Choosing PMS over MF? Do it only if you’re rich and well-informed

One can invest in shares directly or through experts. Experts or professional fund managers typically suggest either Mutual Funds (MF) or Portfolio Management Schemes (PMS). Direct interface with the rough and tumble of the share market is not within the remit of this article. Our focus instead herein is on MF v PMS, period.

Independent portfolio managers, brokerage firms and AMCs (Asset Management Companies — the ones managing MFs) offer PMS as well. PMS is not available for everyone. A high entry barrier has been erected — ₹50 lakh minimum investment. Which means you must be a High Net Worth Individual (HNI) to be eligible to enter the rarified and riskier world of PMS. The market regulator obviously wants the small investors to stay out of the PMS world.

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PMS are for HNI investors

As against this, there is virtually no entry barrier for MF investments. As little as ₹500, in fact as little as monthly ₹100 under Systematic Investment Plans (SIP) of MF would do. While MFs are collective investment schemes, PMS are highly individualistic — so much so that they are unique for each investor.

The PMS agreements are not made public nor are the investment and disinvestment details. The fund manager under a PMS agreement acts for and on behalf of the individual, armed with a power of attorney (POA) from her. Since no public interest is involved, market regulator SEBI rightly leaves the PMS sector largely unregulated. In short, the fund manager under PMS is only your agent acting in the name of the principal i.e., you.

MFs are highly regulated funds

MFs are, on the other hand, regulated almost with a heavy hand as they handle small investors’ funds. Their activities are in the public domain and the Net Asset Value (NAV) of each scheme must be published every day. NAV tracks your fortunes or stakes in the scheme.

Also read: Have ₹50 lakh to spare? It may be time to consider a PMS investment

To wit, if you subscribed to a new fund offer (NFO) at ₹10 per unit, how much it is worth on the second day and third day and so on can be known as reflected by its EOD (end of the day) NAV. Unlike in PMS, the fund manager of an MF invests in the name of the scheme so much so that a unit holder is only a vicarious owner of the shares embedded in the NAV.

An example would bring out the difference between MF and PMS. When a PMS purchases 100 shares of Reliance Industries, it does so for you, which is why you need to notify the PMS your demat account details. When an MF does the same, it buys on its own account; so, you can invest through MFs even if you don’t have a demat account.

In the example on hand, if there are 1,000 investors in an MF scheme with identical investments, you vicariously own but one-thousandth share of these 100 RIL shares. In that sense, an MF investor can be likened to a flat owner in an apartment with just the undivided share (UDS) of the land owned by the apartments. In PMS, it is full and absolute ownership.

PMS has some of the trappings of a close-ended MF scheme where your investment is locked in for say three years, according to the duration of the scheme. You can, of course, sell your units under a close-ended scheme in the market. A PMS also exacts a similar commitment from you — the fund manager will have a free hand and will not be generally heckled during the lock-in period.

Open-ended MF, investor’s delight

An open-ended MF scheme is what the doctor has ordered for investors who are free spirits wanting to enter and exit as they please. And it is precisely this feature that is a put off for its fund manager — it can sometimes give him nightmares. Imagine a run on the stock market under the bear grip. Investors in open-ended schemes are invariably found queueing up before the fund manager, much to his consternation. This is called redemption pressure; he willy-nilly starts selling shares only to rustle up money to pay off the pestering, panicky and restless investors.

Small wonder, an open-ended fund is an investor’s delight and fund manager’s nightmare whereas a close-ended fund is the fund manager’s delight with no one to heckle him with redemption demands.

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Since it is a personalised service, you have to pay more to avail the services of a PMS whereas in an MF, brokerage and other expenses get shared among the members of the collective investment scheme. In the MF industry, the gravitas is towards the fund whose manager has displayed extraordinary skills to produce profits outperforming the market.

High expectations from PMS

In fact, fund managers of MFs enjoy the limelight reserved for rockstars. Small wonder, they walk away with a tiny sliver of the fund profits without arousing any resentment among the investors. Ditto for the anonymous fund manager of a PMS, with the difference that his exploits or failings do not come under public glare, secretive as PMS agreements are. But satisfied customers’ referrals are valuable for PMS.

Investors expect the world out of PMS. Therefore, its manager has not only got to outperform the market but also the best MF industry performance. One migrates to or goes to PMS with higher expectations in terms of financial returns.

But to make your money under PMS work more productively, you should have more money at your disposal as well as better understanding of the share market and its fundamentals so as to play a more proactive role than be led by the nose as is the case with MF.

PMS allows more freedom

This, however, is not cast in stone because even PMS can condemn an investor to passivity at par with MF investments. This happens under discretionary PMS — the manager selects bonds and stocks as well as the time of purchasing the units based on his preference. Most of India’s PMS are unfortunately of this genre whereas the non-discretionary variety gives immense scope for investor participation in investment decisions impinging on his own fortune.

It is believed that the PMS world allows more freedom to interact and intervene if you are an HNI placing a considerably higher amount than the minimum mandatory ₹50 lakh.

AMCs are strictly regulated by SEBI. Chinese walls are meant to be impregnable for an AMC promoted by, say, a bank. But PMSes being largely unregulated, care a fig for such Chinese walls. So much so that front-running is more rampant with PMC fund managers than with MF fund managers.

It is also a common grouse that PMSes invest client funds in scrips an MF would not touch with a barge pole. At the end of the day, a true PMS is non-discretionary, making the investor the true determiner of his own fortunes, though guided by the fund manager.

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It is because of warts in PMS skin that even seasoned investors do not set store entirely by the PMS manager but resort to a healthy direct-MF-PMS mix. Yet, it is a reality that PMS beckons the intrepid investor with the promise of greater returns than from MF investment.

However, since the experiences are unpublished and unique to each investor, each one has his own saga to narrate in private conversations. So, one can safely conclude that while an MF investor’s fortunes are completely in the hands of the MF fund manager, a PMS investor can wangle for himself a pro-active role and structure a riskier investment pattern so as to get a much higher return. Even otherwise, the PMS manager is a little more gung-ho and strives for a greater return than from MF.

(The writer is a CA by qualification, and writes on business, consumer issues and fiscal laws.)