PMS is slowly evolving among the elite class to experient its wealth creation goal. What is the PMS Returns 2019? Do we believe these returns realistic? Who is the best PMS in India?
Portfolio management refers to managing an INDIVIDUAL’S investments in the form of bonds, shares, cash, mutual funds etc so that he earns the maximum profits within the stipulated time frame. Portfolio management refers to managing money of an individual under the expert guidance of portfolio managers.
The major difference between PMS and Mutual Fund is that in PMS it is YOUR individual money which is invested. However, in the case of Mutual Funds, it is a pool of money that gets invested.
As many of you are aware, the minimum investable amount should be Rs.25 lakhs. Do remember that you are holding the stocks in PMS. Whereas in Mutual Funds, you are not holding the stocks directly as it is a pool of money.
There is no concept of NAV (like Mutual Funds) in PMS as you are holding the stocks. However, you receive a daily portfolio status.
Let us see the other features of PMS.
Types of PMS or Portfolio Management Services
There are basically two types of PMS. They are as below.
1. Discretionary PMS – Where the investment is at the discretion of the fund manager and client has no intervention in the investment process. Hence, you may assume that they have a standard portfolio created for you and they just follow it.
Even though you as an investor have no choice to select the fund or the portfolio, you may give a list of negative stocks in this PMS at the time of opening of an account to the fund manager. By giving this choice, you are avoiding certain stocks in your portfolio.
2. Non-Discretionary PMS – Under this service, the portfolio manager only suggests investment ideas. The choice, as well as the timings of the investment decisions, rest solely with the investor. However, the execution of the trade is done by the portfolio manager. It is exactly like you are executing your stock buying and selling orders to your brokers.
Portfolio Management Service or PMS Charges
In PMS, there are mainly three kinds of expenses which you have to bear and they are as below.
Entry Load-PMS usually charge the entry load at the time of investing. It may range anywhere around 2% to 3%.
Fund Management Fees-Every Portfolio Management Services scheme charges Fund Management charges. Fund Management Charges may vary from 1% to 3% depending upon the PMS provider. It is charged on a monthly or quarterly basis to the PMS account. This will be deducted from your portfolio (irrespective of whether you are under profit or loss).
Profit-Sharing – There is an additional yearly fee in the form of profit-sharing above a threshold return. Profit-sharing could be as high as 20% of the gains if returns are over 10% in a year.
Other Charges – Don’t believe these charges alone, there may be certain exit load also. This exit load is bit complex than the Mutual Fund exit load charges. Also, few may charge you the following charges.
- Custodian Fee
- Demat Account opening charges
- Audit charges
- Transaction brokerage
These are the commonly used charges by PMS. However, the rate may differ from PMS to PMS. Hence, be cautious while choosing the PMS.
Taxation of Portfolio Management Service (PMS)
In case of Mutual Funds, the taxation will come into picture only at the time of redemption (irrespective of how many times a fund manager churn the portfolio). The main reason because of this is that it is a pool of money.
However, in the case of PMS, you are holding the stocks in your name. Hence, every time a fund manager buy or sell the stocks, you have to bear the heat of tax.
As of now, the taxation on equity is as below.
# If stocks are held for less than a year, then a profit attracts Short Term Capital Gain Tax. Accordingly, you have to pay 15% of the tax.
# If stocks are held for more than a year, then a profit attracts Long Term Capital Gain Tax. Accordingly, you have to pay 10% of the tax.
# The above rule of taxation applies if you consider the profit as a capital gain. However, if your PMS churn the portfolio so often, then you have to rethink to consider the capital gain. Such frequent buy or sell of stocks may be considered as a business activity for taxation purpose and accordingly, it will be taxed.
You noticed one thing that compares to Mutual Funds, PMS are non-tax efficient. The reason is that in the case of Mutual Funds, the taxation will come into picture only at the time of redemption. However, you have to bear the tax each time your fund manager in PMS churns the portfolio.
Because of this, your compounding effect in PMS may get reduced each time you pay the tax.
PMS Returns 2019 – Who is the best PMS in India?
Now let us come back to the main question of what are the PMS Returns 2019 and who is the best PMS in India?
Before jumping into conclusion, let me share you the recent SEBI’s Report on Working Group on Portfolio Managers Regulations, 2013. It was published on 11th July 2019.
As per the report, there are very few rules governing what portfolio managers can or cannot say in their
marketing material when they are soliciting new clients. Currently, there are wide divergences across PMS providers with regards to the way performance is reported to existing clients, prospective clients and to SEBI. Non-standard reporting formats make it very difficult for prospective clients to compare performances of the PMS providers and make informed decisions with regards to the choice of their PMS provider.
The issues (not exhaustive) listed under this report are as below.
# Returns are reported at the gross level without taking into consideration fees and expenses (including GST).
# Model portfolio returns (rather than actual portfolio returns) are reported.
# Returns are reported on IRR, TWRR, simple average, etc i.e. there is no standardized method for calculating returns.
# Some Portfolio Managers include in their firm performance, the performance which was achieved either before receipt of PMS licence or the performance of their proprietary account/ portfolio.
# Some Portfolio Managers are selectively disclosing the portfolio, getting the same audited and showing them as the returns of the firm.
# For the purpose of comparison, benchmarks are not specified and are changed arbitrarily.
# Upfront fees and set-up costs are not expensed out, but are reduced from the client’s capital contribution.
# Performance fees are often calculated after taking only realised gains into consideration (and thus deliberately omitting unrealised losses & gains).
# Performance is reported for various strategies/products and there is no way for the regulator/investor to identify whether such performance reported is accurate.
# Performance figures which are more than 1 year are not provided on an annualised basis.
Furthermore, below are the major concerns raised by the committee.
# Portfolio managers showing model returns (rather than actual returns)
# Portfolio managers cherry picking certain portfolios (which are doing well) and showing only their returns.
# Portfolio managers inflating returns by annualizing partial periods.
# Portfolio managers comparing the strategy’s returns with incorrect benchmark returns.
# Portfolio managers not taking into account the cash component in computing returns (i.e. ignoring the drag that cash exerts on returns).
# Portfolio managers ignoring withdrawn portfolios (and thus reporting a return which suffers from ‘survivorship bias’).
# Portfolio managers not disclosing qualitative parameters such as a change in the identity of the fund manager, change in the investment strategy.
Furthermore, as per a survey of Indian Portfolio Managers conducted in 2018 by the CFA Institute, they find that-
# 31% of portfolio managers do NOT use asset-weighted average returns of all client accounts when reporting performance.
# 46% of portfolio managers do NOT use time-weighted returns of all client accounts when reporting performance.
# Only 39% of portfolio managers display the standard deviation of the portfolio when reporting performance.
REMEMBER-These are not my concerns but a working group committee report to SEBI.
Also, you may be noticed that there is no such public platform where we can find the returns of PMS and judge who is best PMS fund manager. Even though SEBI’s PMS Monthly Report option is there, but it is absent when it comes to understanding the return part.
Few may go by individual PMS website and fetch the data and then compare. However, with so many drawbacks in reporting the returns how can we judge the returns?
I completely not rely on these PMS returns 2019 data published by a few websites. Rather if you are really interested to consider the PMS option, then I suggest you knock the doors of respective PMS and fetch the data. Understand the returns of how they are representing it (after going through the above negative), and then make your informed decisions.
Should we go for PMS or Portfolio Management Service?
Considering the absence of strict regulations (like Mutual Funds), I feel it is a grey area of investment. Hence, I skip PMS mainly because of below reasons.
# Expenses:- When you compare PMS expenses with Mutual Funds, then PMS expenses are really heavy. When Index Funds are available at damn cheap expenses of around 0.1% to 0.4%, why we have to pay hefty charges?
# Returns:-As I pointed from the above post that return reporting is a big flaw when it comes to PMS. I am not saying all are wrong, but I am completely agree with SEBI report. Hence, on which basis one can trust and go ahead?
# Ticket Size-The current minimum ticket size is Rs.25 lakh. However, in the same report, it was recommended to increase it to Rs.50 lakh. Hence, it is not a product for individuals whose net worth runs in crores.
# Taxation-This is one more negative point to distance. Even though we are investing in equity, the taxation of Mutual Funds is far simpler than the PMS. Also, due to taxation, it will affect our compounding returns. Hence, a big drawback for PMS.
# Documentation-Since PMS accounts entail the opening of a segregated Demat account and registering a power of attorney in favour of the portfolio manager, the documentation tends to be
onerous as compared to Mutual Funds.
# Regulations-Personally I feel, there need to be stricter regulations and disclosure norms for PMS. This is currently lagging. Hence, I don’t want my money be BAKRAA.
My idea of writing this post is not to give you “PMS Returns 2019 – Who is the best PMS in India?”, but the idea of sharing you the risk involved in if you chase the RETURNS and choose the BEST PMS in India.
If you are still not convinced with my points, then you are very much FREE to decide and go ahead with PMS and BEST OF LUCK 🙂