1. Most of these portfolios are concentrated in nature with the fund manager holding a maximum of 15 to 20 stocks. The idea is to allocate capital to a few high-conviction ideas in order to generate above average returns. This gives you an opportunity to generate alpha for your portfolio. However, at the same time, it is important to understand that the lack of diversification can also lead to concentration risk. Since the investments are spread across only select stocks, adverse developments in even a couple of stocks can have a sharp negative skew on the portfolio.
2. The fees charged by PMS providers is generally not fixed and needs to be negotiated. Most PMS providers will offer a combination of fixed management fees and profit sharing over a threshold rate. The normal range of the fixed management fees is 2 to 2.5 per cent. An investor may also need to pay an exit load if he/she redeems the PMS investment before the minimum investment period defined while availing the service. Further, the investor might also incur brokerage charges each time a security is bought or sold.
3. Taxation – every time a security is sold, the resultant capital gains will be subject to tax.
PMS can definitely give HNI investors an opportunity to generate alpha. However, just as ‘all mutual fund investments are subject to market risks’, even PMS investments are subject to risks. It is important to be aware of these risks before investing in PMS.