As a business if PMS has to sound reasonably profitable the minimum size of the portfolio should be at least Rs. 10 Million (Rupees one crore). Why am I saying this?

Well if I have to meet a client 2-3 times a year, take his phone calls 12 times a year and get my staff to attend to him 10-12 times a year, I need to make at least Rs. 50,000 out of him. On a Rs. 10 million portfolio assuming I charge him Rs. 1 lakhs as a fee + say Rs. 50,000 as administration charges + some brokerage (depends on the portfolio construction) – anything more will make it less attractive than a mutual fund.

Secondly it would be great if the PMS provider is not an equity broker himself. Somehow if you give your money to a guy who makes money because of the velocity, there is a chance that he will create unnecessary volatility.

Unfortunately in India I do not know of any PMS manager who is on a pure revenue sharing model – sharing the profit or loss completely. So you have brokers who are sure to earn a lot of money in the brokerage, demat charges etc. If you make money on the portfolio, well they still get a share of the bite. For example buying ITC in your portfolio gives no ‘trail commission’ to the ‘PMS manager’ but buying a FMCG fund will help increase the income from trail.

Conflict of interest between advising and selling is so high that a very few people will be able to overcome that even while handling a PMS.

As a client you should have maturity in knowing what you want. If you want Madoff kind of linear no variability return, go to a bank FD. If you meet a fund manager who has never had a bad year, RUN, with all your money. Strategies fail, mistakes happen, and market gives variability in returns. If you want true to label fund manager (only 2 fund houses qualify – Hdfc and Templeton) make sure you understand labels. If you do not understand labels ask your fund manager about how he selects stocks – there are brilliant fund managers in India who will do it. Unfortunately I do not wish to name friends / fund managers by name.

If your fund manager cannot explain his strategy stay away. There is one fund house which has some well performing schemes but he walks too close to risk. I choose to stay away from that fund house except for an intellectual interaction (one of their recent research reports was recomended  by another manager from another fund house, so I have read it, it is great -in an industry where I have some investments, but as usual no names please).

I know of at least one not very honest PMS providing broker who uses the shares of PMS clients to meet settlement requirements of other clients. So shares move out of ‘your PMS’ demat account for a day or two. Not many end customers know the risk of such a practice. Well if you have gone to a rat, The plague will hit you, sorry.

Big brand is perhaps not a great advantage for fund management quality, but atleast such practices will not happen. However if you know how to do a due diligence on a fund manager a small PMS provider can be of great value. However, if you delegate due diligence go for a big brand – at least rats cannot gnaw at your portfolio.