SIFs offer better risk-adjusted returns: Rishi Kohli, Jyotivardhan Jaipuria

At the Business Standard Smart Investor Arena, fund managers said SIFs may suit investors seeking risk-adjusted returns, while PMS offers higher return potential with greater volatility

Specialised Investment Funds (SIFs) could be an option for investors seeking better risk-adjusted returns in an uncertain market, while Portfolio Management Services (PMS) may appeal to those willing to take on greater volatility in pursuit of higher returns, said SIF and PMS fund managers at the SIFs vs PMS panel at the Business Standard Smart Investor Arena on Tuesday.

 

The two products cater to different investor needs, with most SIFs currently seeking to bridge the gap between equity and fixed income through strategies that combine return generation with risk management. PMSs, meanwhile, offer fund managers greater scope to build concentrated portfolios and pursue higher alpha over a longer investment horizon.

 

 

“More than returns, it is about combining returns with risk, which I think is a very less talked about topic, mostly in India,” said Rishi Kohli, chief investment officer (CIO) at JioBlackRock Mutual Fund.

 

Jyotivardhan Jaipuria, founder and chief executive officer of Valentis Advisors, said PMS investors should have a longer investment horizon and be prepared for volatility.

 

“In PMS, what we try to do is we don’t try to get quick returns, but we try to get, on a sustainable basis, much higher returns than what mutual funds can give you,” he said. “For the funds which we run, we tell people to think of us as a three-year, five-year horizon, not like a three-month horizon.”

 

SIFs have gained traction quickly, with assets crossing ₹40,000 crore in less than a year, Kohli said. Around 75 per cent of the assets had flowed into hybrid long-short strategies, reflecting demand for products that seek to deliver relatively consistent returns.

 

He said such strategies were particularly relevant because both equity and fixed income had disappointed investors in recent periods. Hybrid long-short funds could target returns of around 9-11 per cent, with a focus on limiting risk, although actual outcomes would depend on market conditions.

 

Jaipuria said PMS strategies were designed for investors who had already experienced equity-market volatility and were seeking potentially higher returns than those offered by mutual funds.

 

“If this is a first investment into equities, don’t come into PMS,” he said. “Better to start with mutual funds, get a feel of what the equity animal is, and only then come to PMSs.”

 

PMS portfolios can be more volatile because they often invest in smaller companies and hold concentrated positions. Investors who enter without understanding these risks could become disillusioned after a bad year, he said.

 

“People who come to us want outsized returns than what mutual funds give,” Jaipuria said, adding that investors should build their portfolios gradually before moving into such strategies.

 

One advantage of PMS is the ability to construct a concentrated portfolio around a relatively small number of stocks. Jaipuria said his firm’s strategy involved holding fewer than 20 stocks and undertaking detailed research on each company.

 

He also argued that PMS portfolios could offer genuine diversification from mutual funds, whose holdings may overlap substantially even when investors own several schemes.

 

“Smaller sizes make you more nimble,” he said, explaining that smaller portfolios can allow managers to pursue opportunities that may be difficult for larger funds to access.

 

Transparency is another differentiator, according to Jaipuria. PMS investors hold stocks in their own demat accounts and can track the securities bought and sold, including their purchase prices. They may also have more direct access to the portfolio manager than investors in conventional mutual funds.

 

Taxation is often seen as a disadvantage of PMS because capital gains can become taxable as individual securities are sold. In a mutual fund, investors generally incur capital gains tax when they redeem their units.

 

Jaipuria argued that the timing of taxation should not be confused with the overall tax burden.

 

“The tax is your money only,” he said, adding that investors should compare the post-tax returns rather than focus only on whether tax is paid at the fund level or by the investor.

 

He also pointed out that PMS investors may be able to set off eligible capital losses against capital gains, subject to applicable tax rules. The actual tax implications will depend on the investor's circumstances and the structure of the investment.

 

“You can create a much higher alpha. So, even if you adjust for some tax returns, you still do a much higher post-tax return if you get enough,” Jaipuria said.

 

Kohli, meanwhile, said SIFs could offer a more explicit focus on risk management because their strategies can use short positions and derivatives. But derivatives are not inherently beneficial, and their effectiveness depends on how they are deployed.

 

He cautioned that investors needed to understand whether a strategy used derivatives to hedge risk or enhance returns. Transaction costs and slippage could also affect performance as assets under management increased.

 

The panellists said the choice between SIFs and PMS should depend on an investor’s risk appetite, existing portfolio and return objectives.

 

Kohli said market valuations had become more reasonable after the correction, but opportunities remained uneven across stocks and sectors. With earnings growth still patchy and geopolitical developments posing risks, he believed hybrid strategies could be relevant for investors seeking relatively moderate returns without taking on the full volatility of equity markets.

 

Jaipuria was optimistic that the next two years could deliver better market returns than the preceding two, citing improving earnings growth, more reasonable valuations and the possibility of a recovery in foreign investor flows.