Portofolio Management Service in India

The process of managing the assets of a mutual fund, including choosing and
monitoring appropriate investments and allocating funds accordingly. As per SEBI
guidelines, only those entities who are registered with SEBI for providing PMS services
can offer PMS to clients. There is no separate certification required for selling any PMS
product. So this is case where mis-selling can happen. As per the SEBI guidelines, the
minimum investment required to open a PMS account is Rs. 5 Lacs.
Different companies have different minimum requirements:

Birla AMC PMS has a minimum amount requirement of Rs. 25 lacs for a product
HSBC AMC has a minimum requirement of 50 lacs for their PMS
Reliance has a minimum requirement of Rs. 1 Crore

Three type of PMS

1. Discretionary PMS Where the investment is at discretion of the fund manager &
client has no intervention in the investment process.
2. Non-Discretionary PMS Under this service, the portfolio manager only suggests
the 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. Client may give a negative list of stocks in a
discretionary PMS, which the fund managers make sure are not included.
3. Advisory Under these services, the portfolio manager only suggests the
investment ideas. The choice as well as the execution of the investment decisions
rest solely with the Investor.

Discretionary services
(i) Absolute Freedom Option

A highly flexible investment option

large cap, mid cap, small cap and micro cap stocks.
focus on highly active money management

Examples

Pearl Multi Cap Option

Tactical Asset Allocation Portfolio Optimizer Series
High Conviction Equity Portfolio New Product

(ii) Large Cap Option

Investments predominantly in large-cap stocks

ensure liquidity and lower impact cost
more stable portfolio

(iii) Mid & Small Cap Option

larger mid-caps and smaller mid-caps stocks.

Example

Young Star Portfolio - would have majority of its funds allocated to larger midcaps and smaller mid-caps stocks.

(iv) Concentrated Option

long term capital appreciation from equity and equity related investments
high growth companies ( medium to long term.)

(v) OptiBlend Option

long-term capital appreciation by investing in a portfolio constituted of units of

mutual funds &/or equity & equity related securities &/or debt securities/ money

market securities
combining varied investment styles of various funds.

Example

Multi Asset Allocation Portfolio (MAAP)

Tactical Asset Allocation Portfolio (TAAP)

(vi)Structured Offerings

structured as per the requirements of its clients.

Investing in a PMS
Two ways:
1. Cheque payment
2. Transferring existing shares held by the customer to the PMS account. The
value of the portfolio transferred should be above the minimum investment
criteria.
Documents to be taken care of :

PMS agreement with the provider

Power of Attorney agreement
New demat account opening format (even if investor has a demat account he is

required to open a new one)

PAN
Address proof
Identity proofs

Portfolio Management Services (PMS) Charges

1. Entry Load PMS schemes may have an entry load of 3%. It is charged at the
time of buying the PMS only.
2. Management Charges 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 quarterly
basis to the PMS account.
3. Profit Sharing Some PMS schemes also have profit sharing arrangements (in
addition to the fixed fees), wherein the provider charges a certain amount of
fees/profit over the stipulated return generated in the fund. For Eg PMS X has
fixed charges of 2% plus a charge of 20% of fees for return generated above
15% in the year. In this case if the return generated in the year by the scheme
is 25%, the fees charged by the PMS will be 2% + {(25%-15%)*20%}.
4. Custodian Fee: The charges relating to opening and operation of
dematerialized accounts, custody and transfer charges for shares, bonds and

units, dematerialization and other charges in connection with the operation

and management of the depository accounts
5. Audit charges
6. Transaction brokerage: The brokerage charges and other charges like service
charge, stamp duty, transaction costs, turnover tax, exit and entry loads on the
purchase and sale of shares, stocks, bonds, debt, deposits, units and other
financial instruments.
7. Entry Fees : Entry fees relates to entry charges payable to the Portfolio
Manager at the time of subscription or additional subscription
8. Exit Fees : Exit fees relates to exit charges payable to the Portfolio Manager at
the time of complete withdrawal or partial withdrawal.
9. Premature Termination Fee: termination of the Agreement before the
stipulated / envisaged final exit of all investments and securities or at the time
of withdrawal or partial withdrawal
10. Registrar and transfer agent fee
11. Securities Lending and Borrowing charges
12. Certification and Professional charges : Certification and Professional Charges
payable for out sourced professional services like accounting, taxation, legal
services, notarizations etc. for certifications, attestations required by bankers
or regulatory authorities.

Taxation for Portfolio Management Services (PMS)

Any income from Portfolio Management Services account is a business income. Unlike
MF, PMS is not required to remain 65%+ invested in equity to get equity taxation benefit.
Each Portfolio Management Services account is in the name of additional investor and so
the tax treatment is done on an individual investor level.
Profit on the same can be considered as business income.(i.e slabwise). Profit can be
considered as Capital gains. [STCG(15%) or LTCG(Taxfree)]. It depends on clients
Chartered Accountant or the assessing officer how he treats this Income. The PMS
provider sends an audited statement at the end of the FY giving details of STCG and
LTCG, it is on the client and his CA to decide to treat it as capital gain or business
income.

PROCESS/STEPS OF PORTFOLIO
Specification of Investment objective and
Constraints

Selection of Asset Mix

Formulation of Portfolio
Strategy

Selection of Securities

Portfolio Execution

Portfolio Revision

Portfolio Evaluation

1. Objectives

Maximize the expected rate of return

Minimize the risk exposure

The risk depends on two factors:

a) Financial situation: wealth, major expenses, earning capacity, etc and a careful and
realistic appraisal of the assets, expenses and earnings forms a base to define the risk
tolerance.
Liquidity
Investment horizon: For example, the investment horizon for ten years to fund

the childs college education. (imp. Role on deciding assets)

Taxes

b) Temperament

2. Selection of Asset Mixes

Cash
Bonds
Stocks
Real estate
Commodities/Derivatives
Currencies

3. Formulation of Portfolio Strategy/ Selectiong of

Securities
a) SELECTION OF BONDS (fixed income avenues)

b)

Risk of default:
Tax Shield:
Liquidity:
SELECTION OF STOCK (Equity shares)
Three board approaches are employed for the selection of equity shares:
Technical analysis looks at price behavior and volume data to determine
whether the share will move up or down or remain trend less.

Fundamental analysis focuses on fundamental factors like the earnings level,

growth prospects, and risk exposure to establish the intrinsic value of a share.
The recommendation to buy, hold, or sell is based on a comparison of the

intrinsic value and the prevailing market price.

Random selection approach is based on the premise that the market is efficient
and securities are properly priced.

4. PORTFOLIO EXECUTION
5. PORTFOLIO REVISION

changing the existing mix of securities.

aroused due to changes in the financial markets since creation of portfolio

Portfolio Revision basically involves two stages:

Portfolio Rebalancing: revising the portfolio composition (i.e. the stock- bond
Portfolio Upgrading: re-assessing the risk return characteristics of various
securities (stocks as well as bonds), selling over-priced securities, and buying
under-priced securities.

6. PORTFOLIO EVALUATION

quantitative measurement of actual return realized and the risk born by the
portfolio over the period of investment.

Superior PMS providers in India

Prudential ICICI
Prudential ICICI Asset Management Company is a joint venture between Prudential Plc. UKs leading insurance company and ICICI Ltd. - Indias premier financial institution.
The Company serves as the investment manager for Prudential ICICI Mutual Fund, one
of Indias largest private sector mutual fund.
Reliance Portfolio Management Services
Reliance Portfolio Management Services is an exclusive offering from the portfolio
management division of Reliance Capital Asset Management Ltd., a wholly owned
subsidiary of Reliance Capital Ltd., Reliance Capital Asset Management Ltd. is also the
investment manager for Reliance Mutual Fund schemes wherein it manages assets worth
over Rs. 42,200 crores (as on Feb 28, 2007).
Motilal Oswal Asset Management Company Ltd.
Motilal Oswal Asset Management Company (MOAMC) is part of the Motilal Oswal
Group and a 100% subsidiary of Motilal Oswal Securities Ltd. MOAMC is a public
limited company incorporated under the Companies Act, 1956 on November 14, 2008.
MOAMC has been appointed as the investment manager to Motilal Oswal Mutual Fund.
ENAM Asset Management Co. Pvt. Ltd.
Part of the ENAM Group, a highly respected name in capital markets in India since 1984.
Started in 1998 as the investment management arm of ENAM group and evolved as a
leading provider of equity-oriented investment solutions.
IDFC Investment Advisors Ltd.
A wholly owned subsidiary of IDFC AMC and houses discretionary portfolio
management services & advisory (onshore-offshore) mandates.

Current Market Scenario in India

At present, there are a very few agencies which render this type of services in an

organized and professional way.

There is no constraint on the demand for this type of financial service as every
entity would be saving and investing and interested in optimizing the rate of

return.
The size of capital market is increasing.
There is an increase in the number of stock exchanges.
New instruments are being introduced in the capital market.
The equity cult is spreading in the interiors and rural areas.
The percentage of investment of the household savings is bound to go up.
It is conservatively estimated that during the eighth plan resources to the tune of

over Rs.50000crore will be mobilized through the stock market.

India today has 20 million investors, as compared to 2 million in 1980
Income levels in India on a rise making Rs. 25 lakhs not beyond the reach of

many.
SEBI guidelines have improved investor safety and confidence