The Evolution of PMS: How Modern Portfolio Management Has Change

Back in the day, you had to elbow your way through a crowded market, sorting through heaps of fruit to find the possible optimum pick. Today, you’re ordering those fruits with a swipe on your phone. That’s the journey of Portfolio Management Services (PMS) services in India – once a highbrow affair, now a more accessible and tech-savvy offering. 

What made this metamorphosis happen? In this article, we will discuss how PMS works, explore the factors driving its growth, and look at recent trends.

Understanding PMS: How are They Different from Mutual Funds?

Before we get into the nitty-gritty of PMS’s history and growth, let’s break down how it works. 

Assume you want to invest a large sum of capital. But there are so many possibilities available that you're not sure where to invest your money. You hire a portfolio manager to make these decisions for you. The expert then learns about your financial goals, risk-taking abilities and long-term objectives.

Based on the data you provide, the portfolio manager then creates a customised investment plan for you. Say if your risk appetite is greater, then they might suggest you shares of emerging companies with higher potential growth prospects. And if you're being cautious, they might allocate a larger portion of your portfolio to investments like blue-chip stocks or government bonds.

Unlike a mutual fund, where a crowd of investors pool their money to achieve a common goal, PMS offers a more tailored approach. Now, let’s take a look at the growth in assets under management (AUM) of these categories with the help of the below graph. 

Source: SEBI annual report dated Aug 9, 2024 

While both instruments have experienced growth in their AUM, PMS has a higher total AUM. The SEBI annual report 2023-24 also stated that:

“The increase in high net worth individuals (HNIs) and the growing demand for customised wealth management services outside the traditional mutual fund space have contributed to this gradual rise in PMS. This indicates a diversification and sophistication of investments preferences among investors, driving the growth of the overall asset management landscape in India.”

Humble Beginnings 

In the early 1990s, when India started opening up its economy, PMS was a fresh concept. PMS was like a bespoke suit that only a few wealthy folks could afford it. 

But this period had its issues: The PMS industry was shaky on accountability and transparency. Was it just because PMS was new, or were regulations still catching up?

Let’s understand what changed this outlook.

Regulatory Evolution

The regulatory overhaul by The Securities and Exchange Board of India (SEBI) has greatly contributed to the transformation of PMS.

In the 1990s and early 2000s, SEBI started regulating by implementing new regulations to safeguard investors and regulate the financial markets. Strict rules were in place regarding disclosures, fee structures, and reporting, helping to establish trust and increase the appeal of PMS.

Remember the financial market boom witnessed in the mid-2000s? That surge, coupled with these regulatory changes, was a game-changer for the PMS industry. The market’s bull run brought in more participants and ramped up interest. Check out the chart below to see just how much the participation skyrocketed during this period. 
 

Source: SEBI Annual Report 2009-10 dated Aug 26, 2010

The net inflow in mutual funds increased by over 4 times from 1999 to 2010. There were also indirect regulatory implications that helped boost the industry.

“The sharp increase in AUM of PMS after the strict cap on mutual fund commissions in April 2015 was an expression of fee disparity. Most advisors increased their allocation to PMS from 0-10% to 30-40% in the last three-four years,” – Feroze Azeez, LiveMint article dated 3rd August 2019 (Source: LiveMint)

*The mentioned individual has no direct or indirect connection with Dezerv.

Technological Advancements 

Ever heard of someone finding their old physical shares tucked away in a cupboard worth a fortune? We’ve come a long way from those days of handling physical certificates to managing everything online.

Fintech has accelerated the process, making it not just faster but way easier to grasp. 

Think of it this way – managing investments back then was like driving without GPS – slow and guesswork. Now, thanks to digital platforms, it’s like having a top-notch navigation system guiding your every turn. 

The portfolio managers of today are able to work with real-time data as well as other high-end facilities to make faster and more informed decisions; it is able to steer your investment (car) on the possible right path to your financial destination faster and with fewer jerks.

And it's not just the firms that gain. With tech, investors can now check their portfolio anytime, anywhere – like having a personal dashboard right in their pocket. 

Recent Trends 

Recently, the PMS industry has been experiencing significant success. The AUM has surpassed ₹3 lakh crore, as illustrated in the chart below. The increasing wealth of Indians improved financial literacy, and intensified competition have contributed to this expansion.

Household savings rose from ₹32.9 lakh crores in 2018 to ₹46.2 lakh crores in 2022. Thus, we can assume that people are sitting on more cash ready to invest.

 The graph depicts the trend of Number of Clients and AUM for PMS

Source: SEBI Annual Report 2023-24, dated Aug 9, 2024

The graph above shows that the COVID-19 hit made a noticeable drop in market participation, with fewer clients joining the fray the following year. However, this did not affect the asset under management (AUM), which continued to rise.

Even though client numbers haven’t yet bounced back to 2019-20 levels, PMS AUM has hit an all-time high. It’s not just limited to the stats, though. 

The PMS scene has gotten a major makeover, with more portfolio managers and firms entering the market. Client numbers jumped from about 58,000 in Jan 2014 to 1,50,000 in Jan 2024, while AUM skyrocketed from ₹7.3 lakh crore to ₹32.1 lakh crore in the same period. This growing competition can lead to better services and innovative strategies for investors.

Road Ahead

The future of PMS in India is brimming with possibilities. With tech innovations and tighter regulations on the horizon, PMS is set to become more transparent and efficient. The PMS and AIF industry is projected to grow at a 26% compound annual growth rate (CAGR), reaching ₹43 lakh crore by 2028, according to PMS Bazaar Study. 

Ready to explore PMS opportunities? Learn more about our Portfolio Management Services to see how we can help you achieve your financial goals.

Frequently Asked Questions

How good is an investment in a PMS?

PMS is a viable option depending on your financial objectives, risk tolerance, and investment horizon. It can benefit customers looking for personalised portfolios and potential returns.

What is the minimum investment for PMS?

In India, the minimum investment required is ₹50 lakh. This threshold was set by the Securities and Exchange Board of India (SEBI) to ensure that PMS remains targeted towards high net-worth individuals (HNIs) who seek personalised and professionally managed investment portfolios.

Is PMS similar to a Mutual Fund?

PMS and mutual funds both involve professional management but differ significantly. PMS offers customised portfolios catering to individual needs while requiring a higher minimum investment. Mutual funds pool money from various investors for a single portfolio, offering a standardised approach with lower entry barriers. PMS suits high net-worth individuals; mutual funds cater to broader audiences.

What are the returns generated by PMS?

PMS Bazaar conducted an analysis of 335 PMS investment strategies and 388 regular mutual funds over 1, 3, 5, and 10-year periods. The study revealed that PMS investment strategies outperformed their benchmarks by an impressive average of 70% across all timeframes and categories, while mutual funds achieved a 48% performance.