The Hindu Business Line : Portfolio management service — This can pay off for the well-off

YOU earn money in bagfuls, but don't have the time or inclination to manage it. If this description fits you, do consider entrusting your money to a professional portfolio management service (PMS). In return for a fee, portfolio managers offer to craft a basket of stocks, bonds or even mutual funds that would fit your personal investment goals and risk preferences.

Though a few portfolio managers offer standardised packages for a sum as small as Rs 5-10 lakh, it may take a minimum investment size of Rs 25-50 lakh to fetch you a customised portfolio. Apart from cash, you can also hand over an existing portfolio of stocks, bonds or mutual funds to a PMS that could be revamped to suit your profile.

Why not mutual funds?

But why should you opt for PMS instead of a mutual fund? Here are a few aspects on which portfolio managers say they score over the standardised products offered by mutual funds:

Asset allocation: You may know what stocks, equity funds or bonds you would like to own, but do you know how much of your savings you should allocate to each of these? The decision on asset allocation will be crucial in determining investment returns over the long term. With PMS, an asset allocation plan is tailor-made for you, after a detailed check on your investment goals, savings pattern and appetite for risk.

Timing: Have you ever kicked yourself for switching your entire portfolio into equities just before they tanked? If you have, you probably need help with regard to timing of investments. Once you hire a portfolio manager, you can expect assistance on when you should be investing more money into equities and when you should be bailing out. A portfolio manager may also switch a portion of your portfolio into cash, if he perceives a big risk to stock prices. The focus is on preserving value.

Flexibility: You are bullish on FMCG stocks, but find that equity funds have marginal exposures to the sector. In a PMS, you can expect the portfolio manager to accommodate your sector preferences when he invests. But don't expect to completely dictate what stocks or sectors your portfolio manager will buy for you, as he will be the best judge of that.

Also, portfolio managers do not have to stick to any rigid rules on what proportion of your money will be invested in each sector or stock. They can also use liberal doses of cash or derivative instruments to pep up your returns. Mutual fund managers have their hands tied on these aspects by SEBI regulations.

What to expect from PMS

Okay, you have fallen for the sales pitch and entrusted your money to a PMS. What can you now expect from this service?

More handholding from your portfolio manager than you have been accustomed to from your mutual fund. You can expect to have a personal relationship manager through whom you can interact with the fund manager at any time of your choice. You can also expect frequent (maybe monthly) interaction with the portfolio manager to discuss any concerns that you might have. Expect to be consulted on any major changes in asset allocation or in the investment strategy relating to your portfolio. All administrative matters, including operating a bank account and dealing with settlement and depository transactions, will be handled by the PMS.

If you are the type who likes to watch over your money like a baby, the disclosures offered by a PMS may be just right for you. On handing over your money, you will receive a user-ID and password from the PMS, which will grant you online access to your portfolio details. You can use these to check back on your portfolio as often as you like.

Keeping track of capital gains (and losses) for the taxman can be a depressing chore, when you have furiously churned your investments through the year. Opting for PMS will free you of this chore, as a detailed statement of the transactions on your portfolio for tax purposes comes as a part of the package.

What you pay

Most portfolio managers allow you to choose between a fixed and a performance-linked management fee. If you opt for the fixed fee, you may pay between 2-2.5 per cent of portfolio value; this is usually calculated on a weighted average basis. The structure for the performance-linked fee differs across players; usually, this includes a flat fee of 0.5-1.5 per cent. The portfolio manager also gets to share a percentage of your profit — usually 15-20 per cent — earned over and above a threshold level, which may range between 8 per cent and 15 per cent. Apart from management fees, separate charges will be levied towards brokerage, custodial services and towards meeting tax payments.

There are wide variations in fee structure between players and across products. For instance, Birla Sun Life charges only a performance-linked fee for its portfolio services. Way2Wealth has a differential fee structure for its debt and equity dominated portfolios.

When you opt for a performance-based fee, the profits are reckoned on the basis of "high watermarking". That is, you pay the fee only on the positive returns on your portfolio. For instance, if you invest Rs 100 in a PMS and its value appreciates to Rs 150 at the end of the year, you pay a fee on the profit of Rs 50. Subsequently, a fee will be levied only on gains over and above the Rs 150 mark. If the value of your portfolio slumps to Rs 70, and climbs back to Rs 110, the Rs 40 you earn will not be reckoned as profit. You will again be charged a fee only if the value of your portfolio recovers to over Rs 150, the previous "high watermark."

Who should hire a portfolio manager

Anybody with a nest egg, which meets the minimum investment requirement, can consider using a PMS. However, a PMS may only add significant value in the following cases:

Equity bias: Portfolio management services may be ideal for a person who seeks a substantial investment in the stock markets. An equity portfolio also offers greater scope for a manager to add value than does a debt portfolio. Several of the established players in the PMS business focus on equity investments, though some also offer hybrid products.

Large surplus to invest: The minimum portfolio size that portfolio managers accept for a customised portfolio ranges from Rs 25 lakh to Rs 5 crore. So consider a PMS only if you have a substantial surplus to invest in stocks. If you don't, evaluate if you can use the services of a financial planner or an advisor, instead of a PMS.

If you are willing to handle the paperwork associated with investing, you can get a financial planner or advisor to construct an asset allocation plan and guide you on the choice of investments for a one-time fee of Rs 5,000-15,000.

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