What is Portfolio Management Services

Portfolio Management Service or PMS, is a professional service in which certified and experienced portfolio managers, supported by a research team, manage stocks portfolios on behalf of customers rather than the clients managing their own. PMS is a highly customized solution for high net-worth individuals (HNIs), it offers greater flexibility with an investor’s money and higher returns too. As Mutual fund is a Pool vehicle for investment, here in PMS, every investor needs to open a separate demat account and need to register power of atony with PMS Provider.

Type of PMS

There are two types of PMS services in Markert one is Discretionary and another is Non Discretionary PMS. Both have their own style of investments.

Discretionary PMS: In Discretionary Portfolio Management Services portfolio manager has complete control over the portfolio and can adopt any strategy to achieve investment objectives.

Investment Decisions are entirely at the portfolio manager’s discretion, and the clients don’t have much of a say in investment decisions. The Portfolio Manager never discusses stocks with clients before buying. This PMS is beneficial for clients that don’t have very much time for tracking individual equity.

Non-Discretionary PMS: In Non-Discretionary Portfolio Management Services, the portfolio manager gives investment ideas and Investor has to decide whether to take up these investment ideas or not.

In Non-Discretionary Portfolio Management Services, the fund manager suggests investment strategies and works according to the direction given by the client. Here complete control of Buying and selling of stock is with investors only. Non Discretionary investors have to have adequate knowledge of the equity market & also have enough time for this.

Benefit of PMS

Professional Management: PMS Services are managed by professional fund managers who have expertise in analysing markets, selecting securities, and managing portfolios. These managers have a backup of the research team and make investment decisions on behalf of investors, aiming to achieve the fund's investment objectives. These fund managers are highly qualified and experienced.

Transparent: In PMS every investor have their separate demat account, those are provide access to various reports to client and carry a high level of transparency.

Active Monitoring and Rebalancing: Portfolio managers actively monitor investments and make adjustments based on changing market conditions, economic outlook, and investment objectives. They rebalance portfolios periodically to maintain alignment with the investment strategy and risk tolerance.

Convenience: PMS Platform is very convenient to clients who want to take equity exposure and feel the stocks holding his own. It provides very convenient professional management.

Risk Management: Portfolio managers employ risk management techniques to mitigate downside risk and preserve capital. It has adequate diversification between sectors and stocks.

Taxation of PMS: In a PMS, investments are held directly in the investor’s name in demat account (and not via a trust like in a MF or AIF), the tax liability for the PMS investor is the same as the investor directly buying or selling shares/securities in his own name.

PMS Manager provides audited reports to clients at every financial year for their calculation ease.

Generally, Equity taxations are implemented on PMS, which are as below-

• Equity Capital Gains: 20% (STCG if holding period is less than 1 year) / 12.5% (LTCG if holding period is greater than 1 year with Rs. 1.25 lakh exemption)
• Non-equity Capital Gains: Added to income
• Equity Dividend Income: Added to income
• Interest Income: Added to income

Type of AIF

AIF are divided into three categories:

Category I AIF: AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified come under this category of AIF.

Category II AIF : AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations comes under this category. Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc come under category II AIF.

Category III AIF : AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed securities or derivatives comes under this category. Various types of funds such as hedge funds, PIPE Funds, Open or Closed ended Equity Funds etc. are coming in category III AIF.

Minimum Amount of Investment: Minimum investment amount for AIF is One Crore, which can be invested in either lump-sum or in some tranches depending upon the Funds mandate.

Venture Capital : VC firms raise money from limited partners (LPs) to invest in promising startups or even larger venture funds. Venture capital (VC) is generally used to support startups and other businesses with the potential for substantial and rapid growth For example, when investing in a startup, VC funding is provided in exchange for equity in the company, and it isn’t expected to be paid back on a planned schedule in the conventional sense like a bank loan. VCs typically take a longer-term view and invest with the hope they will see outsized returns should the company be acquired or go public. VCs usually take only a minority stake — 50% or less — when investing in companies, also known as portfolio companies, because they become part of the firm’s portfolio of investments.

Angel Funds: Angel fund is a money pool created by high-net-worth individuals or companies (generally called angel investors), for investing in business start-ups. Angel Funds are a subcategory of venture capital funds with a special focus on startups, whereas venture capitalists generally invest at a later stage of the development of the company.

SME Funds: SME (small and medium enterprise) funds as their name suggests invest in listed/unlisted micro, small and medium enterprises. These companies tend to meet their debt capital requirements through NBFCs. However, there exists a vacuum when it comes to equity funding for these companies. Typically, equity funding goes to start-ups or established listed and unlisted companies. SME funds help bridge this gap by providing equity financing to these companies.

Social Venture Capital/Funds: Social venture Funds (SVC) is a type of impact investing that seeks to generate both financial return and social impact. SVC investors provide risk capital and support to social enterprises businesses that aim to solve social or environmental problems in exchange for equity or a portion of the enterprises profits. SVC has been growing in popularity in recent years as more and more impact investors look to back businesses that are having a positive social or environmental impact. While SVC still represents a small fraction of the overall impact investing market, it is one of the fastest-growing segments.

Taxation on AIF

Taxation of AIF’s are based on 2 factors

• AIF Classification: As mention above AIF are classified into 3 categories Category I, Category II and Category III
• Fund Legal Structure: SEBI regulations permit an AIF to be set up in the form of a trust, a company, a limited liability partnership, or a body corporate.

Taxation of Cat 1 & 2 AIF’s (Non-trust structures)

Cat 1 & Cat 2 AIF’s are considered as pass-through vehicles for a taxation perspective. Any capital gains from the AIF are taxed directly in the hands of the investor.

However, if the AIF income includes business income, this business income is taxed in the hands of the investor. The tax applicable depends on the legal form of the AIF – 30% for LLPs and 25% for Pvt Ltd companies.

Taxation of Cat 3 AIF’s (Non-trust structures)

Cat-3 AIF’s are NOT pass-through vehicles, and Cat 3 AIF’s are taxed at the AIF level itself. The taxation rate depends on the type of income:

Business Income / Non-equity ST Capital Gains / Dividend Income. / LT Non-Equity Capital Gains:Tax slab based on structure

20% (STCG if holding period is less than 1 year) / 12.5% (LTCG if holding period is greater than 1 year with Rs. 1.25 lakh exemption)

Taxation of AIF’s set up as Trusts

The taxation of AIF’s set up as a trust, depends on 2 factors: (a) whether the AIF earns business income (b) whether the trust is Determinate or Indeterminate

• Income includes Business/Profession Income: Taxed as Maximum Marginal Rate
• Indeterminate Trust (beneficiaries not defined at time of set-up): Taxed as Maximum Marginal Rate
• Determinate Trust (beneficiaries taxed at time of setup): Fund pays tax at rate applicable for each beneficiary on his/her share of income

How to Choose a PMS or AIF fund manager

Experience and Expertise:

• Proven Track Record: Look for fund managers with a history of delivering consistent returns.
• Experienced Team: Ensure the fund manager has a team of experienced and qualified investment professionals.
• Strong Research Capabilities: The fund managers should have robust research capabilities to identify investment opportunities.

Investment Philosophy:

• Alignment with Your Goals: PMS’ or AIF’s investment philosophy should align with your financial objectives and risk tolerance along with investment horizon.
• Clear Investment Strategy: Ensure the Fund Manager has a well-defined investment strategy and a clear process for making investment objectives.
• Risk Management: The Fund Manager should have a robust risk management framework in place to mitigate risks.
• Taxation: Taxation is a crucial part of investment & should be considered before selecting a PMS or AIF.

Fees and Charges:

• Transparent Fee Structure: The Fund Manager should have a transparent fee structure with no hidden charges.
• Competitive Fees: Compare fees charged by different Fund Managers to ensure you're getting value for your money.
• Performance-Based Fees: Some Fund Managers may charge performance-based fees, which can be beneficial if the manager delivers strong returns.

Track Record and Expertise

• Past Performance: Evaluate the fund manager's historical performance, including returns, risk-adjusted returns, and consistency.
• Risk Management: Assess the fund manager's ability to manage risk and protect your investments during market downturns.
• Experienced Team: Ensure the provider has a team of experienced and qualified investment professionals.
• Strong Research Capabilities: The provider should have robust research capabilities to identify investment opportunities.

Additional Considerations:

• Adherence to Regulations: Ensure the fund manager is registered with the Securities and Exchange Board of India (SEBI) and complies with all relevant regulations.
• Client Support: The fund manager should offer excellent customer service and support.
• Transparency and Communication: The fund manager should maintain open and transparent communication with clients.
• Customization: The fund manager should be able to tailor investment strategies to your specific needs and preferences.

By carefully considering these factors, you can select a PMS or AIF fund manager that can help you achieve your financial goals.

Choosing the Right PMS or AIF: A Comprehensive Guide

When selecting a PMS or AIF, consider these key factors:

Investment Objectives and Risk Tolerance

• Align Your Goals: Ensure the fund manager's investment philosophy aligns with your specific financial goals, whether it's capital appreciation, income generation, or a balanced approach.
• Assess Your Risk Appetite: Understand your comfort level with market volatility and choose a fund manager that offers investment strategies that match your risk tolerance.
• Long-Term Perspective: PMS and AIFs are designed for long-term investments. Consider your financial goals and select a fund manager that can help you achieve them over the long term.

Fees and Charges

• Transparent Fees: Opt for providers with transparent fee structures and competitive pricing.
• Value for Money: Ensure that the fees charged are justified by the quality of service and the potential returns.

Key Considerations

• Minimum Investment: PMS and AIFs often have higher minimum investment requirements compared to traditional mutual funds.
• Lock-in Period: Some PMS and AIFs may have lock-in periods, restricting early redemption.
• Higher Risk: Alternative investments, such as those offered by PMS and AIFs, may carry higher risk than traditional investments.

Remember: Investing in PMS or AIF may fetch higher growth on capital but may involve higher volatility. Past performance is not indicative of future results. It's essential to do your own research or consult with a financial advisor before making any investment decisions.