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Fancy investing in a PMS? Read this before

The portfolio management services (PMS) industry, which caters to the investment needs of high net-worth individuals (HNIs), has a minimum investment amount of Rs. 50 lakhs. While MFs having a minimum investment of Rs. 1,000/- have a huge retail client base. Let's compare the two over different parameters.

Comparing PMS vs. MF return
  • Over a 5-year period, only 30% of small-cap PMS funds could outperform the average return delivered by MFs in the same category. That is, only three out of 10 small-cap PMS funds delivered a 5-year return higher than 11.5% compound annual growth rate (CAGR), which is the average category return of small-cap MFs.

  • Similarly, only 36% of large-cap PMS funds and 44% of multi/flexi-cap PMS funds outperformed the average return delivered by corresponding categories in the MF space over the said period.

Does this mean investing in MFs has a higher probability of earning better returns? After all, MFs are highly regulated with a tax-efficient structure and low minimum investment limit compared to PMS funds.

Earning a good return in PMS is hugely dependent on an investor's ability to pick the right portfolio manager, according to experts.

There exists a huge divergence in returns between the best and the worst performers in the PMS space. For example, in the small-cap category, the PMS funds that were ranked the best and the worst based on the 5-year return (CAGR) delivered 16.7% and -5.6%, respectively, as of January.

Breakdown of performance

The lackluster performance of the PMS industry in the long run of 5 years (see graphic) compared to MFs could be on the back of concentrated portfolios leading to higher volatility, according to industry veterans who do not want to be quoted.

PMSes generally hold a portfolio of 25-30 stocks, while MFs typically maintain a diversified portfolio of 40 or more stocks.

Other characteristics of PMS to consider before investing in them -

(1) Unfavourable taxation

(2) No standard categorization. Is the Large cap / Midcap fund standard across all PMSes like in MFs? No, they can do whatever they want.

(3) Returns are one part but the risk-adjusted return is even poor in PMS vs MF.

(4) One good year like 20-21 & PMSes will charge you a profit-sharing fee = 10X of the cost of an MF.

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Source: Livemint


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