Rapid Rise of India's PMS Industry
(This
is for information purposes only. This should not be construed as a
recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial
adviser before taking any investment decision. Safe to assume the author has a vested
interest in stocks / investments discussed if any.)
India has witnessed rapid rise in the PMS industry in the past 10 years -- the industry's asset growth is almost five times during the period.
Firms offering Portfolio Management Services (PMS) provide tailored investment management services suitable to their clients. PMS caters to wealthy individuals and institutional investors (including foreign portfolio investors or FPIs).
1. PMS Money Managers
Some examples of entities offering PMS are:
360 One Asset Management, Marcellus Investment Managers, White Oak Capital Management, Ask Investment Managers, Enam Asset Management, Unifi Capital, Kama Capital Advisors, 3P Investment Managers, Quantum Advisors Pvt Ltd and others.
Take for instance, 3P Investment Managers which was founded in 2022. It's a boutique investment management firm. Its founder is Prashant Jain.
Take for instance, 3P Investment Managers which was founded in 2022. It's a boutique investment management firm. Its founder is Prashant Jain.
Prior to starting 3P IM he worked as a fund manager at HDFC Mutual Fund for about 18 years and he has a good track record as money manager at HDFC MF.
His firm 3P IM manages about Rs 9,300 crore of assets on behalf of nearly 470 families. The firm primarily focuses on investing clients' money in listed equities.
At the other hand, we have Ask Asset & Wealth Management which was founded more than 40 years ago and manages about Rs 83,000 crore of client assets. One could say this is India’s biggest money manager other than mutual funds and insurance firms.
His firm 3P IM manages about Rs 9,300 crore of assets on behalf of nearly 470 families. The firm primarily focuses on investing clients' money in listed equities.
At the other hand, we have Ask Asset & Wealth Management which was founded more than 40 years ago and manages about Rs 83,000 crore of client assets. One could say this is India’s biggest money manager other than mutual funds and insurance firms.
It caters to various segments, like, listed equities, alternative investments, real estate, private equity and hedge funds.
One of their biggest segments is PMS in which Ask Investment Managers have assets of more than Rs 25,000 crore under management, with a client size of 15,700.
Mutual funds in India too have their own divisions for catering to PMS clients separate from their main mutual fund business. They too are hefty players in PMS.
One of their biggest segments is PMS in which Ask Investment Managers have assets of more than Rs 25,000 crore under management, with a client size of 15,700.
Mutual funds in India too have their own divisions for catering to PMS clients separate from their main mutual fund business. They too are hefty players in PMS.
2. Basics of PMS
A portfolio manager (PM) is a professional money manager who manages a portfolio of securities on behalf of clients for a fee as per a written contract.
Portfolio managers provide tailored investment services suitable to individual investors.
A portfolio manager basically manages money in two routes, namely, discretionary and non-discretionary basis.
In a discretionary portfolio, a portfolio manager enjoys full discretion with regard to management of funds as per client needs.
However, in case of a non-discretionary portfolio, a portfolio manager does not have any discretion to invest a client’s money – but the PM manages the funds as per the investment decisions of the client.
Most of the money under PMS industry in India is managed via discretionary route.
In a discretionary portfolio, a portfolio manager enjoys full discretion with regard to management of funds as per client needs.
However, in case of a non-discretionary portfolio, a portfolio manager does not have any discretion to invest a client’s money – but the PM manages the funds as per the investment decisions of the client.
Most of the money under PMS industry in India is managed via discretionary route.
A portfolio manager has to obtain a registration from capital market regulator Securities and Exchange Board of India (SEBI) before offering PMS services.
But SEBI does
not endorse the various investment strategies or investment approaches followed by portfolio managers. The PMS industry is regulated by SEBI.
A PMS cannot offer guaranteed or indicative returns to investors.
Minimum net worth of a portfolio manager is Rs 5 crore, as per SEBI.
Association of Portfolio Managers in India (APMI)
is a PMS industry body, a kind of self-regulatory body for the PMS
industry (like what AMFI India is to mutual funds). As per SEBI, all PMS
entities have to send monthly performance reports to APMI.
3. Mutual Funds versus PMS
a) Fee structure:
PMS firms charge a fee from their clients. They have basically three options – fixed, profit-sharing (performance-based) and a combination of fixed and profit-sharing.
PMS firms typically charge a maximum fixed fee of up to 2.5 per cent of assets. PMS entities have different investment approaches and they follow a different fee structure for these strategies.
PMS firms typically charge a maximum fixed fee of up to 2.5 per cent of assets. PMS entities have different investment approaches and they follow a different fee structure for these strategies.
Some investment strategies attract profit-sharing based on the performance of the strategy. The profit-sharing fee may be up to 20 per cent of the return.
Another fee structure is a combination of fixed fee and profit-sharing. For instance, a PMS may typically charge 'two and twenty' fee structure as per the terms of the contract signed between the portfolio manager and the client.
Two and twenty means two per cent of the assets and 20 per cent of the profits, if any.
Expense
ratios of mutual funds are much lower compared to PMS. Direct plans of
mutual funds charge much lower expenses compared to their regular plans.
Regular plans have the benefit of financial advice.
Investors who have financial knowledge invest in direct plans of mutual funds, avoiding the advisors and higher fees of regular plans.
Mutual funds, PMS and AIF compete among themselves for attracting investors' money. While mutual funds cater to all kinds of investors irrespective of their wealth status, PMS and AIF focus on a niche group of wealthy individuals, family offices and institutional investors.
For the PMS industry, the minimum investment limit is Rs 50 lakh, against Rs 1 crore for Alternative Investment Firms (AIFs). Suppose a client wants to invest with a PMS, the client has to bring in a minimum of Rs 50 lakh to be eligible for investing with the PMS.
Why do banks, mutual funds and other portfolio managers offer these services? Because PMS and AIF industry charge higher expense ratios from clients.
In case of mutual funds in India, an investor can invest with a minimum as low as Rs 500 and the expense ratio can be less than 1 per cent (in case of direct plans).
For the PMS industry, the minimum investment limit is Rs 50 lakh, against Rs 1 crore for Alternative Investment Firms (AIFs). Suppose a client wants to invest with a PMS, the client has to bring in a minimum of Rs 50 lakh to be eligible for investing with the PMS.
Why do banks, mutual funds and other portfolio managers offer these services? Because PMS and AIF industry charge higher expense ratios from clients.
In case of mutual funds in India, an investor can invest with a minimum as low as Rs 500 and the expense ratio can be less than 1 per cent (in case of direct plans).
There
is no lock-in period for the PMS money invested by clients. However,
after the partial withdrawal of money, the value of a client's
investment shall not fall below the minimum threshold for PMS (currently Rs 50
lakh).
Portfolio
managers typically impose an exit load if an investor wants to withdraw
money in a PMS strategy.
c) Capital gains tax
PMS
firms incur capital gains taxes while trading securities on
behalf of clients; unlike mutual funds which do not need to pay any
capital gains taxes for securities sold by them while managing assets.
For instance, a PMS entity buys a listed stock for Rs 20 lakh and sells the stock for Rs 30 lakh in less than a year of investment. As the listed stock is sold within one year of investment, the PMS has to pay short-term capital gains tax of 15 per cent.
The short-term capital gain here is Rs 10 lakh (= 30 - 20) and the tax thereon is Rs 1.5 lakh (= 0.15 x Rs 10 lakh).
The capital gain after tax is Rs 8.5 lakh (= 10 - 1.5). The after-tax gain / profit is 42.5 per cent of investment.
Whereas, a mutual fund need not pay any capital gains tax, whether, short- or long-term. So, in the same example as above, the net gain in a mutual fund would be Rs 10 lakh or 50 per cent of investment (versus 42.5 per cent in a PMS).
Whereas, a mutual fund need not pay any capital gains tax, whether, short- or long-term. So, in the same example as above, the net gain in a mutual fund would be Rs 10 lakh or 50 per cent of investment (versus 42.5 per cent in a PMS).
One clarification here is: If an investor sells units of a mutual fund, the investor incurs capital gains taxes, either short- or long-term depending on the holding period of the investment.
d) Fund manager exits
Some mutual fund managers are leaving mutual funds and starting their own PMS firms. For example, Prashant Jain left HDFC MF and started his own PMS in 2022. Others include Pankaj Tibrewal (earlier with Kotak MF), Jinesh Gopani (formerly with Axis MF) and Sunil Singhania (left Nippon India MF).
Star mutual fund managers starting their own PMS firms is good for the growth of PMS, but this could act as a negative for mutual fund industry in the short and medium term before mutual funds could recoup their mojo.
e) Transparency
As far as fee structure and investment strategy are concerned, there is more transparency in mutual funds compared to PMS. The mutual fund industry has evolved over the past three decades since the establishment of SEBI. Its practices are well honed and fully appreciated by the investors.
Compared to mutual fund industry, PMS industry is in its infancy. It has a lot of catching up to do in terms of transparency.
4. Growth in Assets of PMS Industry
Table delineates the growth in assets of PMS from Mar2015 to now:
The assets under management (AUM) of PMS industry rose from Rs 7 lakh crore (Mar2015) to Rs 32.48 lakh crore (Feb2024), as per SEBI data -- this includes EPFO (Employees Provident Fund Organisation) and pension funds.
Excluding EPFO / PFs also, the growth of PMS industry is huge in the past decade.
In the same period, the number of clients increased from 47,000 to 1,54,000; while number of portfolio managers doubled from 200 to almost 400.
5. Reasons for the growth
A lot of wealth creation has happened in India since the 1991 economic reforms unleashed by Government of India. The wealth creation has contributed to the growth of not only PMS industry, but also mutual funds, insurance companies and related segments of the financial industry.
The
personal wealth of promoters of Indian listed companies has grown
enormously in the past 10 years, along with the rise of Indian stock
market.
Many entrepreneurs have created their own family offices and PMS industry caters to their investment management needs also.
In recent years, start-up ecosystem created wealth for young entrepreneurs. They are trying out new investment avenues for their surplus money. India has seen multi-fold growth in number of Unicorns.
A Unicorn is a privately held startup company with a market value of at least USD 1 billion.
The number of HNIs and UHNIs has been growing in India. The tremendous growth of information technology sector has created wealth for the entrepreneurs and top professionals.
According to Bloomberg, India has the fourth highest number of ultra high net worth individuals (UNHIs) numbering 5,480 in India. UNHIs are individuals with investable assets of at least USD 50 million.
HNIs are high net worth individuals with minimum investable assets of USD 1 million.
PMS money managers have more flexibility in terms of asset classes and investment approaches when compared to mutual fund industry. Investors now are willing to try the new investment strategies of the PMS industry away from the traditional mutual funds.
According to Forbes, India's top cricketer Virat Kohli earns more than USD 20 million (almost Rs 170 crore) annually from endorsements, like, MRF, Puma and Audi.
Where does this money go? Kohli might invest some of his earnings in his own business ventures and invest some part of the money in financial assets, like a fund offered by a PMS.
These are the kinds of opportunities available to PMS firms to pitch their products or funds.
And then there is the marketing effort on the part of the PMS industry. India's stock market capitalisation has swelled by five times from Rs 80 lakh crore in May2014 to Rs 400 lakh crore now (as per data from BSE Limited).
The growth of Indian stock market has provided the opportunity for PMS managers to improve their return performance in recent years leading to better marketing of their products and offerings to wealthy clients.
6. Should one go for PMS?
Are the returns of equity PMS plans better than equity mutual funds?
As mid- and small-cap stocks have done well in the past three years, small boutique PMS firms with smaller asset sizes are delivering superior returns compared to returns of big PMS firms and equity mutual funds.
These small-sized PMS firms with higher flexibility tend to invest in mid- and small-cap stocks and in some cases they will not shy away from investing in micro-cap stocks -- thus generating decent returns in recent years.
If you compare the returns across different timelines and time periods, the performance record will definitely be different, because at different times different investment industries do well.
Some entities, like, PMS Bazaar and PMS AIF World provide data on performance of PMS industry. Prospective investors can check the return data on their websites.
Different products and / or investment approaches suit different investors. There is no one-size-fits-all solution in investing as is the case with most aspects of life.
Investing is all about one's personal situation, return expectations, risk tolerance, investment goals and asset allocation. Investors have plenty of choices for their investment needs.
PMS products might be suitable only to a select few / wealthy investors who know the intricacies of PMS industry and who appreciate the risks involved in investing them.
A majority of investor community is better off with simple products. The more complex a financial product, the higher the chances of losing money.
7. Summary
Despite the growth of mutual fund and PMS industries in recent years, Indians have not shed their affinity toward real estate, land assets and gold.
According to a report from Aditya Birla Sun Life Mutual Fund, two-thirds of household assets in India are with real estate / property (50.8 per cent) and gold (15.5 per cent) combined as of Mar2023. But the share of household assets in equities is a mere 4.7 per cent.
In the US, equities constitute 35 per cent of household assets (2020 figure).
India is still a nation of physical assets despite the increased pace of financialisation in India. Indians relish 'touch and feel' of their physical assets. Occasionally, we come across pictures of politicians and the wealthy enjoying a siesta on their cash pile.
Of course, this is seen as an opportunity by the financial industry and they are trying hard to convince investors to move some of their physical assets to financial assets -- a salivating prospect for the financial services industry in the next decade.
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References and additional data:
Urban landscape - Hong Kong residential high rises
SEBI (Portfolio Managers) Regulations, 2020
SEBI archive on PMS
SEBI data Feb2024
Individual PMS monthly report with assets
SEBI FAQs 08Oct2020 on PMS (steps for TWRR calculation)
SEBI circular monthly report to APMI
Tweet 16Jan2024 on UHNIs
APMI or Association of Portfolio Managers in India
PMS AIF World compare PMS performance
Twitter AIF & PMS Experts
Twitter PMS Bazaar
Twitter Neil Borate
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Disclosure: I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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