How Can Portfolio Management Services Improve Returns?

It’s often said that the best part of investing with Portfolio Management Services (PMS) is its tailored strategy and the expertise of the professional, but its less talked about secret side is just how expensive the investment solution is. Experienced investors don’t realize the nuances that lurk in very glossy promises of superior returns and diversification. Now let’s take a look at the lesser-spoken aspects of PMS and how to deal with them.

1. The Cost Conundrum: Fees That Bite Into Returns

More specifically, Portfolio Management Services fees are quite steep (compared with mutual funds) and are typically 2–2.5% of assets under management, with additional performance-related charges. These costs represent personalized service, but they can have a negative net impact, particularly in the downturns of the market. An example would be a ₹5 crore portfolio whose fees will be ₹10–12.5 lakh a year and could outweigh the benefits if returns stagnate. When passive index funds exist, investors should consider whether the alpha produced is worth these costs.

2. Manager Dependency: The Double-Edged Sword of Expertise

PMS success hinges heavily on the portfolio manager’s skill. A star manager’s exit can destabilize performance, as seen in cases where funds faltered post-leadership changes. The PMS differs from the mutual funds that rely on institutional processes as the PMS is based on individual thinking. Investors should look for long-term exposure, the ability to navigate the 2008, or 2020 downturn, and continuity planning at the firm.

3. Liquidity Illusions: The Myth of “Always Accessible” Funds

While PMS portfolios include liquid assets like equities, certain strategies—such as concentrated stock picks or alternative investments—may face redemption bottlenecks. For example, portfolios heavy on small-cap stocks or private equity could struggle to offload positions swiftly during market stress, locking in losses. Investors with short-term liquidity needs should demand clarity on exit timelines and asset composition.

4. Regulatory Grey Zones: Compliance Isn’t Always a Safeguard

Though SEBI-regulated, PMS providers operate with greater flexibility than mutual funds. For instance, discretionary PMS allows managers to execute trades without client approval, raising accountability questions. Additionally, while SEBI mandates a ₹50 lakh minimum investment, this high threshold excludes smaller investors, concentrating risk among HNIs. Vigilance in reviewing contractual terms and alignment with fiduciary standards is critical.

5. Tax Traps: Efficiency Isn’t Guaranteed

While tax optimization is a PMS selling point, frequent portfolio churn (common in active strategies) can trigger short-term capital gains taxed at 15–30%, negating returns. Passive PMS strategies may fare better, but investors must ensure managers employ tax-loss harvesting or hold periods strategically. Transparent reporting on post-tax returns is often overlooked in performance metrics.

6. The Diversification Mirage: When More Isn’t Merrier

PMS portfolios often tout diversification across asset classes, but over-diversification can dilute returns. For example, a portfolio spanning 30+ stocks may mirror broad indices, rendering active management redundant. Conversely, hyper-focused strategies (e.g., sector-specific PMS) amplify unsystematic risks. Investors should seek clarity on how diversification aligns with their risk profile rather than accepting it as a blanket benefit.

Practical Tips for Savvy PMS Investors

1. Interrogate Fee Structures: Demand a breakdown of management fees, performance charges, and hidden costs like brokerage. Compare these against historical net returns.
2. Stress-Test Strategies: Ask how the portfolio performed during past crises (e.g., COVID-19, rate hikes) and what safeguards exist for future volatility.
3. Audit Transparency: Ensure real-time access to holdings and transactions. Avoid providers that delay reporting or obscure portfolio construction
4. Align with Life Stages: A retiree’s capital preservation needs differ from an entrepreneur’s growth focus. Ensure the PMS adapts to evolving goals.

Conclusion: Beyond the Hype, Toward Informed Decisions

Portfolio Management Services are not a one-size-fits-all solution. While they offer customization and expertise, the hidden challenges—costs, liquidity risks, and manager dependency—demand rigorous due diligence. As anyone familiar with the process can attest, PMS presents a wealth tool that is harder to peel away from the layers of marketing gloss than make use of, but upon peeling back enough, investors can turn what was previously just an external party into a coverage or nod to compliance, into an actual strategic partner based on transparency and adaptability. So in an era when financial sophistication plays a critical part in built perceptions of ‘luxury’ as opposed to actual financial power, it could make the difference.

For those considering PMS, the mantra is simple: Look beyond the returns. Scrutinize the fine print, question the assumptions, and ensure every rupee paid translates into measurable value.