DT Personal Finance: Should you go for PMS just because you have Rs 50 lakh to invest?

CHENNAI: In India, the PMS or Portfolio Management Service, requires investors to invest a minimum of Rs 50 lakh. The rationale is that those who have a comparatively large amount available for investment, will have a better understanding about the risks in such products. But should you opt for a PMS just because you have money to spare?

Many small investors think of PMS as a special, and exotic investment option available only to the ‘rich’. But while it can be tempting, the fact is that most PMS schemes are high-risk-highly-return products. And given their nature, they may not suitable for everyone. So even if you have Rs 50 lakh to spare, that doesn’t mean you should go ahead and invest in a PMS.

I don’t mean to give the message the PMS is a bad product. All I am saying is that it is not suitable for everyone. Those who get commissions from pushing (selling) PMS will not tell you this. There have been several cases of PMS being mis-sold to unsuspecting investors who had no idea about the riskiness of such products.

Portfolio Management Services (PMS) can sometimes make a lot of money because they take big risks, but they can also lose a lot of money. Many investors are not ready for the times when things go badly.

Also, PMS charges/fee structure are quite costly and exorbitant in many case. So even though they would try to woo investors using glossy presentations and bold interviews, many don’t even beat the plain old index funds! Your actual portfolio return outcome will depend on how much money you put in and at what point of PMS’s investment cycle is the money deployed.

So, who should invest in PMS? Of course, only those who have the capacity to put in at least Rs 50 lakh are the target population for this product.

But even from the said section, in my view, very few people are suited for this. So, unless you have a few crores to invest in equities (as an asset class), better not get into PMS. And even if you go ahead, it is suggested to limit your exposure to a small percentage of the overall equity allocation. So if you have a portfolio of Rs 2-3 crore, then it’s best to limit your exposure to PMS schemes to a maximum of 25-35% of the equity part of your portfolio.

The remaining investors’ investment requirements are best served via equity funds. That too investing in a few schemes from the categories like largecap index funds, flexicap funds, midcap funds, smallcap funds, etc. is more than enough.

So don’t fall for the sale pitch of PMS sellers. Always invest in products/schemes which are suitable for you and are in alignment with your risk appetite. And even if you do invest in PMS schemes, pick those who have a proven track record and have seen at least a complete market cycle.