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PMS Vs Mutual Funds: Here is what you want to know

Portfolio Management Services or PMS are similar to mutual funds. However, they are offered only to High Networth Individuals or people having a large amount of surplus money. Most financial institutions promise customisation for your investments and say you will get higher returns when compared to other investments. This may not always be true. Here’s why PMS is not for all.

The difference between PMS and mutual funds

PMS are investment services that are based on your return expectations, financial requirements and risk profile. The services are provided for a fee. PMS are presently offered by independent brokerages, banks, mutual fund houses and other financial institutions.

Mutual funds are investments offered by Asset Management Companies (AMC). You need to choose the mutual fund based on your financial requirements and risk profile. There might or might not be a cost for investing in mutual funds.

Minimum investment

The Securities Exchange Board of India (SEBI) has increased the minimum investment for PMS from Rs 25 lakhs to Rs 50 lakhs. It’s just Rs 500 for most mutual funds and in some cases Rs 100 only.

Customisation

Mutual funds cannot be customised as per the needs of the investors. Even though PMS offers customisation, typically firms will offer this only to those who have a very large investible corpus of Rs 1 crore or more.

Most of the PMS firms including banks offer discretionary PMS services. Here, you will be given a few model portfolios. You need to choose a particular portfolio. The portfolio models will be different in terms of their style of investing. You need to take a look at the past performance of the portfolios.

Terms of investment

Note that PMS is an agreement between you and the service provider. So, the onus is on you to ensure that the terms are in your best interest. If you are investing in mutual funds, the terms are the same for all funds as it will be according to guidelines given by SEBI.

Charges

PMS charges are much higher than that of mutual funds as it provides more customised offering compared to a mutual fund. SEBI hasn’t set any limits for charges for PMS so far. According to SEBI, “a portfolio manager shall charge a fee as per the agreement with the client for rendering portfolio management services. The fee so charged may be a fixed amount or a return-based fee or a combination of both.” So, the cost structure might be ambiguous.

You will find that the charges are usually in two formats. One is the fixed fee model while the other is the profit-sharing model. Some could offer a combination of both. PMS firms will also charge you fund management fees. This will be apart from the depository charges, and GST. For instance, ASK Investment Managers Ltd. charges a fixed fee of 2.5% per year or you can pay 1.5% and opt for a profit-sharing model where ASK will get 20% of the gains if the returns are over 10%.

So, PMS charges can be as high as 3-5% of your investment. You can invest in a mutual fund with under 1% if you choose direct plans. Even if you use an advisor, there are mutual funds with the expense ratio as low as 0.5% of your investment.

Smaller industry

Consider this: The PMS industry is said to be worth Rs. 48,000 crores while the mutual fund industry is worth more than Rs. 27 lakh crores. The PMS industry is minuscule when compared to the mutual fund industry. So, the number of PMS products are also much lesser than the mutual funds that are available for you to invest.

Transparency

PMS firms need to tell you which securities were bought, which were sold and what profits were made. You can also know exactly at what price these investments were made. However, this is at the discretion of the firm. Some firms provide these statements every month while other give quarterly statements. Also updating your investment portfolio will differ from firm to firm. Some firms may update your latest portfolio statements on a daily basis while others might update only once in 15 days. With mutual funds, the NAV will be declared every day and you can get it from any of the financial institutions’ websites.

The returns

As you know, PMS is a high-risk product. The returns will become visible only in the long run. Historical data shows that genuine PMS products can only give you only slightly higher returns than mutual funds. You must understand that it’s not guaranteed you will get phenomenal returns using PMS. Note that according to SEBI guidelines, PMS firms cannot promise even indicative returns, let alone guaranteed returns.

There are a number of things that PMS firms will tell you but you should be proactive and ask them questions instead of blindly believing everything they say.

Lock-in period

PMS products usually have no lock in period. However, most of them have an exit load if you decide to close the account within a year. The average charge could be anywhere between 1.5% and 3%. Most PMS firms will not allow you withdraw partially. With open-ended funds, you can withdraw your money any time. There are funds with no exit loads.

Taxation

Most PMS companies hold stocks in your own demat or account only. So the taxation is like any other equity investment – short term capital gains tax of 15% and long term capital gains tax of 10% for returns exceeding Rs 1 lakh a year.

For equity mutual funds too, the taxation is similar with long term capital gains only 10% if the gains are over Rs. 1 lakh, and short term capital gains tax of 15%.

Ideally, you should opt for PMS only if you have a corpus of at least more than Rs 1 crore, and you can keep it away for five years or more. It is substantially different from the standard mutual funds. For any other investors with lower corpus, mutual funds are more convenient and easier to invest in.

Should you book your profits now?

If you had invested in the Indian stock markets towards the end of April, you might be sitting pretty today. The Sensex has given returns of 21.99% in the last three months. In the past month, returns are well over 5%, which is much more than what you can expect from your savings account. Even the Nifty has given about 23% in the past quarter. The numbers seem to tell you that you can sell those investments that you hold. However, booking profits can never be based on the markets. Here’s what you need to do when you want to sell your investments.

#1 Take a look at your asset allocation

When the equities portion of your portfolio has exceeded the target asset allocation, then, it is the right time to sell. For example, if you had an asset allocation of 50:40:10 for equities, debt and cash and now that equities have run up, your allocation is 65:25:10, then you will need to sell some of your equity investments and put the money in debt investments to maintain your asset allocation. This is essential for the risk averse investors more than the risk-taking investors. Look at realignment if your target asset allocation has changed by more than 5%. This is because realignments come at a cost that includes transactions costs and capital gains taxes. However, if your asset allocation is just fine, you can afford to stick to your equity investments as they will give good returns in the long run – this is if you have chosen the right stocks and mutual funds.

#2 Consider your goals

It is prudent for an investor to make allocations based on the time horizon for their financial goals. If you have invested for the long term, you shouldn’t sell your equity investments. However, if you had invested for a medium-term goal and your goal is just a year or two away, then, this is the right time to sell off those equity investments and put them into debt investments to safeguard the capital and the gains from your equity investments. When you invest for the long term (that is more than 5 years), it doesn’t make any sense to book profits in a year or two.

#3 Evaluate your target portfolio returns

An investor should always look at reasonable returns from his/her portfolio. If the returns exceed their expectations, it is prudent to book profits in the asset class that has outperformed. If you want to achieve your financial goals, you have to book profits only after any of the asset classes have outperformed significantly. For example, let’s say you were expecting returns of 15% from your equity investments. However, they have given returns of 21%. Now, you should book partial profits and see if you need to put more money in equities or debt investments.

#4 Talk to your financial advisor

If you are an intuitive investor who thinks that there are certain stocks or mutual funds that have given stellar returns only because of the pandemic and may not outperform in the long run, talk to your financial consultant at Welathzi. They will be able to help you with market trends, industry data and fund information that can help you assess whether you should hold on to a stock or mutual fund. If some stocks or funds such as credit risk funds have gone out of favour, consider exiting them. They can help you invest in alternate asset classes if you are selling your investments. However, it is wise not to invest in asset classes that have already done really well. For example, the one-year return for gold has crossed 50% and investments in gold at this point may not yield reasonable returns in the long run. Your common sense and the consultant’s financial literacy will help you make the right investment decisions.

#5 Find out the value of your investments

The value of your investment is not the price of the stock or the Net Asset Value (NAV) of the fund. It is the value of the business for the former and the right portfolio for the latter. When a fund is underperforming when compared to peers or a stock seems to be running out of profits, you can consider selling the investment and look at investing in other stocks or mutual funds. You can even consider cashing in when the fund’s objectives change or the stock’s business isn’t lucrative anymore. So, when it comes to selling decisions for stocks and mutual funds, always assess the individual investments rather than looking at market trends.

Doubts? Wealthzi can help you. Get in touch with your consultant now.

Hindsight bias in investing

What do you feel when the clouds in the sky are dark? You may say that it will rain or that this will pass. Just in case it rains later, you will just believe that you had felt it will rain. This belief that you had already predicted that something will happen is known as hindsight bias. Let’s consider another example.

Suppose you are viewing the Indian Premier League’s last cricket match and your preferred team is playing. You may think the adversary will win or that the match will be a draw. In any case, if your group wins, you will tell everybody that you had predicted their win long back.

While examining the consequences of a sporting event with your companions or while hearing TV characters talk about races, you may have seen individuals guaranteeing they ‘knew it from the start’. This inclination to investigate the past and think we anticipated the end is known as hindsight bias.

Hindsight bias and decisions

At the point when events have occurred, you are simply following the breadcrumbs like Hansel and Gretel to understand what prompted them to happen. This is surprisingly straightforward. At the point when you definitely know the end result of an event, it’s anything but difficult to find how it could have occurred. Anticipating the future without knowing the end is an altogether other issue.

Along these lines, hindsight bias drives you to have a misguided feeling of trust in your capacity to foresee events. You think you have settled on profitable choices. It frequently entices you to make striking estimates and gives you an incorrect conviction that all is well with the world. This inclination leads to imperfect reasoning and poor decision making which could be dangerous when you are investing.

Investing bias

Suppose you purchase a stock and the stock value falls. You will imagine that you realized that it will fall. However, in the event that you make gains on the stock, you will feel glad that you made a wise decision. At the point when your investments are making gains, you ascribe it to your capacity to choose wise investments when you didn’t get any assistance. You will in general overestimate your capacity to pick increasingly good investments. In any case, since one of the investments progressed admirably, you can’t presume that different investments will do well. It’s difficult to foresee with conviction which investment will be a winner for experts themselves, leave alone beginners. This predisposition could lead to lower returns for your portfolio.

Take mid-cap stock values, for example. A financial expert who took a look at the twofold increase in the returns of mid-cap stocks from 2017 to 2018 may have assumed that 2019 will be an extraordinary year to place everything into this market. Without a doubt, this financial expert would have been frustrated to see a negative drop in mid-caps.

Another point is that the hindsight bias can lead investors to ignore the fundamentals of a company or mutual fund. For stocks, adhering to intrinsic valuation strategies enables an expert to guarantee that their investment choice is unprejudiced and is only dependent on information driven variables and not on personal ones. Intrinsic worth is the view of a stock’s actual worth. This valuation depends on all parts of the business and could possibly not be in line with the present market value. In this way, picking a stock or mutual fund on hindsight bias is not the right thing to do.

Hindsight bias can often result in investors regretting at not noticing trends earlier. For instance, an investor may take a look at the credit defaults by an organization as something that ought to have been foreseen since the organization was having extreme budgetary issues before. This can’t be foreseen by novice investors.

How to overcome the bias?

The best guard that you have against this bias is making a long run investment plan. Judicious investors will abstain from timing the market. Indeed, even market experts can’t state how the market or stock will move. Along these lines, don’t make focused bets on a solitary stock or mutual fund. Rather, take the help of a financial planner or do your own research to buy investments such as stocks and mutual funds. By taking note of your long-haul objectives and having a plan, you won’t be enticed to make impulsive investment choices.

Another way to avoid hindsight bias is by becoming knowledgeable. Despite the fact that you may want to invest in a stock or mutual fund, it is a good idea to ask experts, companions or set out to find out more about the investment yourself. For instance, in the event that you have chosen to purchase a stock, search for reports and news stories that help your choice. This will assist you with keeping away from the hindsight bias. Look into research papers that will help you in making a more holistic investment decision.

Understand that it is common to commit errors. However, you shouldn’t do those errors once more. Observe the slip-ups you made before and make sure that you make the correct moves now. For instance, if you put resources into a stock for the short term and it didn’t work out, don’t repeat the mistake. Consult market experts for such investments and always invest for the long run. Just concentrate on the correct investment choices.

How to make sure you are creating enough wealth

Whenever you think about your finances, the primary thing you should ask yourself is whether you are making enough wealth. Why? The response to this inquiry will assist you with accomplishing all your money related objectives. To see whether you are making wealth for every one of your objectives, you have to evaluate the amount of cash you will require for these objectives. How can you find that out?

As a matter of fact, you should contact a financial consultant such as Wealthzi.com who will have the resources to give you an estimate of the amount you will require for every one of your objectives. However, if you are working it out all alone, you can utilise a number of tools available online. Do consider inflation when you use those calculators. Finding the amount you require for every objective will let you know whether you are making enough wealth. Let’s consider an example to understand this.

Retirement

One of your financial objectives is retirement. Suppose you are 28 years of age and will retire when you turn 58 years. You hope to live until you are 78 years of age. If your current month to month costs are Rs. 25,000, what amount of money will you need for your retirement? You will require Rs. 3.85 crores in corpus. It doesn’t stop here.

Imagine a scenario where your yearly costs are higher and come to Rs. 5 lakhs and you intend to go on journeys and getaways for which you will spend Rs. 2 lakhs? At that point, you will require Rs. 5.9 crores as retirement corpus. This is without considering inflation. If you consider inflation to be about 6%, you will require Rs. 5 crores corpus for managing an income to meet your month to month costs alone. If you need to spare that much when you resign, what is the sum you have to contribute now?

If you need to put aside that amount for your retirement, you should contribute at least Rs. 5 lakhs if the return on your investments give you 7% or Rs. 3 lakhs if your investments will give you over 10% every year. Think these amounts are tough to calculate? Take the assistance of consultants at Wealthzi.com. When you are finished assessing the sum required for every one of your objectives and the sum you have to contribute, you should take a look at the investments that you can make to create enough wealth to achieve your goals.

What are the investments?

This is the next million-rupee question at the forefront of your thoughts. Since most monetary objectives are long haul ones, you should put resources into riskier instruments with the goal of making better returns. The best investments will be stocks, mutual funds, post office savings such as Public Provident Fund (PPF) and other such securities. Since you are investing over the long run, it doesn’t make a difference if the investments have a lock-in.

The most ideal approach to making wealth is to put resources into investments that are well regulated. These will include bank deposits and mutual funds. Despite the fact that mutual funds are well managed, you should do a considerable amount of research if you are investing on your own. Try not to take on funds that are not straightforward. These include investments, for example, in thematic funds. For these you need the help of a financial planner.

You also need to understand the investments, the risks involved and also the tax implications. You should peruse the terms and conditions cautiously, particularly for investments such as Unit Linked Investment Plan (ULIP).

In the event that you are running on a strict spending plan, start with a modest quantity of investments consistently and afterward step it up each year as you get pay hikes. You should attempt to increase your investments in any event by 5%-10% consistently to make enough wealth for your objectives. Ensure that you assess your investments at least once every year.

Having said that, the manner in which you contribute to investments will be dependent on your age as your wealth will diminish as you go past every one of your objectives. That is the reason why you have to design your portfolio according to your age to make enough wealth.

For instance, in your 20s, you might be into your first job and be single. Regardless of whether you have dependents or not, you need to begin setting aside your cash. The earlier you begin setting aside, the more cash you will have when you begin making investments for your objectives. For example, if you can invest Rs. 10,000 in your 20s, you will have Rs. 6.4 crores when you retire from work. Even if you start investing Rs. 20,000 after you turn 30 years of age, you will have just Rs. 4 crores when you retire.

To make enough wealth, use your salary hikes to step up investments for your objectives and make sure that your loans are within 50% of your take-home. For instance, if your salary is Rs. 90,000 per month, your loan EMIs shouldn’t exceed Rs. 45,000 per month. Never use your retirement savings for any of your other goals.

Always review your portfolio consistently and align it to your life goals and financial requirements.

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Mutual Funds I PMS I AIFs I Bonds I FDs

Category: Investment

Categories

360 degree wealth management platform

Learn Investing

The difference between PMS and mutual funds

Minimum investment

Customisation

Terms of investment

Charges

Smaller industry

Transparency

The returns

Lock-in period

Taxation

#1 Take a look at your asset allocation

#2 Consider your goals

#3 Evaluate your target portfolio returns

#4 Talk to your financial advisor

#5 Find out the value of your investments

Hindsight bias and decisions

Investing bias

How to overcome the bias?

Retirement

What are the investments?

Categories

360 degree wealth management platform

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