors as well as the service providers. On the other hand, professionally managed portfolios make the portfolio manager answerable to the investor. They are managed for a fee and everything including, research, investing, operations, etc. are available to the investor.
PMS could either be Discretionary; i.e. where the fund manager takes decisions on investors' behalf or Non-Discretionary; i.e. where the fund manager needs to take approvals from the investors on suggested investments. The other alternative for professionally managed investments into equities is through Mutual Funds; which is a very popular choice too. Discretionary PMS differ from Equity Mutual Funds in following aspects:
Investors in Mutual Funds are allotted units that represent their holding in a basket of stocks. For every PMS investor, the portfolio manager creates an aggregated demat account where his portfolio is held on his behalf. The portfolio manager has to be provided with a power of attorney to transfer stocks in and out of the demat account.
Mutual Funds have investment thresholds as low as Rs. 500/- or Rs. 1,000/- while for PMS, regulation requires that such services be offered only to investors bringing in a minimum of Rs. 25 lakhs by way of stocks or cash. Subsequent investments (top-up), typically have a threshold of Rs. 1 lakh.
However, there are certain aspects where PMS could be seen to be having distinct advantages for long term buy and hold investors as compared to investing by self or investing via Mutual Funds.
I. Focused Portfolio
People who manage their own portfolios on an average buy less of quality and focus more on price, rather than value
Data shows that while there are thousands of listed companies; individual investors (Non Promoter Non Institutional [NPNI]) have a lower share of holding in the larger indices like Nifty, BSE 200 or even Nifty 500. Retail or NPNI holding is higher in non-index smaller companies. There is askew to lesser quality stocks in their portfolios. It is equally remarkable that Nifty accounts for almost 60% of total market cap, BSE 200 accounts of nearly 85% of market cap and Nifty 500 accounts for nearly 94% of market cap (Source: Capitaline). This means that while the bulk of the market value resides with the top 500 companies, retail direct investors' holding is with the ‘long tail’ which doesn't hold much value. Retail investors consistently seem to ignore the adage, “Price is what you pay; Value is what you get”. They seem to chase stocks that are attractive on price and may or may not be so on value. It's not that retail investors never buy good quality stocks; it's just that they have a tendency to sell when they make a profit and hold on to stocks that have depreciated in value. It's a well-known fact that profits are booked easily and mostly prematurely, but losses are allowed to run. Motilal Oswal AMC promotes 'BUY RIGHT : SIT TIGHT' having realized that when people buy right they book profits and when they buy wrong they become long term investors. A simple test to measure the quality and performance of a portfolio can be done by visiting :www.motilaloswalmf.com/tools/compare-portfolio
II. Independent Portfolio
PMS Holdings are isolated and hence not impacted by other investors behavior.
Mutual Funds being managed and held as a pool may be at times exposed to vagaries of the sum total behavior of hundreds of thousands of investors. In general, investors tend to invest in rising markets or improving fund performance and there could be times of panic in rapidly falling markets and times of poor fund performance. It may happen that mutual funds at times are forced to buy in rising markets and sell in falling markets because fund managers have discretion on stock picks but not on fund flows. Apart from managing the portfolio, managing fund flows is a significant activity on a daily basis. As far as PMS is concerned, every investor influences his own buying or selling time and price, there is no impact on other investors' holding or experiences. PMS has isolated individual holdings so one investor's behavior doesn't impact other investors investments.
At the same time, it is worth noting that Mutual Funds get benefited by regular inflows by way of Systematic Investment Plan, which helps them buy stocks in all kinds of market conditions. On the other hand, PMS would get inflows depending upon client discretion and their preferences. It is possible to register a SIP with Motilal Oswal PMS too, but these PMS-SIP flows will benefit individual client accounts and not comparable with enabling a fund to buy in general, consistently on a monthly basis.
III. Online Top Up
Mini PMS facility
Registering SIP in Motilal Oswal PMS is an interesting experience because our portfolios have very low churn. As an investor when one registers PMS-SIP more often than not, one knows the curated focused list of high quality stocks that one will end up buying month on month. Also, one can register a paperless and user-friendly PMS-SIP, online. Similarly, Motilal Oswal PMS also enables an investor to purchase additional amounts into the PMS portfolio online on a same day basis. Ideal for the day when some global event not connected with our markets results in a 1000 point correction on the Sensex, only to bounce back in a few days!!!
IV. Transparent Holdings
PMS is transparent
If we were to use cricket parlance, one can say that in PMS an investor can get a ball by ball update on the portfolio. Every trade is intimated to the investor and a live portfolio view is available on the managers' website.Specifically for Motilal Oswal PMS portfolios, there is a focused portfolio of curated stocks which the client can view in his holdings. Mutual Funds typically tend to have large diffused portfolios ranging from 25, 30 to even 100 stocks, (which restrict the transparency) and the holdings are made available only once in a month or a quarter. And for investors holding 5/6/7 different funds in their portfolios, they end up holding over 250-300 stocks. Even if they de-duplicate the holdings through proper analysis, they would realize they pretty much own whatever of the market there is to own, resulting in dilution of returns. You can't beat the market if you buy the market.
V. Superior Returns
PMS can be more aggressive and has the potential to generate higher returns.
Mutual Funds being structured for a wide mass of retail investors tend to be regulated strictly; for instance there are regulatory norms for benchmarking, scrip level exposure, investment patterns etc. More specifically in Mutual Funds, no stock can be over 10% of portfolio exposure. In PMS for instance; if a stock has 8% exposure and all things being static, this stock appreciates to become 12% of the portfolio, there is no compulsion to sell. There are times when a stock classified as mid cap appreciates over time and comes within the large cap basket. In a Mutual Fund scheme depending on investment universe defined the portfolio manager might be forced to sell. In a PMS, a portfolio manager may choose to have higher exposure as well as hold on to concentrated positions as long as they are delivering growth. While this can cut both ways, the ability to run concentrated positions combined with no inflows and outflows or compulsions of fund flow management, does afford the potential to generate higher returns.
VI. Transparent Expense Ratio
PMS is flexible in terms of expense ratios being transparent and customized
Expense ratio disclosures of PMS are transparent as each client signs a specific fee structure and receives a monthly detail of charge levied on the portfolio. Further, expense structures can be customized based on ticket size and profit sharing based fee structures are possible too.
VI. Focused Customer
PMS helps focus on the mass affluent and affluent customer
While Mutual Funds can focus on the new to market and lower sized segments through SIPs etc; PMS by definition, focuses on the mass affluent and affluent. This audience in India is growing by leaps and bounds, values flexibility and most importantly they are familiar with equity investing. The number of equity investors is almost 3 times the number of Mutual Fund investors. Significant wealth creation in the last decade has anyway occurred by way of sweat equity. It is then easy to diversify the holdings by investing in PMS. Hence, while there is a market for Mutual Fund investors, there also exists a market for PMS products
Our experience at Motilal Oswal brings out that PMS ageing is almost 1.5 to 2 times higher than Mutual Funds. This longer investing period means higher chances of returns, especially if you 'Buy Right' and 'Sit Tight'. A WIN-WIN-WIN situation for investor-manufacturer-investment advisor.
In general, if PMS is offered to experienced direct equity investors who have a higher risk appetite and Mutual Funds are offered to investors who are risk averse or at early stage of equity investing, it would be ideal in product suitability terms.
I. Tax Implications
While Mutual Funds are registered as a tax exempt trust structure, for PMS portfolios the tax implications are the same as those for investors investing directly. If stocks are held for more than a year, it results in long term capital gain which is tax free for equities. If the portfolio manager indulges in short term trading activity, it may result in short term capital gains, which would mean the investor has to pay tax. At Motilal Oswal specifically, our average holding for stocks is in excess of 3-4 years and hence this tends to be a lesser concern.
Since PMS accounts entail opening of a segregated demat account and registering a power of attorney in favour of the portfolio manager, the documentation tends to be quite onerous as compared to Mutual Funds.
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