“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Warren Buffet

Markets have seen a fair amount of volatility in the past few weeks. As we continue our journey which started in April this year, we have been meeting investors from across India. We have been able to put our views across to the NRI community as well. We are encouraged at the response and the level of interest expressed by investors. This interest has motivated us to come up with a note focused on simple investment solutions as the best driver to building sustainable long-term portfolios.

This year 2018, has been a year that appears to differentiate the men from the boys. Equity markets broke all records to touch new highs and inflows continued across investment strategies – PMS and equity mutual funds. In our earlier blog (When Fixed Income Rocks Equity Markets) we had touched upon issues of the rout in debt and equity markets with Phundo’s recommendation on the next steps.

As concerns of non-banking financial institutions simmered to the surface, portfolio managers (in specific those managing Portfolio Management Services or PMS) started feeling the heat. Equity assets of over US$ 13 billion or Rs 96,000crs lost an average of 10% based on information received from our sources.

Whether you choose to invest in direct equities, use a portfolio management service (PMS) platform to channel your money or invest in equity mutual funds, the end objective remains the same – make your money work harder for you.

In the past few weeks, we have been approached by investors asking our opinion on which is the best route to build a sustainable, high return investment portfolio. This note helps decipher the mysterious codes around PMS which we hope will assist investors in choosing the right investment vehicle on a risk v/s reward basis.

Before we get into addressing concerns around PMS, lets highlight the impact of the Nifty index over the past two decades –

The Nifty has delivered positive returns in 15 of the 22 years. Understandably, investors looked at alternatives to improve their returns hence, interest in portfolio management services (PMS) built up. Today the AUM of PMS stands are approximately Rs 1 lakh crores.

How did portfolio managers perform when markets hit a rough patch as we have seen in September 2018?

As rising oil and weaker rupee weighed on sentiments, the average fall of PMS products is higher than the Nifty 50’s decline of 6.42% in September, the most in a month since February 2016. This implies that if you had invested in a mutual fund with a large concentration of the Nifty 50s stocks – simple, plain, vanilla investment products - you would have been better off than investing in exotic investment strategies such as PMS.

One would question on being selective in our analysis by reviewing the data for September 2018, the month of many market driven events so far. To address this concern, we looked at the gains / losses on a YTD basis for both PMS and Nifty 50s (benchmark used by active mutual fund managers).

No doubt that the Nifty 50s have also erased the year’s gain and is down by 1.73% from its average. But in comparison, PMS returned a negative of 8.4% on an average with just about a handful of PMS products returning gains on a year-to-date basis.

The below figure provides the gains / losses on a year-to-date basis for PMS:-

PMS has always been positioned as an investment medium that suits high-class investors who are commonly termed as High Net-worth Individuals or HNIs. The minimum investment in a PMS is not less than Rs.25 lakhs while the minimum investment in equity mutual funds is as low as Rs.5000 and in some cases even lower. Now how does a PMS investor benefit from a higher threshold limit? Sales people who offer and promote PMS investment propositions claim that the investor would get “personalized” service,yet nobody knows how exactly this is given or who exactly will give that service; the salesperson or the portfolio manager?

Investors need to ask tough questions such as; Do I need personalization or returns? Am I paying for consistency or volatility? Do I need higher level of transparency or am I happy with the extent of information provided on the underline securities?

Phundo has put together a ready reckoner of the differentiation between a PMS and an equity mutual fund.

  1. Axe the Tax: - Most investors invest also to save tax. Saving taxes adds to your returns. Equity mutual funds are governed by capital gains tax under the income tax act. If you sell your equity mutual fund holding earlier than a year then you pay 15% short term capital gains tax. If you sell your holding post one year you pay 10% capital gains tax if the gain is more than Rs 1lakh. PMS on the other hand is governed by the investor’s marginal tax rate. Therefore, if an investor’s marginal tax rate is 30%++ then the gain from a PMS investment is added to his total annual income and is taxed at 30%++. There have been in the past conflicting tax rulings by the income tax department as to how capital gains are to be treated in case of PMS. For instance, there have been occasions where capital gains have been treated as business income leading to application of tax at the investors marginal rate of taxation even if the gains can be generally classified as capital gains. Whilst guidelines have been issued of late on what should be deemed as business income and what as capital gains, in view of the large number of litigants in this regard, the overhang of this concern is a factor to be kept in mind.
  2. Simplicity leads to scalability: - While PMS can be customized to a small group of similar investors, in mutual funds the same is standardized across all investors. While the former can be done for a single individual investor as well, it is not feasible to employ this strategy in mutual funds. Therefore, the size of PMS portfolios in India is less than 10% in comparison to mutual funds. As highlighted above on a YTD basis you would have lost 1.73% of your investment in a mutual fund as against 8.3% in a PMS. Mutual funds have the ability to scale due to their diversification appeal, low value of investment commitment and the systematic investment plan feature.
  3. Diversification manages risks: - Further, under PMS the underlying types of portfolios may be restricted to three or four types while in mutual funds the list of such portfolios can be quite long. Diversification is the best way to mitigate risks in investing.
  4. Transparency leads to credibility: - The other significant difference between these two types of portfolio management is the transparency factor; mutual funds are more transparent while PMS can be quite opaque. A higher degree of information will always lead to better understanding of the investment process. SEBI has clear guidelines on disclosures (including restriction on selective disclosures) to mutual fund companies. This helps in better analysis, which is crucial to taking investment decisions.
  5. Personalization is expensive: - On the fee front almost, all PMS products collect upfront charges ranging from 2% to 3% on the quantum of investment done (on an investment of Rs.25 lakh the upfront commission payable could be as high as Rs.75,000). This implies that you start your investment journey in a PMS on a negative note as the upfront is deducted from the investment corpus deployed. Apart from upfront charges the investor is charged with management fees which again varies from 1% to 3% annually.
    Besides, some PMS may even charge profit sharing fees based on achieving the hurdle rate. Mutual funds on the other hand are regulated in their fee structure which is far lower than a PMS product. In 2007, SEBI banned the upfront charge (also known as entry loads) in mutual funds. In September 2018 SEBI has reduced the expenses charged by mutual funds thereby making mutual fund schemes more attractive.
  6. Liquidity comes at a cost: - Exiting from a PMS investment can be expensive and inflexible. High exit loads and pre-defined exit windows delays the ability for an investor to retrieve the investment. Mutual funds on the other hand allow exit at anytime (even with an exit load). Once you redeem your investment in a mutual fund equity scheme you receive the credit in your account on T+3 basis. This does not apply for closed ended mutual fund schemes.
    In conclusion, the case for investing in equity mutual funds is stronger owing to better tax efficiency, improved disclosures, deeper diversification and low expenses. But one of the most important features between a mutual fund and a PMS product is in its execution. While investing in mutual funds requires minimum documents to establish the KYC of an investor and complete the financial plan, in PMS the documentation process can be quite laborious.There are several agreements that requires client consent to establish a PMS portfolio.

So next time you choose an investment strategy, always ask all the right questions. Reach out to us at for more insights and advise.


Disclaimer: Mutual Fund investments are subject to market risks. Please read offer document before investing. Past performance does not indicate future returns.