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Are PMS Investment Crucial to Boost your Long Term Wealth Creation?

Portfolio Management Services and Mutual Funds (MF) both rank among the popular ways of building wealth in the Indian investment scenario. While MFs have conventionally remained a staple choice for retail investors owing to their accessibility and simplicity, the fraternity of High Net Individuals (HNIs) have started liking Portfolio management services because of its exclusivity and personalised strategies.

With PMS Asset Under Management (AUM) growing faster than mutual funds, the question might be: By not taking part in PMS investment, is one missing out on some wealth creation opportunities?

This blog will help you compare PMS and mutual funds from multiple aspects like returns, fees, investment strategy, and accessibility to determine whether PMS investment is a must for your long-term wealth creation.

Understanding PMS and Mutual Funds – Key Differences

Before diving into the performance, it’s important to understand the structural difference between Portfolio management services and mutual funds. Both investment vehicles pool money from investors to give returns, but they differ significantly in how they actually operate.

Portfolio Management Services (PMS):

• Portfolio Customization: PMS will provide customised portfolios based on each client’s goals and risk tolerance.
• Higher Entry Threshold: A Minimum investment required is ₹50 lakh, making it exclusive for HNIs, raised from ₹25 lakh in November 2019.
• Direct ownership of Stocks: In PMS, investors must hold the ownership of stocks or securities in their name for better transparency and flexibility.
• Higher fees: PMS charge 2% to 2.5% per annum. There are a few that even charge a performance fee.

Mutual Funds:

• Pooled Investments: Investors pool money to invest in various classes of assets, which include equities, debt, and hybrids, professionally managed by fund managers.
• Lower Entry Barrier: Investors can invest as little as ₹500, hence making MFs for all.
• Diversification at scale: Mutual Funds can immediately diversify holdings across sectors and companies, thus reducing risks associated with individual stocks.
• Lower Fees: Active mutual funds charge about 1% every year, and passive index funds tend to be even cheaper.

Performance Comparison of PMS and Mutual Funds

A common reason as to why investors gravitate towards PMS is a belief that active management offers superior returns and customization. However, recent data shows mutual funds doing just as well, if not better. As of March 31st, 2024, gross returns before fees of many active equity MFs were comparable with PMS funds.

Breaking Down the Returns:

• PMS Gross Returns: Most of the PMS funds have generated high gross returns, but at higher management charges of 2-2.5% and performance-linked incentives, such final returns post-fees fall substantially.
• Mutual Fund Gross Returns: On the other hand, active equity mutual funds with an average fund fee of around 1% have achieved similar returns.
• Impact of Fees: Even though the PMS portfolios may record higher gross returns, net returns usually lag due to the fee structure. Therefore, MFs are very effective at wealth creation and growth among retail investors.

• Performance Takeaway: Mutual fund investors do not have a disadvantage compared to PMS investors. Offering greater affordability, the long-term returns from MFs are competitive and simply prove that keeping it simple does not hurt in creating wealth. As a matter of fact, for those who cannot afford the minimum ₹50 lakh ticket size for PMS, mutual funds remain an excellent investment option.

Growth in PMS AUM – An Upcoming Trend

Interestingly, despite a high entry barrier and fees, PMS investments have shown rapid growth in AUM. The reasons for the growing popularity of PMS are as follows:

1. Personalised Investment Strategies: PMS differ from mutual funds, catering to huge pools of investors by offering the opportunity for customised strategy formulation based on specific individual goals and risk profiles.
2. Concentrated Portfolios: PMS funds operate on and maintain a focused portfolio, with fewer stocks having the possibility to yield higher returns in case the risk appetite of an investor is higher.
3. Direct Access to Opportunities: Portfolio managers of a PMS may invest in relatively lesser-known small- or mid cap stocks that probably would not be accessible via mutual funds.
4. Direct Client-Fund Manager Interaction: Through PMS, the investor gets to interact directly with the portfolio manager to understand the strategy behind the works and market outlook.

While PMS does offer customised strategies, not all PMS funds outperform mutual funds on a regular basis. High fees also need to be considered by the investors, which can significantly reduce net returns, especially in a year with moderate market performance.

Are Retail Investors Really Missing Out?

It is believed that with the rapid growth of PMS investments, a feeling of missing out among retail investors for not being able to meet its high minimum investment threshold could arise. However, as the data shows, there is little reason for worry.

Why Mutual Funds Hold Their Ground:

• Well-regulated environment: Mutual Funds operate under strict regulations of the SEBI for better transparency and protection of investors. PMS, although regulated, enjoys more flexibility, therefore, risks are much higher.
• Consistent Track Records: Many mutual funds have shown excellent performance over longer periods, especially large-cap and hybrid funds.
• Low-Cost Advantage: The lower expense ratio of mutual funds means that, over time, the investor can retain more of his or her returns.
• Ease of Investment: Mutual Funds offer SIPs, whereby small amounts can be invested on a regular basis by investors, which can help build wealth over time easily.

With these privileges, Mutual Funds investors should not feel left out in any way as mutual funds still present an excellent regimen option in one’s quest for long-term wealth creation. Registration of mutual fund with SEBI is crucial in current scenario.

Evaluating the Right Choice – PMS or Mutual Funds?

A choice between PMS and mutual funds is essentially based on your financial goals, investment horizon, and risk tolerance. A few pointers that can help you in choosing the right investment vehicle are as follows:

➢   Ideal Times to Invest in PMS:

• You have a high-risk tolerance, and you are comfortable with market volatility.
• A minimum investment of ₹50 lakh has been attained.
• You want customised portfolios in which you can have full control over your holdings.
• You enjoy working with portfolio managers and truly understand how they select stocks.

➢   When Mutual Funds Are Ideal:

• You are a retail investor or just starting your wealth creation journey.
• You want a diversified, low-cost investment that is professionally managed.
• You want to invest regularly through SIPs to build wealth over a long period of time.
• Access and liquidity are the ease by which the investment can be redeemed at any time.

Is PMS Investment Good for Long-Term Wealth Creation?

While PMS funds offer customised portfolios and early access to suitable deals, they are not essential to long-term wealth creation. There is no data to prove that an investment in PMS is vital for superior wealth creation, as mutual funds have been known to perform either at par or even outperform PMS many times. Besides, mutual funds provide an effortless and inexpensive avenue for market participation and yield competitive returns.

For most investors, mutual funds remain the smarter, more accessible choice for creating wealth in the long term. While PMS may appeal to those with larger capital and customised management, it is not something that one ‘needs’. Ultimately, more than seeking some exclusive investment product, disciplined investing consistently in line with your financial goals is what wealth creation has everything to do with.

To Wrap Up

While there are certain merits of investing in a PMS, it holds no monopoly over long-term wealth creation. Mutual funds continue to provide excellent returns at much lower costs, hence remaining an efficient choice for the large majority. Hence, the takeaway is simple: one does not need exclusive products like PMS to create wealth.

The right mutual fund strategy, patience and discipline will get you to your desired destinations as far as wealth creation is concerned. PMS will suit a select few, but for the majority, mutual funds have all the tools you would want and need to start a successful wealth creation journey.

To get PMS consulting support and assistance in other regulatory services, such as AMFI registration, visit https://enterslice.com/.

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