Portfolio Management Services for NRIs

With the long-term benefits that equity investments offer and the outlook for Indian economic growth looking positive, equity investments of NRI (Non-Resident Indians) have taken a steep climb in recent years. As a consequence, many brokerages, investment advisory firms, wealth management firms and banks have introduced new services and products to cater to NRIs who desire to invest in Indian equity markets.

The notable among the services introduced is the Portfolio Management Services (PMS). PMS Account is basically an investment portfolio with varied asset categories like Stocks, Debt, Fixed Income etc., which is managed by a professional money manager. The service can be tailor-made to suit an investor’s objectives and personal preferences. In a PMS, the portfolio manager assigned to manage an investor’s portfolio should be licensed and registered at Stock Exchange Board of India (SEBI). SEBI regulates and monitors all the registered portfolio managers in India through periodical reports filed by them.

How can NRIs invest through PMS?

The minimum investment limit to avail Portfolio Management Services for both NRIs and Residents is 2,500,000 INR. This can be done either by paying through existing funds or through the transfer of existing investment portfolio to the service provider. An NRI investing in PMS, is required to sign a PMS agreement with the provider, sign a Power of Attorney and also open a PIS demat account for PMS purpose only. The documentation, though, seems tedious, is a one-time process and handled majorly by the PMS provider. All NRI investments in PMS should be done through Rupee accounts only.

Before taking up the task of investment and portfolio management of a customer, the PMS provider has to enter into an agreement with the client, clearly defining the terms of the agreement, mutual rights, liabilities and obligations of managing the investment portfolio of the client.

Types of PMS

PMS is classified broadly into two types:

  1. Discretionary PMS – In this type, the portfolio manager independently manages the funds of the investors according to their investment objectives. The investors need not intervene in the investment strategies of the fund manager.
  2. Non-Discretionary PMS – In this type, the portfolio manager manages the solely on the directions of the investor. The manager can only suggest investment ideas, but needs the consent of the client to execute the same.

How PMS works?

On choosing a PMS for investment management, a portfolio manager is assigned who would build a custom-made portfolio to suit the personal preferences and investment objectives of the investor. A portfolio manager may manage hundreds of portfolios of other investors, but each portfolio will be unique to every individual investor. The fund manager will build a suitable portfolio based on risk profile and the defined investment objectives of the investor.

Typically, every PMS Scheme has a model portfolio for varied risks and income profiles of customers. The portfolio manager would make/recommend investments based on model portfolio, but the portfolio of every investor with same model portfolio will differ because of:

  1. Different time of entry into the market.
  2. Additional investments/withdrawals done based on the needs of an individual.
  3. Funds invested.

Thus, the valuation for each PMS portfolio differs. The investor will get a valuation of the portfolio at intervals agreed during PMS sign-off. By SEBI regulations, a portfolio manager is bound to furnish the below reports to the client at the agreed intervals but not less than six months: –

  1. Composition and Value of the portfolio – This should include details of the number of securities held, description and value of each and cash balance, as on date.
  2. All transactions made during the period of report – This should include details of all purchases and sales made, and the specific dates of such transactions.
  3. Interest received – This should include details of interest and dividends received from stocks and debentures, bonus shares issued and rights shares issued during that period.
  4. Expenses – This should include expenses incurred in the transactions done and in managing the portfolio.
  5. Risk Foreseen – This should include details of any risks, foreseen by the portfolio manager in relation to the investments managed.

As NRI investors in PMS, it is important to be exceptionally aware that PMS is only a scheme to manage investments professionally and it does not offer any guaranteed return. As per SEBI regulations, any PMS provider should not offer or promise either guaranteed or indicative returns. Also, a PMS provider cannot impose a lock-in period for any investor. However, an exit fee for early exit can be charged as defined in the agreement. There is no regulation in India on the constituents of a portfolio for a customer profile and it is the sole discretion of the portfolio manager to decide the percentage allocation to different asset classes for a Discretionary PMS.

When availing a PMS scheme from a firm, a portfolio manager shall be assigned at the discretion of the firm and the performance indicator of the manager should be disclosed. For a discretionary PMS, the performance of the fund manager is calculated by considering the weighted average of each individual category of investments for the immediately preceding three years.

On expiry of the PMS contract, NRI investors of PMS can repatriate the net portfolio value after tax, if the investments were done through a Non-Resident External (NRE) account. If the NRI investment in PMS was done from Non-Resident Ordinary (NRO) account, it cannot be repatriated.

Charges for NRI Portfolio Management Services

Charges for PMS may be fixed or performance-linked or a combination of both. The fee model should be clearly communicated to the investor and should be mentioned in details in the agreement between the PMS provider and the customer.

Fixed Charges – Fixed Charges are calculated as a percentage of the average value of the total portfolio over a billing period.

Performance-linked Charges/Profit Sharing Charges – These charges are calculated as a percentage of profit or a fixed amount charged on the excess profit/return generated over the specified return.

The percentage or fixed fees charged varies for each provider and as NRIs, it is important to understand the fee structure applicable for NRIs before proceeding to sign up for any PMS Scheme.

Apart the fees chargeable by the PMS provider, NRI investors in PMS have to pay PIS account opening charges, demat account maintenance charges and brokerage charges for all the transactions made.

Taxation

There are no tax benefits available for PMS subscribers either for NRIs or as Resident Indians. The tax on the investment portfolio held in a PMS is treated at an individual investor level. Depending on the holding tenure of each investment, Long Term Capital Gains (LTCG) Tax or Short Term Capital Gains (STCG) Tax might be applicable. Equities are exempt from LTCG and are taxed at a concessional rate for STCG. Debt instruments are taxed at the marginal rate for STCG and at 20% for LTCG for NRIs. All dividends received from any investment are tax-free.

For NRI investors in PMS services, taxes applicable, are deducted at source (TDS) by the brokerage firm and net profits are disbursed. However, if the net profit/income in India for an NRI is below 250,000 INR, a tax return can be filed to claim a refund of the taxes deducted.

Advantages and Disadvantages of PMS for NRIs

Advantages: Though coming at a higher cost, Portfolio Management Schemes offer professional money management with research backed investment strategies. With a dedicated person having access to fundamental and technical aspects of every investment, the possibility of getting better returns from a portfolio, while conforming to an individual’s risk profile, is beneficial.

Disadvantages: The cost of a PMS is the main drawback of subscribing to it. Apart from the mandatory fund management charges, an investor has to pay account maintenance charges, brokerage charges and taxes, if applicable. Also, the returns on a PMS depends on the capability of the portfolio manager. If the portfolio manager makes frequent churns in the portfolio, then the profits made may be nullified with applicable brokerage charges, short term capital gain taxes etc.