Should I move my Rs 1.2 crore portfolio to a PMS?

Is it advisable to use a PMS to manage a portfolio of Rs 1.2 crore? If so, which are the top-rated, highly recommended ones? I have been managing on my own, with your guidance. - KK

Dhirendra Kumar: Let me tell you. Once we have money of a certain scale, we start to think we need exclusive treatment.

When it comes to money and financial services, keep a few things in mind. Most money is being invested, and the vehicles differ. You invest in stocks, which is ownership. You invest in bonds, which is lending money to someone. You invest in a commodity like gold. Or you buy an asset like a house, expecting appreciation and some periodic income. Those are broadly the four classes of assets. The rest is currency: the money in your bank account, your locker, or your wallet.

That money just sits there. Sometimes it goes up, sometimes down. And the money in your pocket, in local currency, and more so in India, looks constant as long as nobody has pickpocketed you. But it is not constant. Inflation reduces it every day. That is the first-principles way to look at money.

Then come the vehicles - you can invest in stocks yourself. You can invest in bonds. You can invest in small savings schemes, which is also lending. You can make bank deposits, which are lending vehicles. And then there are pooled investments. A mutual fund is a pooled investment. A PMS is not. In mutual funds, there are also hybrid vehicles.

The great advantage of a mutual fund, or an SIF or any such vehicle, is this. You invest your money in equity, and the fund manager holds 40, 50, 60, 70 stocks. He buys, he sells, he changes his mind, he books some profits and some losses, and all of it is reflected in the daily NAV you see on our app. That is why you invested in a mutual fund.

In fact, the whole conversation today was about how to manage the taxation that comes from changes of opinion. A change of opinion on a stock is frequent, and that is what a PMS does. You give your money to a PMS manager. He spreads it over 10, 15, 20 stocks. The money appreciates, he books profit, and you are liable for the tax. It could be short term or long term. The return he generates is reduced by the tax you pay every year. Some portfolio managers hold for the long term, or do not churn very actively.

Even in the case of mutual funds, if all the mutual funds are adjusted for all the actions of a fund manager, your returns would fall by around 10 per cent. If that is the case, you earn less. This tax disadvantage of a PMS is significant.

Second, you may think a PMS treats you in a preferential or customised way. Not really. Most portfolio managers run model portfolios, with a couple of strategies each. Every manager runs one, two, three, four strategies, which you can see on the APMI website, the Association of Portfolio Managers in India. Look at the long-term returns and they are not impressive.

Many fund companies also run portfolio management services. Unless there is something a mutual fund cannot give you, our 25 to 30 years of research on mutual funds tells us that every fund company puts its finest people on its mutual funds, because that is where the scale and the economics are. When a fund does well, more people invest, and the company earns more. The interests are aligned. Your tax efficiency is high. And as a Value Research Fund Advisor subscriber, you are paying us to choose the good fund managers for you.

So hands down, unless you come across something extraordinary, a PMS is not a wise decision. Investing in one just because you can clear the Rs 50 lakh minimum stacks the disadvantages against you, and there is randomness in the outcomes too.

I also have worries about the numbers. With a mutual fund, every NAV is disclosed every day. You put money in at that NAV and take it out at that NAV. With a PMS, the return quoted is a claim that is not validated in the same way. A PMS is loosely regulated. Mutual funds are intensely regulated. I am not questioning the design of a PMS. I am saying a mutual fund is a far superior vehicle in terms of efficiency. Do not fall for it.

Ashutosh Gupta: We would like to debunk something. There is a mindset that small investors use mutual funds, the slightly better off move to a PMS, those better off still go to AIFs or alternatives, and the ultra-high-net-worth become venture capitalists. There is no such ladder. A good, simple, low-cost mutual fund will deliver the same, or perhaps better, long-term outcomes than any of these.

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