- By Priyanka Payal
- Wed, 01 Mar 2023 07:55 PM (IST)
- Source:JND
When it comes to investment decisions, novice investors often find it difficult to choose where to invest. With so many options available including equity investment, mutual funds, government, SIPs, Portfolio Management Services (PMS), or cryptocurrencies, it becomes challenging to decide which type of investment is best suited to our needs.
If you are someone, who is still indecisive on whether to invest money in mutual funds or PMS, this article is for you.
Mutual funds SIPs are considered a perfect choice for the novice investor who is new to equity markets. It helps them learn the power of averaging, and the advantages of long-term investments and develop the patience to withstand market downturns. While PMSes are for investors who understand equity and need a professional manager to receive curated solutions based on the client's age, goals and preferences.
For those investors who have huge funds to invest, PMSes are undoubtedly the best option as experienced money managers do not easily panic during market volatilities and thus they have the maturity to hold on to their investments. In contrast, novice investors who panic easily tend to prematurely withdraw their investments leading to reduced returns. Timing the market is possible in the case of PMS investments, however, this is not the case with mutual funds due to an obligation to invest soon after they receive client money. PMS managers are not obliged to immediately deploy capital and can keep cash for an elongated time.
There have been times when mutual fund returns outperformed the PMSes and vice versa. Based on market conditions, PMS managers have greater flexibility to change gears between equity, debt and cash, and this is why they can manage market meltdowns comparatively better than mutual fund managers.
Qualities sought in a good PMS provider, how to pick one?
A good PMS provider should have a good record of generating consistent returns and they should be transparent in communicating any change in strategies. Other criteria include the fee charged and returns across different plans. Selecting a PMS provider can be complicated as only a comparison of returns against the benchmark is published. Besides, when it comes to costs/charges, churn in the portfolio, risk-adjusted return ratios and strategy deviations information is usually opaque.
The best way to pick is to identify a PMS with low volatility in returns in different time frames - 1 year, 3 years or 5 years. The manager should find it comfortable to answer questions like What are drawdowns during market meltdowns? What are the risk-adjusted return ratios? What is the portfolio volatility and churn? etc.
Risks involved in investing with a PMS compared to a mutual fund?
Putting your hard-earned into someone else’s hands who promises to provide curated solutions looks more assuring compared to investing in a mutual fund. However, they can be vulnerable to risks. MFs are more regulated compared to PMSes and thus the latter are more prone to mismanagements such as window dressing of returns when the scrutiny period ends.
Mutual fund distribution has lost its charm because of low fees, PMS distribution is lucrative as managers provide better fees to get more investment. This can many times result in mis-selling. Besides, PMS managers can over-invest in a particular asset based on their convictions. If the conviction is not in the right direction, it can lead to considerable losses. Regulations do not permit MFs to invest more than 10% in one stock.
Nonetheless, compared to MFs, PMSes provide more flexibility as they are not limited to set objectives or conditions. It is entirely at the discretion of the fund manager, to decide how and when to invest or sell the holdings. If necessitated, the fund managers can sell the complete holding and keep 100% cash holding or use the same in liquid funds until they find an investment opportunity.