How NRI can invest in Portfolio Management Services?

NRIs are approaching to invest in Indian Capital Market and one of the other way, they hire the professional to manage their funds. Most probably NRIs chose to hire experts for managing their fund due to their less involvement in Indian Capital market. Actively managed options are Mutual Fund and Portfolio Management Services, while Bank FDs do not require an active management. Even Real Estate requires maintenance and taking care of the properties. Considering the return and reward ratio across asset classes, traditional investment options delivers limited return after certain level. Actively managed Investments has the possibility to give relatively higher return as compared to traditional options. So if NRIs who prefer actively managed investment avenues by advisor, PMS will give appropriate diversification to overall portfolio.

Under Portfolio Management Service (PMS), investment related decision will be taken by fund manager on behalf of Non Resident and there will be transparency in all actions taken by fund manager. For these services, NRIs will be charged fees based on Asset Under Management (AUM) which is generally termed as ‘Management Fee’, and the method to calculate it can differ from manger to manger. There are Pros and Cons of every investment, for PMS you will find same as below.

Pros Cons
Actively Managing Funds by Professionals Relatively taking high risk compare to Traditional Investment Options.
Transparent working & SEBI regulated
No headache for Tax Calculation at the End of the Year Choices of PMS Funds are very limited.
One of Investment option for Long Term Horizon
Suitable to HNI and UHNI Investors It is not Fixed return instrument.
Relatively Higher returns than Traditional Investment Options

 

What are the Pre-requisites of PMS Investment?

  1. NRO/ NRE Bank Account
  2. PIS Account
  3. Trading and Demat Account
  4. PMS agreement

PMS provider will charge you fees based on their plans and policy. Usually it is being charged as,

  1. Fixed Management Fees:

It is simply a fees charged at fixed percentage of your fund valuation.  The base to charge the fees is an average of your asset evaluated on quarterly or fixed interval basis. The resulting case would be, if the market goes down for certain period and your portfolio Average is lower at the point in time then you will have to pay less fees and vice versa.

For Example:

Mr. Pradeep Shinoy has invested Rs. 50 lakhs in PMS and his PMS provider has fees structure of 0.5% per quarter so he would be charged fees as below,

Quarter Average AUM Quarterly Fees
1 50,00,000 25,000
2 52,00,000 26,000
3 45,00,000 22,500
4 54,00,000 27,000
Total Fees in a Year 100,500

 

*Above example is hypothetical based on general tendency to charge fees in industry, please refer fees structure before investing.

  1. Profit Sharing Fees:

When the percentage return exceeds a pre-defined fixed limit (Watermark) in a single year than the sharing will be made with your PMS provider on that. The manger follows profit on the basis of high water mark principle over the life of the investment. In the succeeding years when the return crosses the predefined limit on higher side that will become your new Watermark return and onwards it will be your new limit for calculating sharing fees.

 

For Example:

Mr. Pradeep Shinoy has invested Rs. 50 lakhs in PMS and his PMS provider has fees structure of profit sharing of 15% above per year return of 10% so his fees will as below,

Year Year Return Yearly Sharing Fees
1 -8% NIL
2 11% 15% sharing for 1% (11-10=1%)additional return
3 10.5% NIL (As new Watermark will be 11%)
4 16% 15% sharing for 5% (16-11=5%) additional return
Total times Fees charged 2 times

 

This kind of PMS fees structure is very rare to see, it may be possible that as fixed fees are not charged so profit sharing ratio may be higher. Moreover, sharing will be counted at the end of the year only, as it is based on individual year returns which are different from CAGR since inception. Few calculation variations, you may find among different companies.

 

  1. Mix of Fixed and Profit Sharing Fees:

At certain level of per year return, PMS Company will charge fixed percentage fees which are usually lower that option 1 mentioned above. Additionally, return more than Watermark, will be same as option 2.

 

For Example:

Mr. Pradeep Shinoy has invested Rs. 50 lakh in PMS and his PMS provider has fees structure of 0.375% per quarter and profit sharing of 15% above per year return of 10% so his fees will as below,

 

Year Year Return Yearly Sharing Fees Yearly Fixed Fees
1 -8% NIL 50,000
2 11% 15% sharing for 1% (11-10=1%)additional return 50,000
3 10.5% NIL (As new Watermark will be 11%) 50,000
4 16% 15% sharing for 5% (16-11=5%) additional return 50,000
Total Fees Two times 2,00,000

*Assuming Fixed Management fees will be charged same based on Average AUM.

Usually, clients who enrolled prefer Fixed structure and every PMS provider has this structure as basic offering under PMS.  Even you can switch over different structure during time of your investment in which you are comfortable. Ultimately main focus is the return for which you have invested in Equity.

Which kind of Fund or Investment you can bring in while enrolling for PMS?

You can bring in investment amount in different forms like already invested equity portfolio. Fund manager then restructures it according to his way of managing. During this, your portfolio may go in to high churning once while new scrips are introduced based on research made by Fund manager and his study. Formats in which you can bring in funds are:

  1. Your Existing Full & Partial Equity Investment in Demat (with same or different brokerage)
  2. Your Existing Investment in Physical Certificate (Subject to Dematerialization)
  3. Fresh Fund & Liquidated Fund from other Investment Avenues

Concluding, Portfolio Management Service is investing in different investment avenues keeping in mind preferable time horizons, for example if investing in equity it should be at least 5-7 years and if debt, it should be 3-5 years or depends on average maturity of instruments included in the portfolio. Procedure, Fees and sources of Fund are one time crucial decisions, but at the end how much time you give to your investment counts.

 

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