Mr Prakash had been promoted to a very senior role in his organisation and in appreciation of his performance has received a huge fat bonus. His banker contacted him and recommended a large investment — `25 lakh — in a Portfolio Management Scheme (PMS) offered by the bank. Now Mr Prakash, being a very busy man, heeded to the advice.

This was in August 2007. In September 2010, when he finally decided to encash this money, the value of the portfolio stood at `22 lacs. Now, Mr Prakash did not understand this. PMS was supposed to give him super profits and returns. His holdings value was supposed to increase multi-folds and here after 3 years, he finds that his capital has been eroded, forget about the return.

Mr Prakash, called his new advisor, Mr Sanjay and shared this situation with him and wanted to know the reasons for the promises and performance being poles apart. Now, Mr Sanjay was not amused, as he had come across such cases and he helps us decipher the PMS .

What is PMS?

PMS products are customised products which involve a big-ticket investments, usually `25 lakh & above . (off-late, there are PMS with investment of `5 lakh also).

Unlike a mutual fund, in PMS, the fund manager invests the money ( in a basket of products, viz, equities, commodities, bonds, gold, derivatives) based on the customer risk profile and needs.

PMS — are of two types — discretionary and non-discretionary.

In a discretionary PMS, the portfolio manager independently manages the funds based on the pre-determined risk profile and objectives. In a non-discretionary PMS, the portfolio manager would consult the client before every investment decision, explaining about the investment rationale and listing out the risk and return possibilities.

Most of the PMS are — discretionary in nature. There is no fixed method in the structure of the PMS charges. Based on the provider, the fee structure could vary. Typically, a management fee of 1-2 per cent (at times, even three per cent) of the funds asset value, along with a performance fee is charged. The performance fee is calculated as a percentage of the profit made over and above the hurdle rate, which is a percentage figure fixed by the distributor. So, if the hurdle rate is 12 per cent and the returns are 15 per cent, the 3 per cent profit made over
and above the 12 per cent hurdle rate will be shared between the investor and the distributor. On returns below 12 per cent, no performance fee would be paid.

Besides this, there are separate charges for brokerage and custodian services and tax payments that is around 0.5 per cent to one per cent.

To whome does this product work ?

PMS, in majority of the cases, invests in direct equities. Direct equities as a class does not fit into the risk profile of many of the investors. Only those who have ‘play’ funds (funds which one is ready to lose and not lose sleep over it), should park their money in these products. There are enough financial products from which to choose from, and one should invest in only those products ,which one understands and is comfortable with. Mr Prakash’s case is not an isolated one. It is more of the norm rather than an aberration.
(Brijesh Damodaran
Founder – WealthWays Private Wealth Management and can be contacted at brijesh@wealthways.in)