Portfolio Management Services (PMS) in India, designed for High Net Worth Individuals (HNIs) seeking personalized investment strategies, are facing increasing scrutiny regarding their ability to deliver value commensurate with their fees. While the PMS industry has witnessed substantial growth, fueled by a rising number of affluent investors, a closer look reveals that many premium PMS offerings struggle to outperform benchmark indices and even simpler investment options like mutual funds and fixed deposits. As of February 2025, the PMS industry in India manages more than ₹30 lakh crore across over 1.9 lakh clients.
One of the primary reasons for this underperformance lies in the high fee structures associated with PMS. These fees typically include fixed management fees, performance-based fees, and other charges like entry or exit loads, and custodian fees. Management fees can range from 0.25% to 2.5% of the portfolio value annually, irrespective of performance. Performance fees, levied as a percentage of profits above a certain threshold, further add to the cost. Hybrid models combine both fixed and performance-based fees. For instance, an investor with a ₹50 lakh portfolio could pay ₹50,000 annually as a fixed fee, plus a percentage of returns exceeding a pre-defined hurdle rate. These fees can significantly eat into the returns, reducing the net profit for investors.
In contrast, mutual funds typically have lower expense ratios, ranging from 0.5% to 2.5%, and do not always include performance-based fees. The higher cost structure of PMS necessitates significantly higher returns to justify the investment, a hurdle that many PMS providers fail to clear consistently. According to SEBI regulations, the minimum investment for PMS is ₹50 lakhs, targeting high net worth investors capable of managing associated risks.
Another challenge is the dependence on the portfolio manager's skill and expertise. While PMS offers the advantage of active portfolio management, the performance heavily relies on the manager's ability to make timely and effective investment decisions. Market volatility, concentration risk (due to lower diversification), and liquidity risk (especially with investments in small-cap stocks) can further impact portfolio performance. Managerial errors and unforeseen economic events can also lead to underperformance.
Moreover, the lack of standardization in reporting and benchmarking PMS performance makes it difficult for investors to compare and evaluate different PMS schemes. The formula for setting up hurdle rate is not consistent, creating difficulty in fairly judging performance. Some PMS funds charge incentive fees for returns above 7-8-9%, which is easily achieved by index funds with lower fees.
To address these concerns, investors need to conduct thorough due diligence before investing in PMS. This includes assessing their risk profile, investment horizon, and return expectations, researching the background, track record, and reputation of the portfolio manager and the PMS provider, understanding the investment philosophy, strategy, and risk management processes of the PMS scheme, and comparing different PMS schemes across various parameters. SEBI also requires PMS providers to clearly define performance benchmarks and fee structures.
Despite the challenges, PMS can still be a valuable tool for customized wealth management if it aligns with an investor's objectives and risk appetite. PMS offers personalized investment strategies tailored to individual goals and preferences, diversification across various asset classes, and tax efficiency by considering tax implications during investment decisions. The key is to carefully evaluate the costs, risks, and potential benefits before making a decision and choose a PMS provider with a proven track record of delivering consistent, benchmark-beating returns.
