By the end of 2024, the mutual fund industry had assets under management (AUM) of ₹66.9 trillion, while the PMS industry had a combined AUM of ₹37.1 trillion. The market regulator allows more flexibility to PMS fund managers totake aggressive bets with their clients’ portfolios, potenially delivering higher returns than mutual funds which operate under stricter rules.
The result is a mixed bag. While some PMS deliver superior returns, investors are also more likely to be stuck with underperforming products. Mutual funds, in contrast, tend to offer more stable returns.
In this article, we analyse direct plans of mutual funds against PMS returns for new investors holding spare cash of more than ₹50 lakh.
Also Read: Why do regular plans dominate some types of mutual funds and not others?
Methodology
It is a challenge to compare PMS and MF returns as they are not apples-to-apples comparisons. In MFs, equity schemes have distinct categories such as large, mid, small, flexi, multi-cap, etc. PMS operates under broader categories: equity, debt, hybrid, and multi-asset.
PMS benchmarks its returns with either Nifty 50 or BSE 500. while MFs have different categories with distinct benchmarks. To be sure, in October 2024, Sebi said PMSes could choose a secondary benchmark that was more specific but this was kept optional. APMI doesn’t maintain data for secondary benchmarks.
Data provided by the industry body Association for Portfolio Management Services (APMI) does not bifurcate the returns of direct and regular plans in PMS.
To make it comparable, we have relied on categorization done by PMS Bazaar.
R. Pallavarajan, founder of PMS Bazaar, said they asked PMS houses what categories they would assign their PMS strategies and compile them. Some of the PMSes disclosed the percentage of their holdings in large, mid, and small-cap, whereas others gave only their desired categorization. He said APMI data would show many more PMSes, but many of them might have very low AUM and not accept public money.
Of 1,029 PMS strategies reported on the APMI website, 436 shared their data with PMS Bazaar. In terms of the number of PMS investors, this data captures 85% of the total universe. The PMS Industry has around 1.84 lakh investors and PMS Bazaar captures 1.56 lakh investors.
“The APMI data also include many that are customized for a single family and are not open to the general public, whereas our database only includes those open to the public,” said Pallavarajan of PMS Bazaar. “Our database covers more than 80% of the PMS investors.”
Key findings
We have looked at one-year, three-year, and five-year returns for the largecap, midcap, smallcap, and mix categories across various timeframes. In the mixed category, we have combined schemes falling under both multi-cap and flexi-cap to make comparisons more standard.
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All MF schemes are taken for this analysis in the respective categories, whereas for PMS, we have taken a sample size from PMS Bazaar.
The results show us that direct mutual funds on median terms, have outperformed that of PMS in most of the periods we’ve looked at (see infographic). The median looks at the middle return in a data set. For instance, if there are 10 data sets, we rank them from highest to lowest and take the average of the fifth and sixth ranked data.
“There is no strong evidence of outperformance of PMS against MF. Given the high ticket size, operational works, and higher tax, one should choose PMS if it absolutely offers major diversification benefits,” said Saurabh Mittal, an RIA and founder of Circle Wealth Advisors.
Mutual funds are also a more tax-efficient vehicle. MFs are treated as pooled vehicles and investors pay capital gains tax when they exit. On the other hand, a PMS portfolio is like holding securities: investors incur taxes every time securities are sold within their portfolio.
“This makes MFs a more tax-efficient vehicle than PMS. Among PMSes, the edge lies with those that churn their portfolio less and hold stocks for the long term,” said Sachin Shah, executive director & fund manager, of Emkay Investment Managers Ltd.
Experts say average returns in PMS hide an important detail. For instance, in the flexi plus mid-cap category, the best PMS scheme gave a 38.5% return in five and the worst gave 8.34%. Although the average return was 21.09%, the actual return a PMS investor could get can be wide-ranging. In comparison, the best MF scheme in the same category gave 32.36% and the worst 15.28%.
PMS scheme returns are also more susceptible to survivorship bias. Rajeev Thakkar, CIO of PPFAS said, PMS managers can launch multiple strategies and close the ones that are not working well or merge it with those that are performing well. Thakkar said this can also happen in MFs but is more prevalent in PMS space.
Moreover, PMS returns are based on the average return of all its investors. Within the PMS, two people investing might get different returns. PMS can also charge a performance fee above the annual management fees.
Abhishek Kumar, RIA and founder of Sahaj Money said, “This data shows that there is no significant outperformance by PMS over MF, as the median return of PMS in this sample is not substantially higher than that of MF in their respective categories. Additionally, the return from the worst-performing PMS fund in a given period is much lower than the return from the worst-performing MF in the same category.”
What should you do?
Investors who understand the risks and can evaluate managers carefully may consider PMS. However, most investors would be better off with mutual funds.
“In PMS, the person managing the portfolio is the most important factor and the investor has to decide if their temperament and expectations match with the fund manager,” said Shah of Emkay Investment managers.
He said even if returns are similar to those of MF over the same period, the frequent tax payments in PMS can erode gains.
Investing in PMS can potentially yield higher returns, but you need to select the right investment manager. PMS can take higher risks and can deliver higher returns for a short period. But more often than not, a once-outperforming PMS may not be able to sustain its performance.