Choosing a PMS manager? Don’t miss these key metrics

The credibility of a PMS heavily depends on the fund manager’s experience and track record..

By Ankit Patel

As high networth individuals increasingly look beyond traditional mutual funds, Portfolio Management Services (PMS) have emerged as a compelling avenue for bespoke wealth creation. However, choosing the right PMS product requires more than chasing returns. It calls for a disciplined evaluation across multiple dimensions.

PMS offer investors a valuable layer of diversification, not merely through different stock selections but through a fundamentally distinct investment approach.

Comparison with mutual funds

Mutual funds typically follow a top-down, benchmark-driven approach, building portfolios that closely mirror the composition of broad market indices. While fund managers may make adjustments to sector weights based on their market outlook, increasing exposure to sectors they are optimistic about and reducing those they are cautious on, the overall structure remains largely aligned with the benchmark. This results in broad-based diversification, with portfolios often spread across dozens of stocks, helping to mitigate individual stock risk. Mutual funds also benefit from greater liquidity, lower minimum investment requirements, and strict regulatory oversight, making them accessible and relatively safer for a wide range of investors.

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PMS, by contrast, adopts a bottom-up, high-conviction approach, allowing managers the freedom to construct portfolios around their strongest investment ideas. Unlike mutual funds, PMS strategies are not bound by benchmark weights or sectoral limits. Fund managers typically hold 15 to 25 thoroughly researched businesses, selected for their fundamentals, growth potential, and competitive edge. This focused strategy enables PMS portfolios to pursue absolute returns, regardless of broader market direction. By backing specific opportunities rather than mirroring the market, PMS can uncover alpha in areas often overlooked by benchmark-driven funds, making it an ideal vehicle for investors seeking differentiated, insight-led exposure.

The credibility of a PMS heavily depends on the fund manager’s experience and track record. A seasoned manager who has navigated multiple market cycles brings valuable perspective, especially during volatile phases. Look for a demonstrable history of consistent performance, preferably across different strategies or firms. Longevity, decision-making under pressure, and past success in executing a defined investment approach all strengthen the case for trusting the manager with long-term capital.

What PMS investors should look for

One of the most important factors when selecting a PMS is its investment philosophy—the core approach to identifying and allocating capital. Unlike mutual funds, PMS strategies are built on focused convictions such as value, growth, or thematic investing. A strong philosophy should be rooted in time-tested principles, not short-term trends, and should demonstrate resilience. It’s essential that the philosophy aligns with your own risk appetite and the prevailing market environment. A credible PMS manager sticks to a consistent approach but adapts within that framework as cycles evolve balancing conviction with contextual awareness.

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The strength of a PMS lies in the depth and discipline of its investment team and processes. An experienced fund manager, supported by sector-specialist analysts, ensures informed decision-making across industries. Top-tier PMS teams do not rely solely on published data, they engage in forensic analysis of financials, scrutinising cash flows and accounting quality. Importantly, they often meet company promoters and management to assess intent, governance, and long-term vision. This combination of structured research and on-ground diligence forms a robust investment process, enabling the PMS to make high-conviction bets based on insight, not assumption.

While not a predictor of future returns, past performance is a valuable lens to assess a PMS product’s consistency, strategy execution, and ability to navigate market cycles. Look beyond headline returns and evaluate how the portfolio performed during volatile or bearish phases, not just in bull markets. Focus on metrics like 5-year and 10-year CAGR, benchmark-relative returns, and risk-adjusted ratios such as Sharpe or Sortino. A quality PMS should show not just high returns, but stable performance with controlled drawdowns, indicating discipline in both opportunity capture and risk management.

High portfolio churn in a PMS can trigger frequent short-term capital gains, impacting post-tax returns. Unlike mutual funds, where taxation is handled at the fund level, PMS portfolios are held in the investor’s name, making each transaction a taxable event. It’s important to assess how actively the portfolio is managed and whether the strategy prioritises tax efficiency. Lower turnover, when backed by conviction, can lead to better compounding and reduced tax drag over time.

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Many PMS offerings impose an exit load if funds are withdrawn within a specified timeframe usually the first 1 to 3 years. This fee, often ranging from 1 percent to 3 percent, is meant to discourage short-term exits and align investor behaviour with the long-term nature of the strategy. It's important to evaluate the exit load structure alongside your investment horizon to avoid unnecessary cost implications.

Finally, understanding the full fee structure is critical when evaluating a PMS. Most products charge a fixed management fee (typically 1–2.5 percent annually) and a performance fee (usually 10–20 percent above a hurdle rate), ideally with a high-water mark to prevent double-charging. Investors should also watch for upfront or setup fees, which are deducted from the initial corpus and can impact net investment value. Additionally, review ancillary charges such as custodian fees, transaction costs, audit fees, and other administrative expenses. These often go unnoticed but can erode returns if not properly accounted for.

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The writer is partner at Arunasset Investment Services.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with financial advisor before taking any decisions.