How to Choose a PMS: A 10-Point Due Diligence Checklist

1. Start with fit, not returns

Before looking at any manager, be clear about the job the PMS has to do in your portfolio — growth, diversification away from what you already own, access to a particular market segment — and how much of your wealth it should represent. An excellent small-cap strategy is the wrong choice if your portfolio is already heavy in small caps.

2. Understand the investment philosophy

Can the manager explain, in plain language, how they pick stocks, when they sell and what kind of market will hurt the strategy? Consistency between what a manager says and what the portfolio actually holds is one of the best signs of discipline.

3. Judge the track record properly

• Use time-weighted returns (TWRR), which SEBI requires portfolio managers to report, and compare them with the benchmark APMI assigns to the strategy’s category.
• Look at rolling returns over three and five years, rather than point-to-point figures that depend on the start date.
• Check performance in different market phases — a strong bull-market record says little about behaviour in a correction.
• Confirm how long the current team has run the strategy; a record built by a manager who has since left isn’t the same thing.

4. Examine risk and drawdowns

Ask for the strategy’s maximum drawdown — its largest peak-to-trough fall — and how long it took to recover. Then ask yourself honestly whether you would have stayed invested through it. Concentration, meaning the number of stocks, the weight of the top ten and the size of sector bets, tells you how far the portfolio can stray from the market.

5. Look inside the portfolio

• The number of holdings and the weight of the largest positions.
• The market-cap mix, and whether it matches the stated strategy.
• Overlap with what you already own, directly or through funds.
• Portfolio turnover, which drives trading costs and short-term capital gains tax.

6. Model the fees

Compare fee structures across realistic return scenarios, including GST, operating expenses, brokerage and exit loads. See PMS and AIF fees explained for worked examples.

7. Estimate the tax drag

Because PMS gains are taxed in your hands on every sale, a high-turnover strategy can deliver noticeably less after tax than its headline return suggests. Ask for historical turnover, and read how PMS and AIFs are taxed.

8. Assess the team and the firm

• The depth of the investment team, and how much rests on one individual.
• The firm’s assets under management, and whether the strategy can absorb more money without changing character — especially in small caps.
• Whether the managers invest their own money in the strategy.

9. Check operations and reporting

• Who the custodian and fund accountant are.
• The quality and frequency of reporting — holdings, transactions, performance, fees and capital gains statements.
• How easily you can reach the team with questions.

10. Verify registrations and watch for red flags

• Confirm the portfolio manager’s registration on the SEBI website, and that anyone distributing the product is registered with APMI.
• Read the Disclosure Document, including its section on penalties, pending litigation and regulatory action.
• Red flags: assured or guaranteed returns; requests to pay money into any account other than your own PMS bank account; pressure to decide quickly; reluctance to set out fees in writing.

Our investor awareness page explains how to verify intermediaries and raise a grievance.

Questions to ask any portfolio manager

1. What is this strategy designed to do, and when should I expect it to underperform?
2. What were the worst drawdown and the longest recovery period?
3. What is the typical annual portfolio turnover?
4. What would I pay in total at 0%, 10% and 25% returns, including GST and expenses?
5. Who manages the strategy day to day, and for how long have they done so?
6. How much of your own money is invested in this strategy?

Considering a Category III fund instead? The same discipline applies — see hedge funds in India. To see how a shortlist is built for you, read how to invest in a PMS.

Frequently asked questions