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Portfolio Management Services – Be Cautious

Portfolio Management Services
Portfolio Management Services

Portfolio Management Services is one of the pleasant side effect of being “Super Rich”. If your bank is offering Portfolio Management Services to you than it means that you have arrived in life. In short, welcome to Super Rich Club. Once the bank see money in your account, you will start getting attention from one street smart bank executive. Indians are typical attention seekers. The more attention you get, the more you want. Banks leverage this syndrome and treat super rich club like VVIP’s. The ultimate goal of bank executive is to sell Portfolio Management Services to “Super Rich”.

Who is Super Rich

According to definition of bank, any individual with investible surplus of 25 Lacs is super rich / High net worth individual (HNI). Investible surplus is the money left with you after adjusting all your expenses from total income. In short, Investible surplus is money left for investment. On an average, Investment in Portfolio Management Services is between 80 Lacs to 1 Cr by HNI’s.

What is Portfolio Management Services

In laymen terms, Portfolio Management Services is personalized and customized investment vehicle/scheme for specific HNI. It is also called PMS fund. PMS fund is covered under regulatory framework. Its similar to Mutual Fund. Banks have to report investment pattern of PMS fund to SEBI (Securities and Exchange Board of India) once in every six months. Each HNI will have dedicated Fund Manager, who is authorized to take investment decisions on behalf of HNI.

Portfolio Management Services are not available for ordinary customers of bank and are offered on one to one basis. Unlike other schemes, Portfolio Management Services are not publicized or advertised by the bank. Bank is under “NO” compulsion to offer Portfolio Management Services even if an individual is willing to invest 1 Cr. Basically, the profile of customer should fit into Bank’s target audience for such services. Bank would like to retain the tag of “Exclusivity”. Portfolio Management Services in true sense is like Kingfisher calendar, which is circulated only to people in personal mailing list of Vijay Mallaya. There are certain things which money can’t buy for everything else there is MasterCard. Only exception to this rule is that if bank executive has target to achieve than “Exclusivity” is sacrificed to achieve targets.

Why HNI’s opt for Portfolio Management Services

There is a famous saying that “It is easy to earn Money but very difficult to Manage“. Portfolio Management Services work on same principle i.e. HNI’s job is to earn money and Money Management should be left to PMS Fund. Its a known fact that Indians are very poor in financial planning & moreover as we move up the ladder we don’t have time for financial planning.

Service Charges

Banks charge Service Charge for providing Portfolio Management Services. Fees can be fixed or commission in profits or Mix of both. It is advisable to opt for Portfolio Management Services which charge fees on profits. Under profit sharing , PMS fund will be more careful in managing the portfolio.

Myth of Assured Returns

Recently actress Suchitra Krishnamoorthi settled a case of mismanagement of her funds by very reputed MNC bank. SEBI found irregularities in Portfolio Management Services offered by the MNC bank. The actress claimed that bank assured her return of 24% but due to mismanagement of funds, she incurred losses on 3.6 Cr investment. Though all banks offer assured return in Portfolio Management Services but there is no magical formula to generate double digit assured returns. The confidence to provide higher returns stems from the fact that PMS funds provide very high flexibility to fund manager to manage the portfolio/fund. Value buying is core theme for any PMS fund manager. He buy when everyone is selling & sell when everyone else is buying. It sounds very easy but its an art.

Limitations of Portfolio Management Services

PMS fund cannot invest in certain investment vehicles like

1. Commodities

2. Derivatives (Leveraging)

3. Currency

Do’s & Don’ts of Portfolio Management Services

1. Please go through Disclosure Document of Portfolio Management Services Fund. It contain complete information like scheme objective, Investment philosophy and  inclusions/exclusions. It will be suicidal to invest without going through Disclosure Document

2. Please check whether Disclosure document is filed with SEBI or not. Filing with SEBI is sufficient to launch the scheme until unless SEBI objects or raise any concern related to scheme.

3. Type of Portfolio Management Services Fund

(a) Client approval required for all buy/sell decisions by Fund Manager also called Non-Discretionary PMS fund

(b) Fund Manager can take buy/sell call without keeping client in loop also called Discretionary PMS Fund

4. Reputation of Bank’s Portfolio Management Services

5. Keep a tab on investment either online or apply for physical statement. Normally Portfolio Management Services share statement once in 6 months but you may request for monthly statements.

6. In order to achieve their targets, Fund Manager may churn the portfolio too aggressively. Keep a watch on same. You may check my post “Beware of Relationship Manager

7. Portfolio Management Services attract exit load & trust me absolute amount of exit load will be huge as investment is in the range of few crores.

Alternatives to Portfolio Management Services

In my opinion, if you don’t wish to avail Portfolio Management Services than you may opt for following investment vehicles to manage your funds depending on your risk appetite

1. Index Mutual Funds

2. Fixed Maturity Plans

3. Debt Funds

4. Capital Protection Funds

5. ETF”s

Grievance Redressal

As in the case of Suchitra Krishnamoorthi, if you are not happy with fund performance or fund manager is not managing the fund as per agreed guidelines and principles according to Disclosure document than you may directly approach SEBI with your complaint against Portfolio Management Services.

Copyright © Nitin Bhatia. All Rights Reserved.

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