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Comparison of mutual funds and PMS

Dhirendra Kumar makes a case for mutual funds over PMS

Please throw some light on the Portfolio Management Service (PMS) and its advantages over mutual funds.
- Saikat Chatterjee

 

 

There is no advantage of Portfolio Management Service (PMS) over a mutual fund so I cannot throw any light. But I will tell you the reasons. The first reason is that a mutual fund is a tax-efficient vehicle. When you invest in a mutual fund, everything that the fund manager does, it doesn't affect your tax liability irrespective of what stock he buys or sells in the fund's portfolio. If you buy and hold an equity mutual fund for more than one year, it becomes liable for long-term capital gains tax at flat 10 per cent, which was earlier used to be tax-free and for short-term capital gains tax, if you hold it less than one year. In the case of PMS, all transactions by the fund manager will be treated as your own transaction and if it is a very active PMS, then several gains arising out of it could be short-term.

The other is that mutual funds are subject to intense regulatory oversight and scrutiny. They are supposed to calculate their NAVs, everybody's investment gets pooled and expenses are charged on it collectively and there is a formula to it, disclosure standards are far more rigorous and you have plenty of options to choose from while investing.

There could be some exceptions to the general statement that I am making and there are some good portfolio management service providers. But generally speaking, if a fund company provides both PMS and a mutual fund, then it will put its best talent for the mutual fund not for the PMS, as the mutual fund is a scalable business. If you have a brilliant guy, you will actually deploy him to manage that 500-1000- crore-odd AUM which can also potentially become about a Rs 3-crore fund and there are equity funds worth 20-30-thousand crore. So, you will put your best talent to manage a mutual fund than a PMS if you are running both. Again, of course, there are exceptions to all the things that I'm saying. I'm generally giving some general principles that are guiding my opinion against PMS and not because we are in the business of tracking mutual funds.

Another is reporting. PMS is not supposed to talk about its performance. It is a private thing. It is something between you and the company providing PMS. The transparency of mutual funds is that everything that you see in a mutual fund is in the public domain, its portfolio is disclosed every month, its performance is reported every night as NAVs are disclosed. There you can look at how a particular fund did in what context and why. On the other hand, in the case of PMS, it is a secret and it is supposed to be because the PMS service provider cannot reveal details of the portfolio of any ex-investor because its performance is a function of which investor invested at what point in time in a given PMS which could be its bigger driver.

That apart, there is the convenience bit. You can invest with Rs.500 in a mutual fund. The minimum in a PMS is now revised to Rs.50 lakh rupees from earlier Rs.25 lakhs, which is quite big for many investors. Your ability to average your investment with even Rs.500 every month is pretty cool. If you have to start with a portfolio with 50 lakh rupees, then it's a different story altogether.

So, I would say that you are not missing out on anything if you are investing in a mutual fund and not a PMS.