Shubhodeep Das has been a very disciplined investor for the past six years, similar to what financial planners aim to make of a retail investor. Regular investing reaped benefits and Das had Rs 10 lakh in his name last year.
"I was elated," he remembers. He had made his investment decisions all by himself and this made him overconfident. "I decided to give 80 per cent of my money to a professional," said Das.
The portfolio manager assured a 20 per cent annual rise in Das' investment and zero capital erosion if markets went down. Unfortunately, over the past six months, Das has lost Rs 3 lakh from the Rs 8 lakh he invested.
The product: Portfolio Management Service (PMS) is a specialised product, offering a range of investment strategies by a professional manager to make maximum from the market.
It largely invests in equity, debt and precious metals, just as mutual funds do. The manager strategises your capital and advises the right product mix, in-line with your financial goals and risk appetite. Every portfolio management firm has a defined style of investing. The minimum ticket size for PMS is Rs 5 lakh.
Charges: You are liable to pay a fixed brokerage (between 30-50 basis points) and a fund management fee (up to 3 per cent), which may vary from one firm to the other.
Some managers ask for a very small brokerage (fixed) and a share (typically 10-20 per cent) of the profits made. Or profits may be shared at a fixed rate of 5-10 per cent, irrespective of the brokerage.
Experts say investors should get the profit sharing arrangement cleared from the manager, as it varies widely. This will protect you from getting duped of large portions of profit.
Advantages: PMS relieves you from the administrative hassles of investments. Your account statement, sent periodically, reflects your portfolio performance. You need not track your portfolio as regularly.
"Since there are fewer customers with PMS compared to mutual funds, it is easier to get a customised product that addresses your needs," said Hemant Rustagi, CEO, Wiseinvest Advisors.
Even though PMS is professionally managed, you need to be careful with your money, like with any other product.
"PMS is good if you have at least Rs 50 lakh. It is not for those with Rs 5-10 lakh," said Sriram Venkatasubramanian, head - wealth management, FCH Centrum Wealth Managers.
History and transparency: Just like in mutual funds, put your money with portfolio managers with a good history. Many times, stocks brokers run PMS operations and are not able to take decisions according to you. Opt for registered companies, available on the Securities and Exchange Board of India (Sebi) website.
Your portfolio manager sends account statements regularly. Nalin Moniz, director, Forefront Capital, said, "The investor should check the frequency of these statements and should be comfortable with it."
To be able to keep a constant check on your money, you should ask for monthly statements, which only a few PMS providers give. Typically, managers dispatch account statements quarterly.
Style of investing: Portfolio managers adopt unique styles for investing.
Some may invest only in mid- and/or small-cap stocks. While this style may pay off when markets rally, during market downturns these fall as easily. Experts say many managers made huge sums in the 2007 rally, which got wiped out in 2008, as the focus was on smaller stocks.
"Some time back, portfolio managers were concentrating on gold and silver, due to their price rally," said Rustagi. Portfolios holding large-caps and debt are safer bets. By Sebi guidelines, PMS should not guarantee returns.
Also, be careful that your portfolio is not being churned frequently. "There are two types of account records sent to investors - transaction and holding statements. The first one shows the total turnover and can help calculate the sum lost," said Venkatasubramanian.
The latter shows the status of the portfolio as on date. Frequent churning is done at a cost. A percentage of the amount traded is charged as brokerage each time.
Tax: Each transaction is taken as an independent trade and capital gains tax is applicable, depending on the holding period. Unlike mutual funds, where irrespective of the number of times the fund manager buys and sells, capital gains is levied only when the investor redeems the scheme.
Holding for over a year will call for zero long-term capital gains tax but selling within a year of buying will attract a 15 per cent short-term capital gains tax.