Why PMS' need to be viewed differently from investing in a mutual fund

To open a PMS (Portfolio Management Services) account requires 37 signatures from a resident Indian. Even with digital onboarding, one still requires a physical signature to validate power of attorney, a new demat account, and in some cases even a new trading account and bank account opened. Not to mention the incremental audit and tax filing requirements this poses.  Thus, it only makes sense that with all of these impediments, there should be a distinct purpose that a PMS serves for an investor versus a mutual fund (MF), which is relatively easier to start. 

 

There are two reasons why one should consider investing in a PMS. First, the customisation it offers. This is the primary feature by design for a PMS given each account is opened in an individual investor’s name. It allows you to omit businesses from your portfolio that don’t align with your ethical/ religious beliefs or where there might be a conflict of interest. It also enables you to request for tax loss harvesting which is impossible to do in a MF’s NAV structure. 

 

 

There are finer aspects such as investing in businesses that are at the right price at the time of your investment rather than being tagged along in winners where most of the gains are already through. Enabling this degree of personalisation is a yard stick one must judge the PMS on for this truly offers a different investment vehicle possibility versus a MF today. 

 

The second reason is this possibility of a different outcome versus MF investment itself. There are two aspects to this different outcome- higher returns (of course this is an expectation) and non-correlation of returns. The latter is missed by most. 

 

A PMS portfolio even without any customisation is typically more concentrated. There is a higher concentration of smaller/ niche businesses in these portfolios as liquidity concerns in a particular stock’s trading volume aren’t as colossal as they are for some of the MFs. Furthermore, future flows do not change the outcome of your portfolio by adding more companies to it. All of this should result in outcomes that have lesser if not zero correlation to market returns. 

 

This collection of 15-25 small businesses in your portfolio can have a very different outcome versus the index. They need to be therefore assessed differently. The outcome cannot be judged on a monthly basis. The integrity of the style as marketed must definitely be judged on an ongoing basis. A complete visibility into transactions unlike MFs allows for the same.   Assessment criteria  However, if an investor wants a different outcome versus MFs, the assessment criteria must be different. The daily NAV tracking nature of MF investors has cornered the respective fund managers into ensuring they toe the line with their benchmarks. Ease of transactions in MF have made investing there akin to outcomes of ODIs in knockout.

  AMFI data as of FY25 year-end shows that over 45 per cent of equity investors redeem from a folio in less than 2 years. This is after a good two year run. The same data at the end of FY23 was 10 percentage points higher! 

 

Investing in PMS should be looked at as a test series. You can judge consistency on an ongoing basis but the outcome is drawn out as per the stated objective of the fund.  A growth strategy PMS must be judged on a quarterly basis on the earnings growth of the portfolio, a momentum strategy on the up-capture performance, and so on. However, to burden PMS managers too with the same monthly NAV benchmarking is cornering the fund manager into giving you a me too product vs. the differentiated outcome the investor came looking for. 

 

In a PMS, having bought into the philosophy of the fund, an investor must judge the style integrity constantly and not performance alone. 

 

(Harini Dedhia is Head of Research at Tamohra Investment Managers. Views are her own.)