Why PMS over Mutual Funds?

Investment and risk taking go hand in hand. Whenever one is investing his/her hard-earned money in the hope of generating higher returns, there is a possibility of huge gains or even bigger losses. Thus, one needs to do investment with caution; which may require considerable research, vision, and educated guesswork.

There are several investment options available to an investor. Let us first understand the concept of mutual funds and, PMS (Portfolio Management Services).

A mutual fund is a legal vehicle that enables a group of individuals to pool their surplus funds and collectively invest in instruments/assets for a common investment objective. It enables an investor to optimize the knowledge and experience of a fund manager, a capacity that an individual investor may not have. Investors benefit from the economies of scale which size of the fund enables.

PMS, on the other hand, is a type of wealth management service, usually offered to wealthy investors or HNIs (High Net-Worth Individuals) who can invest large amount of money at one go. It offers greater flexibility and higher customization, with an aim to generate superlative returns in comparison to other investment avenues focusing on the same asset class.

PMS can be Discretionary PMS or, Non-discretionary PMS. In discretionary portfolio management, funds of each client are managed individually and independently by the fund manager. However, in non-discretionary portfolio management, the funds are managed by the fund manager in accordance with the directions of the client and the portfolio manager refers to the client for every transaction.

Let us look at how PMS is different from investing in mutual funds.

  1. Unlike mutual funds; PMS create entry barriers by keeping minimum investment limit considerably above the reach of an average retail investor. Mutual Funds have investment thresholds as low as Rs. 500/- or Rs. 1,000/- while for PMS, a minimum sum of Rs. 25 lakhs by way of stocks or cash is required. Subsequent investments (top-up), typically have a threshold of Rs. 1 lakh.
  2. PMS offers personalized services and customized portfolio solutions unlike mutual funds.
  3. A feature that goes against PMS is that unlike mutual funds, they do not come under the purview of the Securities and Exchange Board of India (SEBI). Hence, the restrictions placed by SEBI on the structure of the fund's portfolio do not apply here. In that case, mutual funds are more strictly regulated.
  4. Another aspect is the cost structure. The cost structure may be ambiguous in most of the PMS; and there is no regulatory authority to monitor these charges. Further, trading costs can be significant as short-term capital gains tax on market transactions is incurred, taking up the total cost of fund management.

PMS could, however, be seen to be having distinct advan

tages for long term investors over Mutual funds:

  1. PMS holdings are isolated and are not impacted by the behaviour of other investors. However, mutual Funds being managed and held as a pool may be exposed to the idiosyncrasies of the sum total behavior of hundreds of investors. As investors tend to invest in rising markets and there could be times of panic in rapidly falling markets, mutual funds may at times are forced to buy in rising markets and sell in adverse situations because fund managers have discretion on stock picks but not on fund flows. However, in case of PMS, every investor influences his own buying or selling time and price, there is no impact on other investors' holding or experiences. (It may be noted that mutual funds get benefited by regular inflows by way of Systematic Investment Plan (SIP), which helps them buy stocks in all kinds of market conditions. On the other hand, PMS would get inflows depending upon client discretion and their preferences.)
  2. PMS offers a more transparent portfolio where an investor can get even the smallest updates on the portfolio. However, Mutual Funds typically tend to have large diffused portfolios ranging from 25 to even 100 stocks. This restricts the transparency and the holdings are made available only once in a while.
  3. PMS can be more aggressive and has the potential to generate higher returns. Mutual Funds being structured for a wide mass of retail investors tend to be regulated strictly; as there are regulatory norms for benchmarking, scrip level exposure, investment patterns etc. In PMS for instance; if a stock has 8% exposure and all things being static, this stock appreciates to become 12% of the portfolio, there is no compulsion to sell; unlike a mutual fund exposure to scrip levels are defined. There are times when a stock classified as mid cap appreciates over time and comes within the large cap basket. In a Mutual Fund scheme, depending on investment universe defined, the portfolio manager might be forced to sell. In a PMS, a portfolio manager may choose to have higher exposure as well as hold on to concentrated positions as long as they are delivering growth.

Now, one may ask if investing in PMS is better than investing in Mutual funds. It may be noted that the only similarity between PMS and mutual funds is that the actual investment decisions and stock selection is made by a fund manager. As far as returns are concerned it is not necessary that PMS will offer better returns than mutual funds or vice versa. The focus should be on an asset allocation model. While the underlying in mutual funds is also stocks, PMS is also a structured way of investing into stocks. The risk appetite of an investor is another factor to be looked at. The risk profile of the investor should match with that of the product being offered. Also, mutual funds are largely broad based as far as the investment in stocks is concerned whereas PMS is a much more concentrated portfolio. So, every investor should have mutual funds to give stability and consistent growth, along with PMS to provide for aggressive wealth creation opportunities.


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