PMS Vs. Mutual Funds
Investing in PMS or a mutual fund seems relatively similar. But there are a few differences between the two. Let us discuss how.
The entry point is different for PMS compared to what we have in a mutual fund. It is more oriented towards investors who have more knowledge about markets compared to one when they are investing smaller amounts in the mutual fund. PMS strategies are ideally more focused in nature. The fund manager’s past experience which has been in a particular sector or a particular segment or type of managing the fund is what plays in. For example, there is a fund manager who kind of specializes more in value stocks, there is a fund manager who specializes more in mid and small-cap stocks and there is a fund manager who specializes more in multi-cap stocks. So, choosing the right fund manager becomes very important when one is investing in a PMS compared to standardization which is available in a mutual fund. So, that standardization is not available in PMS. One has to do more research and study before putting money into PMS.
From the K&E perspective (Knowledge and Experience), the investor should have invested in stocks or into PMS schemes earlier or the investor should be having the appetite to fathom the volatility which can be higher in a PMS rather than a mutual fund because PMS will tend to kind of focus on a few stocks or on a particular theme or particularly where the markets are playing out.
So, can be it said that it would be better for an investor to start with the mutual fund, learn how it works, and then maybe move on to a PMS?
Yes, it can be a good stepping stone. So, once one is comfortable with the mutual funds he or she can go on to PMS and especially if you have experience investing in direct stocks then PMS can be an option where you have one more fund manager managing your stocks.
Let’s assume we are comparing the same kind in terms of the category of a mutual fund or PMS. If we look at any large-cap mutual fund; typically it will have anywhere between 30 to 50 stocks which are the underlying stocks whereas if we look at PMS it will have as small as about 4 to 5 stocks. There are PMS which have 15 to 20 stocks or 25 stocks at a maximum. So it is a much more concentrated strategy that one is getting into and therefore the risk of a particular stock or a particular segment not performing is high when one is investing in a PMS. On the flip side, there can be benefits in case the investment which has been made which is more of a fundamental investment with a longer-term perspective is something that plays out well for the fund manager. If one has a 2 to 3 year horizon, a mutual fund is a better option but if one has a 3 to 5 year plus horizon as well as the risk appetite to fathom the volatility, then PMS should be some part of one’s portfolio.
Transparency- Mutual funds give their monthly fact sheets. The transparency is relatively lower in PMS compared to mutual funds in 2 ways- One in terms of regulatory requirement and the other in terms of standardization. The PMS industry is smaller in size and nascent compared to mutual funds which are huge. Also, there is a lot of standardization in the mutual fund industry which is not the case in PMS because different portfolio managers follow different strategies.
For example, an investor who has come into PMS two years back vs. the investor who has come into the same PMS one month back is likely to have a different portfolio. It is because the fund manager may not invest in the same stocks that he invested in 2 years back. In that context, it becomes very difficult to compare. Having said that, we should also know that transparency is available to PMS investors. Most of the PMS managers now have an online portal where every day the investors can go and check their portfolios and as and when they make changes that are disclosed to the clients on a regular basis.
Returns- One should look at the history and volatility of PMS returns vs. Mutual funds. As a matter of fact, an investor should know his investment philosophy especially in terms of understanding the underlying investments which are being made- whether it is large-cap, mid-cap or small-cap; and within that what is the liquidity profile, what is the volatility which is attached to it, what is the fund manager’s expectations as far as holding period is concerned. As a matter of risk profiling, I might be an aggressive investor but within that aggressive investor if my liquidity requirement is different compared to another aggressive investor then I have to weigh whether I should be investing into a PMS or a mutual fund.
PMS Average Returns
Courtesy: ET Now (As on December, 2020)
Costs- In mutual funds, we have a direct scheme option where the investors can directly go and invest at a different fee structure than what it is in a normal distributor-led fee structure. In the PMS also; SEBI has mandated that PMS houses should have two fee structures- one for direct investors and the other for distributor-led investments. For example- the difference in fee structure for an equity large-cap fund in PMS vs. the difference in fee structure for a large-cap mutual fund may not be the same. It may be higher in a mutual fund compared to a PMS scheme largely due to the fact there is a lot of specialization in PMS and a large cost involved in direct investment for a PMS house.