A PMS return of 20% may look impressive at first glance. But is it actually a good result?
That depends on several things: what the benchmark returned, how much the portfolio fell during market corrections, how concentrated it was, how long the performance lasted and what the investor paid in fees.
This is why evaluating PMS returns requires more than looking at a single percentage.
If you are considering a Portfolio Management Service (PMS), you need to understand how the return was generated and whether the strategy delivered that return consistently without taking an unsuitable level of risk.
Two terms are particularly important here: TWRR and XIRR. TWRR helps assess the performance of the investment approach, while XIRR reflects the return experienced by an individual investor based on their actual cash flows.
Let's look at how PMS returns are calculated and, more importantly, how you should evaluate them before investing.
What Are PMS Returns?
PMS returns represent the performance of a portfolio or investment approach over a particular period.
One important difference between PMS and a mutual fund is that PMS investors directly own the securities in their demat accounts. Because money can be added or withdrawn at different points, two investors following the same PMS strategy may end up with different personal returns.
For example, imagine two investors enter the same PMS strategy.
Investor A invests before a market correction.
Investor B invests after the correction.
Both remain invested in the same strategy.
The strategy's performance may be the same for both, but their individual returns can be different because their money entered the portfolio at different times.
This is where the distinction between TWRR and XIRR becomes important.
How Are PMS Returns Calculated?
There are two return measures you should understand when looking at PMS performance:
- Time-Weighted Rate of Return (TWRR)
- Extended Internal Rate of Return (XIRR)
They measure performance from different perspectives.
What Is TWRR in PMS?
Time-Weighted Rate of Return (TWRR) is used to measure the performance of an Investment Approach while eliminating the effect of external cash flows such as additional investments and withdrawals. The investment period is divided into separate intervals whenever an external cash flow occurs, and the returns for these intervals are then calculated and compounded.
As per PMS performance-reporting requirements, the TWRR of the respective Investment Approach(es) and the trailing return of the benchmark(s) are required to be presented separately.
The key idea is simple: TWRR focuses on the performance of the Investment Approach without the influence of the timing of an individual investor's cash flows.
What Is XIRR in PMS?
XIRR (Extended Internal Rate of Return) takes the actual dates and amounts of an investor's cash flows into account.
As per PMS regulations, Portfolio Managers are required to present the XIRR for each Investment Approach (IA) in which the investor has invested when reporting performance to the investor. This is accompanied by the minimum, maximum and median XIRR returns generated across all investors in each Investment Approach in which the investor has invested.
XIRR is useful when an investor:
- Invests money at different times
- Makes additional contributions
- Withdraws part of the portfolio
- Has multiple cash flows during the investment period
Because XIRR considers the timing and amount of these cash flows, it reflects the return experienced by the individual investor.
TWRR vs XIRR
| Metric | TWRR | XIRR |
|---|---|---|
| Measures | Investment Approach performance | Individual investor return |
| Cash-flow timing | Eliminates its effect | Takes it into account |
| Best used for | Evaluating Investment Approach performance | Understanding personal returns |
| Investment timing | Does not affect the performance measurement | Can influence the investor's return |
So, if you want to understand how the PMS Investment Approach performed, TWRR is the relevant measure.
If you want to understand the return generated on your actual investments, XIRR reflects the timing and amount of your individual cash flows.
PMS Return Calculation Example
Let's make this more practical.
Suppose you invest ₹50 lakh in a PMS strategy.
After some time, your portfolio grows to ₹55 lakh. You then invest another ₹10 lakh. Later, the total portfolio value increases to ₹70 lakh.
Your personal return depends not only on the final ₹70 lakh value, but also on when the ₹10 lakh was added.
TWRR separates the performance periods around the cash flow and measures the performance of the investment approach.
XIRR considers:
- The initial ₹50 lakh investment
- The additional ₹10 lakh investment
- The dates on which those investments were made
- The eventual portfolio value
Therefore, the PMS strategy's TWRR and your personal XIRR can be different.
This distinction is particularly important when comparing your own portfolio statement with the performance reported for a PMS investment approach.
TWRR vs CAGR vs XIRR
These three terms are often confused, but they answer different questions.
| Metric | What It Tells You | Best Used For |
|---|---|---|
| TWRR | Performance of the investment approach | Evaluating PMS strategy performance |
| XIRR | Return based on actual cash flows and dates | Measuring an individual investor's return |
| CAGR | Annualised growth between starting and ending values | A single lump-sum investment over a period |
For PMS strategy comparison, TWRR is particularly important. For understanding your own investment experience, XIRR can provide a more relevant picture when there are multiple cash flows.
Gross PMS Returns vs Net PMS Returns
A return figure also needs context on fees and expenses.
Depending on the PMS agreement and service structure, costs may include:
- Management fees
- Performance-linked fees
- Brokerage and transaction costs
- Custody charges
- Other applicable expenses
Suppose one PMS strategy reports a higher gross return than another. That does not automatically mean the investor received a higher return after applicable costs.
Before comparing two PMS strategies, check whether the performance being shown is gross or net of applicable fees and expenses.
The more useful question is:
How much return did the investor actually receive after applicable costs?
How to Evaluate PMS Performance
A PMS should not be selected solely because it has the highest historical return.
Look at the return from several angles.
1. Check Performance Over Multiple Periods
Start with more than one time period.
Look at one-year performance, but don't stop there. Three-year, five-year and longer periods can provide more context when an adequate track record is available.
| Period | What It Can Tell You |
|---|---|
| 1 year | Recent performance and market conditions |
| 3 years | Consistency across different market environments |
| 5+ years | Longer-term behaviour of the investment approach |
A strategy can have an exceptional one-year return because of a favourable market environment. A longer track record gives you a better opportunity to see whether the investment process has remained consistent.
2. Compare PMS Returns With the Right Benchmark
A PMS Investment Approach is required to be evaluated against a benchmark prescribed for its respective Strategy.
As per the SEBI framework, Investment Approaches are classified under broad Strategies, and benchmarks are prescribed for each Strategy. These benchmarks are intended to reflect the core philosophy of the Strategy. The Portfolio Manager is required to select one benchmark from the benchmarks prescribed for that Strategy for each Investment Approach to enable investors to evaluate the relative performance of the Portfolio Manager.
Therefore, the benchmark for an Investment Approach is not simply selected from any index of the Portfolio Manager's preference. It must be selected from the benchmarks prescribed for the applicable Strategy.
When evaluating PMS performance, consider:
- What benchmark has been selected for the Investment Approach?
- Has the Investment Approach outperformed the selected benchmark over comparable periods?
- How did the Investment Approach and the benchmark perform during market corrections?
A benchmark serves as a reference point for evaluating relative performance; it is not a guaranteed return.
3. Look at Drawdowns, Not Just Returns
This is one of the most overlooked parts of PMS evaluation.
Suppose:
PMS A returns 18%
PMS B returns 16%
At first glance, PMS A looks better.
But what if PMS A experienced a 35% drawdown while PMS B experienced a 15% drawdown?
The two strategies have delivered very different experiences despite their relatively similar returns.
Look at:
- Maximum drawdown
- Duration of drawdowns
- Volatility
- Recovery time
- Downside relative to the benchmark
A higher return may come with substantially higher risk. Whether that trade-off is acceptable depends on the investor.
4. Study Performance Across Market Cycles
Bull markets can make many strategies look good. The more revealing question is often what happens when markets become difficult.
During rising markets, look at whether returns came from:
- Stock selection
- Sector allocation
- Market-cap exposure
- Overall market participation
- Portfolio construction
During corrections or falling markets, examine:
- How much the portfolio declined
- How it performed against the benchmark
- Which holdings contributed to the downside
- How quickly the portfolio recovered
The goal isn't to find a PMS that never falls. That isn't realistic for a market-linked investment.
The goal is to understand how the strategy behaves when market conditions change.
5. Understand Portfolio Construction
Two PMS strategies can invest in equities but behave very differently because their portfolios are constructed differently.
Check:
- Number of holdings
- Largest individual positions
- Sector concentration
- Market-cap exposure
- Diversification
- Characteristics of the underlying businesses
A concentrated portfolio can potentially participate strongly when its key holdings perform well, but the same concentration can also increase downside when those holdings decline.
PMS Returns vs Benchmark: What Should You Look For?
Imagine a PMS strategy delivers 15% while its relevant benchmark delivers 14% over the same period.
The PMS has outperformed by one percentage point.
But is that enough to conclude that it is a better strategy?
Not necessarily.
Look at:
- How long the outperformance has lasted
- Whether it occurred across different market phases
- The volatility experienced
- Maximum drawdown
- Portfolio concentration
- Differences between the strategy and benchmark
- Whether the investment philosophy remained consistent
A small amount of outperformance over a short period may tell you much less than consistent benchmark-relative performance over a longer period.
How to Compare Two PMS Strategies
Don't start by comparing the return percentages.
First check whether the two strategies are actually comparable.
| Factor | What to Check |
|---|---|
| Investment approach | Philosophy and investment objective |
| Asset allocation | Equity, debt, hybrid or multi-asset |
| Portfolio construction | Concentrated or diversified |
| Market-cap exposure | Large-cap, mid-cap, multi-cap, etc. |
| Returns | TWRR over comparable periods |
| Benchmark | Performance against the relevant benchmark |
| Risk | Volatility and drawdowns |
| Concentration | Stock and sector exposure |
| Costs | Fees and applicable expenses |
| Track record | Length and consistency |
| Investment team | Experience and continuity |
| Process | Research, valuation and portfolio construction |
Comparing a concentrated mid-cap PMS with a diversified multi-asset strategy purely on historical returns can lead to the wrong conclusion.
Their objectives and risk profiles may be completely different.
What Is a Good Return From PMS?
There isn't a single number that defines a good PMS return.
A 15% return can be attractive in one context and less impressive in another.
It depends on:
- The benchmark
- Investment horizon
- Market conditions
- Risk taken
- Drawdowns
- Portfolio construction
- Investment objective
- Applicable costs
Instead of asking:
“Which PMS has the highest return?”
A better question is:
“How was that return generated, what risk was taken to generate it, and does the strategy fit my investment objectives?”
Past performance should not be treated as a guarantee of future performance.
PMS Performance During Bull and Bear Markets
Looking at different market conditions can tell you more about a strategy than a single annual return.
During Bull Markets
Check whether the PMS participated meaningfully in market upside and understand what contributed to the performance.
During Market Corrections
Look at the size of the decline, the portfolio's concentration and the strategy's performance relative to its benchmark.
During Recovery Periods
Consider how the portfolio behaved after a correction and how long it took to recover.
This gives you a better picture of the strategy's upside participation and downside behaviour.
PMS Returns vs Mutual Funds: What's the Difference?
PMS and mutual funds are both professionally managed investment options, but they have important structural differences.
| Factor | PMS | Mutual Funds |
|---|---|---|
| Ownership | Investor directly owns securities | Investor owns fund units |
| Portfolio | Can offer greater customization | Generally follows the scheme structure |
| Management | Portfolio manager manages the client's portfolio | Fund manager manages the scheme |
| Individual cash flows | Can affect investor's XIRR | Can affect investor-level return |
| Customization | Generally greater scope | Generally standardized |
| Fees | Based on the PMS agreement and applicable charges | Fund expense structure applies |
| Minimum investment | Generally higher | Comparatively lower |
The right choice depends on factors such as investment objectives, capital, risk tolerance and the level of portfolio customization an investor wants.
Historical returns alone shouldn't determine the decision.
7 Things to Check Before Investing in a PMS
1. Investment Philosophy
Understand how the portfolio manager selects businesses, evaluates valuations and makes portfolio decisions.
2. Track Record
Look at performance across multiple periods rather than focusing on the latest return.
3. Benchmark
Know which benchmark is being used and why it is relevant to the strategy.
4. Risk and Drawdowns
Review maximum drawdown, volatility and periods of underperformance.
5. Portfolio Concentration
Understand exposure to individual stocks, sectors and market-cap segments.
6. Fees and Expenses
Know the complete fee structure and understand how costs affect your eventual return.
7. Investment Team and Process
Look at the experience and continuity of the team, as well as the research and portfolio-management process.
Common Mistakes When Evaluating PMS Returns
Looking Only at the Highest Return
The highest return isn't necessarily the best fit. Consider how much risk was taken to achieve it.
Comparing Different Strategies
A concentrated equity strategy and a diversified multi-asset strategy shouldn't be judged using the same return expectations.
Ignoring Drawdowns
A portfolio's decline during difficult markets can have a major impact on the investor experience.
Overlooking Fees
A gross return may not represent the return ultimately received after applicable expenses.
Focusing Only on One Year
One strong year doesn't establish a long-term investment track record.
Confusing TWRR and XIRR
TWRR and XIRR measure different things. Make sure you know which number you're looking at.
Assuming Past Performance Will Continue
A strong historical record is useful information, but it doesn't guarantee future outperformance.
A Practical PMS Returns Checklist
Before investing, ask yourself:
- What is the investment philosophy?
- What benchmark is being used?
- Is the benchmark appropriate?
- What is the TWRR over different periods?
- How did the strategy perform during market corrections?
- What was the maximum drawdown?
- How concentrated is the portfolio?
- What fees and expenses apply?
- How experienced is the investment team?
- How long has the current investment process been followed?
- What is the strategy's risk profile?
- How does my individual XIRR compare with the strategy's TWRR?
- Does the strategy actually fit my investment objectives?
Having answers to these questions can give you a much clearer picture than simply looking at a headline return.
How to Evaluate a PMS With Purnartha
Choosing a PMS shouldn't begin and end with its historical return.
At Purnartha, investors can evaluate a PMS offering by understanding its investment philosophy, portfolio construction approach, research process, risk considerations and performance history.
Before making an investment decision, investors should understand the strategy's objectives, associated risks, applicable costs and how the investment approach fits their individual requirements.
Explore Purnartha PMS to learn more about the investment approach and assess whether it aligns with your investment objectives.
Final Takeaway: Look Beyond PMS Returns
PMS returns are an important starting point, but the number itself doesn't tell the whole story.
A meaningful evaluation should bring together TWRR, individual XIRR, benchmark-relative performance, drawdowns, volatility, portfolio concentration, fees, investment philosophy and track record.
TWRR helps you understand how the investment approach performed. XIRR helps you understand the return generated by your own cash flows.
So before choosing a PMS, don't ask only:
“How much return did it generate?”
Ask:
“How was the return generated? What risk was taken? What did it cost? How did it perform against the right benchmark? And does the strategy fit my objectives?”
That broader view can help you make a more informed PMS investment decision.
PMS investments are subject to market risks. Past performance is not indicative of future results.
Frequently Asked Questions About PMS Returns
PMS investment-approach performance is measured using Time-Weighted Rate of Return (TWRR). For an individual investor, XIRR can reflect the timing and amount of personal cash flows.
There is no fixed percentage that represents a good PMS return. The return should be considered alongside the appropriate benchmark, risk, drawdowns, investment horizon, fees and investment objectives.
Compare the PMS strategy's TWRR with its tagged benchmark over the same period. Also consider differences in investment mandate, portfolio construction, risk and market conditions.
CAGR measures annualised growth between an initial and final value, generally assuming a single investment. XIRR considers multiple cash flows occurring on different dates, making it useful for measuring an investor's return when money is invested or withdrawn at different times.
Under SEBI PMS requirements, performance data reported by the Portfolio Manager is required to be reported net of all fees and expenses, including taxes.
A benchmark is a market index selected by the Portfolio Manager against which the performance of a PMS Investment Approach is evaluated and compared. The Portfolio Manager shall select one benchmark from the prescribed benchmarks to enable the investor to evaluate relative performance of the Portfolio Managers.
Track record helps show how an investment approach has performed over time and through different market conditions. It should be considered alongside the investment process, team, risk and portfolio construction.
No. Past returns should be considered alongside benchmark-relative performance, drawdowns, fees, concentration, investment philosophy and suitability for your objectives.
Compare strategies with similar mandates using consistent periods and metrics. Look at TWRR, benchmark-relative performance, drawdowns, volatility, fees, portfolio construction and investment process.
Consider market risk, concentration risk, sector and market-cap exposure, liquidity risk, volatility, drawdowns and the possibility of underperformance relative to the benchmark.