Since you are betting only on a few stocks, the risks are high. However, the returns can be spectacular as well.
Portfolio management services (PMS) are aggressively trying to tap wealthy customers with strategies or stock portfolios that are uncommon or unique - say, small-caps.
PMS is especially being tailored to the needs of a client. Fund managers , in these schemes, can also take a call on the market and decide to move into cash and redeploy the money when the time is right.
While an MF has over 50 stocks in its portfolio, PMS offers not more than 25. The investors can get to play popular themes and exit before these get out of flavour.
"Those investors who appreciate the privilege of talking to fund managers are also attracted to PMS," says Anil Sarin, chief investment officer - equity, Global Asset Management Group, Edelweiss Financial Services.
Strategies
Reliance PMS, for example, runs a High Conviction strategy. Explains Shahzad Madon, head of PMS & Alternative Assets at Reliance Capital Asset Management, it's a concentrated portfolio that comprises 20 top stocks, with the potential to give outside returns.
At present, it has 50 per cent in quality mid-cap companies and 30 per cent in large-caps, and the remaining portion comprises unique stocks ideas.
A popular theme-based product from ICICI Prudential AMC is a small-cap strategy that looks at stocks beyond the top 200-300 listed ones.
Raghav Iyengar, executive vice-president - ICICI Prudential AMC, says the portfolio comprises 15 stocks.
These are filtered, based on various value investing parameters. Such as economic moat (an indicator that shows a company's ability to retain its advantage over competitors), return on capital, return on equity and low or zero debt.
Similarly, a popular product with investors offered by Motilal Oswal Asset Management is a mid-caps strategy called as the 'Next Trillion Dollar' that has 18 stocks at present.
Edelweiss MF has a Hexagon Portfolio; this selects stocks based on six strategies, including companies that have shown consistent performance but are undervalued, special situations (demergers, M&A, etc), firms moving up the value curve, leaders in sunrise sectors such as education and media, counter-cyclical stocks, and businesses that were doing well earlier but were hit by rough times and are now poised for a turnaround.
Nuts and bolts
While the PMS in essence is a customisable offering, it can be flexible only in certain aspects. Most PMS offered in India are discretionary.
That is, the fund manager takes investment decisions and has the power of attorney to manage the investor's demat account.
In a non-discretionary PMS, he merely suggests investment ideas; the rest is the investor's prerogative. However, this is rare.
In the former, the investor signs a bilateral agreement with the service provider.
Before the signing, investors can instruct on the sector or stocks they don't want to take exposure to. This is called a 'negative list'.
Aashish Somaiyaa, chief executive officer and managing director at Motilal Oswal Asset Management says PMS usually starts by accepting a stock transfer or cash or a combination of both.
"Once fund managers get the mandate, they start building the portfolio slowly, picking a stock at the price they think is apt.
Usually, a PMS comes up with strategies that can last for years and updates the stock list as and when better companies are discovered.
However, in case of those based on special themes that might last for a limited time , investment managers either return the money to investors or draw up a new agreement to shift them to a new strategy, once the theme has played out.
Ticket size and fee
The market regulator, Sebi, has mandated that for a PMS, the minimum size must be Rs 25 lakh.
Brokers and fund houses have a differential investment amount, depending on the fund. Reliance Capital Asset Management's average ticket size is slightly under Rs 90 lakh.
The fee, too, varies depending on the strategy and client corpus. Somaiyaa says expense can also be customised for large investments.
Typically, there's a flat fee of one to 1.5 cent and a performance-linked fee. In the latter, there are different hurdles. Say, if the annual returns are over 10-12 per cent, the fund house or broker will take a percentage of the profits.
Before enrolling
PMS is a high-risk and high-reward investment, meant for only the erudite investors.
Investors also need to keep taxation in mind. Opting for PMS is similar to trading on your own. Just that someone else is operating your account. If stocks are held for less than a year, the investor will incur short term capital gains.
Madon says selecting a PMS provider is much like choosing a MF. The investor needs to see the pedigree, processes and performance history across various market cycles.
The record of the fund manager and the investment style is mostly the deciding factor for investors. "If the fund manager changes so will the performance and portfolio," says Sarin.
Features of these schemes
- Number of stocks are 25 or lesser
- Stocks can be beyond the top 200
- In discretionary schemes, the fund manager has PoA to manage the investor's demat account
- In non-discretionary schemes, the fund manager gives only investment ideas
- Investors can say the sectors that they want to avoid
