What are the risk factors involved with investing in a PMS? Which is better-mutual funds or a PMS for someone who has Rs 50 lakh to invest?
- KK Lavania
I would say that for most individual investors, mutual funds are a better bet for various reasons. And if you have Rs 50 lakh to invest, don't go with PMS. There are several reasons.
One is that in PMS, you will have to invest this amount at one go. You cannot stagger your investment through an SIP or an STP. Further, PMS is not as tightly regulated as mutual funds are. For mutual funds, it is very well defined by the regulator in terms of what fund houses can do and what they cannot. Also, the PMS claims of performance may not be verifiable, whereas mutual funds calculate their NAV and disclose it every day.
Mutual funds also have a tax advantage. In the case of PMS, you are simply giving the authority to somebody for buying and selling stocks on a regular basis. All the purchase and sale transactions are taxed accordingly. So, if your PMS manager is selling something within one year, it will be liable for short-term capital gains tax of 15 per cent. On the other hand, if they are sold after a year, the gains will be taxed at 10 per cent. But in the case of mutual funds, you are liable to capital gains tax only when you sell your investments. You don't have to pay any tax even if your fund manager is buying or selling every day.
And I also think that there could be a cost advantage in mutual funds when you invest in a direct plan. You have the benefit of the scale. The entire pricing and structure of the mutual fund are that when a fund gets bigger, it gets cheaper. So, for most retail investors, I think mutual funds are a better bet. They are tax-efficient, transparent and tightly regulated.