What are the different types of PMS?

Types of Portfolio Management Services

Portfolio Management Services (PMS) are investment solutions offered by SEBI-registered portfolio managers. 

Portfolio managers invest your money in stocks, bonds, mutual funds etc. so you can create wealth and achieve financial goals.

PMS is regarded as ‘investment management for the wealthy’ as the minimum investment amount required is Rs. 50 Lakh.

Everything you need to know about Portfolio Management Services (PMS) ->

In this article, we will discuss the various types of portfolio management services and understand the differences between them.

Types of Portfolio Management Services

PMS can be categorised into various types based on two factors:

  1. Investment control: Investment control refers to who is in charge of decision making and execution in PMS client portfolios.
  2. Asset class of investments: Asset class is a grouping of investment options that show similar characteristics. For example: stocks, bonds, cash etc. are each considered to be separate asset classes.

Types of PMS based on investment control

The SEBI has defined 3 types of PMS based on investment control:

  1. Discretionary Portfolio Management Services (DPMS)
  2. Non-discretionary Portfolio Management Services (NDPMS)
  3. Advisory Portfolio Management Services

It is up to the portfolio manager what type of ‘investment control’ they want to allow in their investment strategies. While some may choose to offer their investment strategy in all 3 types of PMS, some may offer it in only one of the 3 types.

This means if Dezerv PMS has an investment strategy called ‘Alpha Focus Strategy,’ it is up to Dezerv to offer it in one of DPMS, NDPMS or advisory types or just one or two of them.

Let’s discuss each of them in detail.

Discretionary PMS

Discretionary PMS (DPMS) is independently managed by the portfolio manager as per the agreement between the portfolio manager and you.

Simply put: All you need to do is sign an agreement with the PMS provider and add money to your demat account. The portfolio manager takes care of everything else - when to invest, where to invest, when to withdraw etc.

While it may sound a bit scary to just let someone manage your money without your involvement, it is a regular industry practice. 

You and your money are protected because in the demat account all securities (stocks, bonds etc.) are owned by you. Further, the portfolio managers are strictly regulated by the SEBI (Securities and Exchange Board of India) Portfolio Managers Regulations, 2020.

The advantage of discretionary PMS is that the portfolio manager can execute investment decisions in real-time. 

This means that if the portfolio manager makes an investment recommendation today and thinks it should be executed immediately, they can do it without waiting for your approval. If the recommendation is right, it will benefit you.

In contrast, had the portfolio manager had to wait for your approval, it may have taken him longer to execute the investment recommendation immediately. The delay caused may result in lower or no benefit.

Non-discretionary PMS

Non-discretionary PMS (NDPMS) is managed by both the portfolio manager and the investor. More specifically, the portfolio manager makes investment recommendations with their thesis and the investor can approve or reject the recommendation.

NDPMS gives you autonomy on what investment recommendations are executed in your portfolio.

However, as we discussed, this may work against you some times. There may be a delay between the investment recommendation and your approval which may result in you not realizing the full/any benefit of the recommendation.

The advantage of NDPMS is that you know what’s happening in your portfolio at all times. You review and approve/reject investment recommendations which keeps you in the loop always.

This also means that NDPMS is not for everyone. Only sophisticated investors who can thoroughly understand the investment recommendations should opt for NDPMS.

Advisory PMS

Advisory PMS gives you even more control than NDPMS.

In advisory PMS, the portfolio manager only makes investment recommendations and nothing else. The rest of the investment process is the client’s burden: order execution, account maintenance, capital gain statement generation etc.

Advisory PMS is for investors who have the time and knowledge to manage their own money but would like some professional assurance/assistance.

Types of PMS based on asset class of investments

Portfolio Management Services can have 4 types based on the asset class(es) they take exposure to.

  1. Equity PMS
  2. Debt PMS
  3. Hybrid PMS
  4. Multi-asset PMS

Let’s discuss each in detail.

Note: These types are not defined by the SEBI (Securities and Exchange Board of India). It is just an attempt to simplify the types of PMS based on the ‘asset class’ factor.

Equity PMS

Equity PMS invest mainly in equity securities like listed and unlisted shares and equity mutual funds.

Among the 4 types of PMS based on asset classes, equity PMS is the riskiest.

Debt PMS

Debt PMS invest mainly in fixed income securities like bonds, debt mutual funds etc.

Among the 4 types of PMS based on asset classes, debt PMS is the least risky.

Hybrid PMS

Hybrid PMS invest in equity as well as fixed income securities to create diversified portfolios.

The risk level of hybrid PMS strategies depends on the asset allocation and asset allocation rebalancing approach (if any) that the PMS follows.

Multi-asset PMS

Multi-asset PMS invest in gold, REITs, InvIT etc. to create portfolios that are diversified beyond the usual equity and debt.

It is difficult to determine the risk level of a multi-asset PMS as it may vary wildly depending on the asset allocation and investment strategy.

FAQs about Types of PMS

What is the difference between discretionary (DPMS) and non-discretionary (NDPMS) PMS?

In DPMS, the portfolio manager can manage client portfolios independently without requiring any intervention from the client. In NDPMS, the portfolio manager has to seek approval from the client before executing the investment recommendations. Learn more about discretionary vs non-discretionary.

What are the instruments PMS invests in?

PMS can invest in a variety of investment instruments to create client portfolios. List equity, unlisted equity, mutual funds, and corporate bonds are some of the most common ones.

Who can invest in PMS in India?

Since a minimum ticket size of Rs. 50 lakh is required for PMS, only investors who have Rs. 50 lakh investible surplus can consider and invest in PMS.