PMS or mutual funds, which should investors choose? Check risks, rewards for both

A seasoned investor with a large enough ticket size should opt for a PMS or Portfolio Management Service, said Manu Rishi Guptha, Founder & CEO of MRG Capital. Drawing from personal experience as the leader of a PMS, Gupta dissects the risk versus returns trade-off between mutual funds and PMSes.

Should a new investor choose a PMS or a mutual fund? Which offers better returns?

Mutual fund SIPs are a good introduction for a novice investor to equity markets. It teaches them the power of averaging, the benefits of holding on for long term and patience to withstand drawdowns. PMSes are for investors who understand equity and who need a professional manager who can offer curated solutions based on the clients age, preferences and goals.

For investors whose investment ticket sizes are larger, PMSes are definitely better as a more experienced money manager will have the maturity, not to panic during market volatilities and hold on to their investments while a novice individual can easily panic and prematurely withdraw his investments leading to lesser returns. Timing the market is possible in PMS investments which MFs cannot do due to obligation to invest soon once they receive client money. PMS managers also don’t have the obligation to immediately deploy capital and can hold cash for longer period of time

There are times when MF returns outperformed the PMSes and PMS returns out did the MFs. PMS managers have greater flexibility to shift gears between equity, debt and cash based on market conditions and hence can manage market meltdowns better than MF managers.

What are the qualities of a good PMS provider, how do you select one?

Besides having a history of generating consistent returns, a good PMS provider should be transparent in communicating any shift in strategies than signed for, fee charged, returns across different plans. Selecting a PMS provider is tricky as only returns comparisons against the benchmark are published. Information is opaque when it comes to costs/charges, risk adjusted return ratios, churn in the portfolio and strategy deviations if any.

The best way to select is to find a PMS with less volatility in returns in 1 year, 3 year and 5 year time frames. The manager should be able to answer questions like:

  • What are drawdowns during market meltdowns?
  • What are the risk adjusted return ratios?
  • What is the portfolio volatility and churn?
  • What is the fee charged and hurdle rates?
  • What is the philosophy and mindset of the fund manager?

What are the risks of investing with a PMS, vis-a-vis mutual fund?

Giving your hard-earned money to a personalized manager who promises to offer curated solutions seems more assuring than investing in a mutual fund. However, they can be prone to risks. PMSes are less regulated than MFs and so prone to mismanagements like window dressing of returns at end of the scrutiny periods to make them appear to beat benchmarks and other competitors.

As mutual fund distribution has lost its luster due to low fees, PMS distribution is lucrative as managers offer better fees to attract investments. This can lead to mis-selling. Additionally, a PMS manager can go overboard and over invest in a particular asset based on his conviction. If the conviction is wrong, it can lead to significant losses. MFs by regulation cannot invest more than 10% in a single stock

Do PMSes offer the same flexibility and liquidity as mutual funds?

MFs can be subscribed and withdrawn through online brokerages. PMS on other hand need detailed documentation for subscribing but digitalization has eased the process to a great extent and the redemption process is equally simple. Just like mutual funds, PMSs generally don’t have a lock-in period. However, there might be an exit load if exited before 1 year or 2 years depending on the fund.

PMSes offer more flexibility compared to MFs, as they are not restricted to set objectives and conditions. It is completely at the discretion of the fund manager, how and when to invest or to sell the holdings. If required, the fund manager can sell the entire holding and maintain 100% cash holding or deploy the same in liquid funds until he finds an investment opportunity.

Is there a likelihood that the entry level of Rs 50 lakh to invest in a PMS could be brought down? If so, what are the pros and cons of the same?

It is unlikely that the entry level of Rs 50 lakh investment in PMSes can be brought down, as the purpose of the increase is to restrict the growth due to fears of mis-selling and risk involved mostly due to lower restrictions on the PMS industry. While the move is detrimental to the growth of the industry to an extent, it will make PMSes more attractive to investors who understand risk better and who can evaluate better and choose the right scheme.