Why PMS products aren’t suitable for most retail investors

I was recently talking to an acquaintance about his investments. He told me that he invested Rs 50 lakh in a well-known PMS (portfolio management service). I asked about his other investments and he said he had about Rs 8 lakh in equity funds and Rs 10 lakh in bank FDs.

So, out of Rs 70 lakh portfolio, Rs 50 lakh was in a PMS!

I asked him why he invested a major part of his portfolio in a high-risk product such as a PMS?

His reply was that since he had Rs 50 lakh to spare, he decided to invest it!

I think that’s a horrible mistake to make.

PMS is not for everyone who can spare Rs 50 lakh. So don’t think about investing in it just because you can.

Not suitable for all investors

You may perceive it to be a sophisticated and exotic investment option available to the select ‘rich’ and get an ego boost about it. But these are extremely high-risk, highly-concentrated products focused on return maximization. These are not suitable for everyone (with Rs 50 lakh).

Please don’t get me wrong. PMS isn’t exactly a bad product. All I am saying is it’s unsuitable for most people. PMS sellers won’t tell you this because their commissions depend on your buying their product. And beware, there is a lot of mis-selling in the PMS space as well.

One more thing. You and I know that we need to invest in equities to generate inflation-beating returns. But there is a risk spectrum in equity investing as well. And PMS is on the side of very high risk. So just because you have money to invest in equities, it doesn’t mean that you go straight to the highest-risk bracket. Right? It’s the same as having a car with a top speed 220kmph. You don’t straight away push the pedal and go for the top speed. It’s risky and can cause harm.

PMS returns & fees

Given its concentrated portfolio and risk-reward approach, at times a PMS will give great returns. But at other times, it will crash and burn. And this is the volatility that most investors are ill-prepared to handle.

And don’t fall for the high-return narratives of many PMS schemes in India (a few of which are pretty shady in their approaches). Many don’t even beat index funds! The glossy presentations and bold interviews (and tweets) that you see by PMS people shouldn’t be blindly trusted. The claimed PMS returns and your returns can differ vastly. Your portfolio outcome and experience will depend on how much money you put in and at what point of the PMS’ investment cycle the fund was deployed.

PMS charges also are something to be a bit cautious about. The fixed fee plus performance fee structure makes PMS expensive and eats into your portfolio returns all the time. And higher the fee expenses, lower your in-hand returns.

When should one invest in PMS?

There is no formula to decide. But my view is that unless you have a few crores of rupees to invest in equities, don’t even think about PMS. And even when you do invest in it, make sure the exposure is limited to a small percentage of the overall equity portfolio.

So if you have a portfolio of Rs 7.5 crore with the allocation as: Rs 5 Crore in equity and Rs 2.5 crore in debt, it’s best to limit your PMS exposure to 10-20 percent of the equity part of your portfolio, i.e., Rs 50 lakh to Rs 1 crore.

The regulator had recently increased the minimum investment size from Rs 25 lakh to Rs 50 lakh. I think that was a good move even though it was an unpopular one.

PMS is not at all suitable for small investors, even if they can arrange Rs 50 lakh somehow to invest in it. Most investors are best served in equity via SIP in equity funds. That too via a limited number of categories such as index, flexi-cap funds, mid-cap and aggressive hybrid funds.

SEBI has recently announced the identification of a new class of Accredited Investors who will be considered as informed investors on the basis of their financial capacity. These people would be a suitable client category for PMS providers. Also, HNIs having large portfolios and looking for exposure to themes/ideas that aren’t available via mutual funds can definitely consider PMS though.

So all said and done, unless you an HNI or UHNI, don’t bother about PMS investing.

Try to keep things simple. Stick to a combination of equity funds, debt funds, PFs, fixed deposits, a few direct stocks (if you are sure), gold bonds and ETFs. That’s it. Nothing fancy.

Disclosure: I neither sell PMS nor mutual funds. I make financial plans and investment strategies for my clients (regular and HNIs) and operate as a no commission, fee-only SEBI Investment Advisor (RIA).