The pandemic, coupled with digitisation and easier regulations, helped in increasing the allocation of household financial assets to 15.7 per cent of GDP in 2020-2021 from 12 per cent in 19-20.
Equities has been one asset class that has witnessed a substantial increase in investor participation. Demat accounts increased to almost 9 crore accounts at the end of March 2022.
This has risen by over 2 times since the pandemic broke out. In 2021-22, mutual funds collected around 1.25 lakh crore across 5.5 crore accounts in their SIP books alone.
Digitisation and regulations will continue to spur higher penetration of Indians into financial markets. Catering to the needs of more and more individuals has and will force manufacturers to come out with varied financial products that can cater to the dynamic needs of this growing investor base.
While earlier investors had largely mutual funds as the most preferred vehicle for equity investments, lately there have been a lot of buzz around portfolio management services or PMS.
PMSes manage around 24 lakh crore of assets versus 38 lakh odd crore managed by mutual funds. However, this doesn’t present a clear picture as out of this 24 lakh crore, 18 lakh crore are invested by EPFOs.
If we have to see the individual participation on the PMS side, it is largely the equity PMS side which is 2 lakh crore and around 16 lakh crore on the MF side.
As more and more mutual fund managers move to start their own PMS the lure of PMS investing as an added flavour in one’s portfolios seems to be very high.
However, one big question that investors keep facing is – mutual funds or PMS, which is better for us? We try and address this debate by analysing both vehicles through multiple lenses.
One of the obvious reasons for investors to invest in PMS is the lure of higher returns. However, is that hypothesis true? Our analysis across funds and PMS did not result in any conclusive evidence to support the same.
While PMS did better than MF’s over a 3-year period, mutual funds seemed to have a slight edge over a 5-year period (a lot of PMS do not have a 5-year history and hence the analysis could be a little in favour of MF’s here. The average difference in returns though were in the range of 1-3 per cent.
Practically, PMSes due to the higher flexibility and manoeuvrability have the prospects of higher returns, though the same reason could make them a tad riskier as well.
Importantly, it is rare for either a mutual fund or a PMS to perform in all cycles and hence the million-dollar question – Which MF or PMS will do well over the next few years is something which is almost impossible to answer.
Hence, the possible solution here is to stick to tried and tested managers (irrespective of whether it’s a mutual fund or a PMS) and /or look at index funds.
Index funds and mutual funds score here over PMS as index funds have wafer-thin costs while direct plans of mutual funds have costs that are under 1 per cent. PMS costs on the other hand are not standardised.
It ranges all the way from 1-2.5 per cent with some PMS having a mix of fixed and profit sharing while some few have only profit sharing as well.
Investors who are confident about the PMS manager and the philosophy could explore selective PMS and for others mutual funds especially index funds could be the preferred option.
This is an area where PMS score over mutual funds as investors can exactly witness the equity purchase and sales done by the PMS on the clients’ behalf while Mutual Funds just disclose the month-end holding reports.
Most PMS also offer flexibilities where if due to certain compliance reasons investors are not allowed to buy certain stocks, they can request the PMS to keep it in the restricted list.
Mutual Funds are treated as a single instrument for investors while PMS is treated as a pass-through vehicle from a tax perspective.
This means that if I buy an equity mutual fund and hold it for over 1 year I will be taxed at 10 per cent long Term capital gains tax ( it does not matter to the investor whether the fund has sold some shares below 1 year), however in a PMS if the PMS manager sells any stock before 1 year that will be taxed at 15 per cent short term.
On fixed income/debt funds it is even more stark with mutual funds being much better as they allow indexation benefits which you don’t get if you invest in debt instruments through a PMS where it’ll be taxed at slab rates. This is also one big reason why debt investing is still preferable through mutual funds
Accessibility & ease
Mutual funds score here as they don’t have minimum amounts while PMS have a minimum investment of 50 lakh that is needed. Even the documentation is easier for mutual funds versus PMS where a demat account has to be opened along with a broking account.
Basis all the aspects discussed, it seems that PMS due to the minimum entry level of 50 lakhs plus the inconveniences are more for informed investors who want to add a different flavour to their investments.
However, inherent tax and cost advantages and the fact that they are standardised make them a better alternative for the larger set of investors especially retail and relatively uninformed users.
(The author is Founding Member of GoalTeller. Recommendations, suggestions, views and opinions given by him are his own. These do not represent the views of Economic Times)