Evolution of PMS allocation in India

Indian business groups have been riding on the fast-paced growth of the Indian economy over the last decade and a half. Although some sectors have faced challenges due to technological disruptions and other global and local factors, the overall business economy has maintained strong growth momentum. This growth has enabled business families and groups to generate significant profits, which they are now looking to deploy either within their own enterprises or in other avenues to secure the future and mitigate risks. One such avenue is investing surplus cash in various investment options to let it grow independently and create wealth for the next generation.

High net-worth individuals (HNIs) and families have seen multiple options emerge for parking their surplus money over the last decade. With real estate losing its charm over the years, alternative investment funds (AIFs) have opened up opportunities in private markets, while the maturity of portfolio management services (PMS) has provided options with a tilt towards public markets.

Types of PMS

Essentially, PMS can be of three types:

1. Discretionary: The portfolio manager has full control over decision-making and execution, including money from EPFO and PFs.
2. Non-Discretionary: The decision is still made by the fund manager, but the investor has a handle on the decisions.
3. Advisory PMS: The fund manager’s role is limited to providing advisory services, and the investor decides whether to execute the buy or sell orders.

PMS Troika: Who Takes the Final Call?

EPFO/PFs dominate the money flowing into discretionary PMS. Over time, the total AUM under discretionary PMS has risen ten-fold, partly driven by a two-fold increase in the number of clients. We looked at data spanning more than a decade for the other two streams to analyze the behavior of HNIs concerning their PMS investments.

History of PMS Investment in India

Looking at the universe of non-discretionary PMS clients, Indian HNIs have shown cyclic behavior. The number of non-discretionary clients for PMS providers more than doubled between 2011 and 2013, only to decline over the next two years. However, PMS providers experienced a five-year up-cycle, with the number of non-discretionary clients tripling to an all-time high of 9,488 in January 2020. This peak occurred just weeks before the great crash in the public market induced by the onset of the pandemic. The number of non-discretionary clients more than halved by mid-2023 but saw a rebound until February this year, followed by another correction, according to SEBI data.

Examining the assets under management (AUM) under non-discretionary PMS, barring some temporary shocks in early 2023, the growth has been secular and one-way. The AUM under non-discretionary PMS has jumped over 40 times between December 2010 and April 2024. During the same period, the number of non-discretionary PMS clients grew by just 50%. This reflects in the average amount under non-discretionary clients, which has increased from under Rs 2 crore to over Rs 50 crore over the last 14 years.

There is also a sharp divergence in advisory PMS services. The number of clients in this segment rose by 50% between 2011 and 2014 but has been on a free fall since. Barring a short period where it showed some promise, with the number of clients doubling on a low base between 2017 and 2020, the trendline shows it has lost its appeal and has remained almost flat with fewer than 2,000 clients over the last few years.

AUM under PMS

The total assets under management under advisory PMS have held their ground. Although the growth has not matched that of non-discretionary AUM, it has tripled in quantum since 2010. The average amount per client for advisory PMS, which was around Rs 10 crore, grew tenfold between 2013 and 2017, only to correct and more than halve right before the pandemic. However, the average amount has seen significant growth over the last three years, rising to over Rs 200 crore in March 2024.

Meanwhile, the total AUM under non-discretionary and advisory PMS, which had a factor of difference of around 12 (with advisory PMS being much larger) in 2010, has seen convergence. During 2022-23, non-discretionary PMS assets momentarily overtook those of advisory PMS. Since then, the two have been neck and neck.

The data shows how HNIs have been bullish on non-discretionary PMS as a way to park their money, preferring to have some control over their investments rather than relying solely on external advisory services. While HNIs have also increased the quantum of money parked with discretionary PMS managers, the rise is not comparable to non-discretionary money, reflecting the wealthy’s preference to have some say in final buy or sell decisions. However, due to the mandatory nature of EPFO and PFs, the actual quantum of discretionary assets has also grown over tenfold in the last 14 years.

Source for data: SEBI