By: Tavaga Research
The ferocious equity bull run in Indian stock markets post the coronavirus pandemic has significantly contributed to investors’ wealth. Financial inclusion is thus set to reach record levels. Improvement in corporate earnings, deleveraging of corporate balance sheets, decrease in non-performing assets, and the return of Foreign Institutional Investors (FIIs) were the major drivers for indices scaling new highs of late. Moreover, the growing awareness of equity investing and the rising equity cult have added to the success story of the Indian stock market. So much so that India has outperformed the S&P 500 Index of the US and the Shanghai SE Composite Index of China.
As markets trade at all-time highs, HNIs and Ultra HNIs have been investing their surplus capital in equity markets in a staggered manner. However, one needs to consider important ways to gain exposure to equity markets.
It is one of the most commonly followed approaches to gain exposure to the equity segment of the financial markets. Investors buy listed equity stocks from the exchange and hold them in their demat accounts.
Another simple way to gain exposure to equity-oriented instruments is via mutual funds. We are here to solve this problem for you by helping you figure out if “Mutual Funds Sahi Hai” works for you, or not!
A portfolio management service is best suited and permitted to high net worth investors (HNIs) and ultra HNIs. Unlike a mutual fund, an investor has direct exposure to stocks but it is managed by a professional.
So which is the best way to buy equity-oriented instruments? Team Tavaga is here to help you select the best mode of investing in terms of cost efficiency, tax efficiency, and return expectations.
A mutual fund is a collective financial instrument, which pulls together money from a large number of investors to purchase a variety of securities like equity or bonds. Through mutual funds, an investor can diversify his\her portfolio. And because of diversification, mutual funds are known as a relatively safer investment mode to invest.
A mutual fund is a pooled investment product that invests in securities according to a preset mandate and is available to investors in units.
PMS is one of the professional financial services offered by a portfolio manager with the intent to beat the average rate of inflation. Simply said, in India, a portfolio management service hires a fund manager who further does due diligence on various equity stocks and constructs a portfolio depending on the investment mandate initially framed. For example, if the investment mandate is Large Cap – Equity, then the PMS simply offers a Large-Cap PMS strategy to its investors similar to what a mutual fund offers.
The following are the differences between a mutual fund and a PMS:
| Sr. No. | Mutual Fund | Portfolio Management Service |
| 1. | No trading or demat account is required | Demat account and trading account are required |
| 2. | The expense ratio includes all the transaction costs | Fixed management fee or a variable fee does not include transaction costs |
| 3. | Buying of mutual fund units | Exposure to direct equity stocks |
| 4. | Can buy in a SIP mode or Lumpsum Mode | Investments are generally made via lumpsum mode only |
| 5. | Minimum investment of Rs. 100 or Rs. 500 | Minimum investment amount of Rs. 50 lakhs as mandated by SEBI |
| 6. | Best suited for both – retail and high net-worth investors | Only high-net-worth investors are permitted to invest via PMS |
Now that the difference between a mutual fund and a PMS is clearly understood, let’s discuss as to which is the best way to buy equity stocks in India. If the difference is not clear, a simple thing to remember – in a mutual fund you buy mutual fund units. The Asset Management Company (AMC) purchases shares in its own portfolio and issues units against those purchases.
On the other hand, a portfolio management service purchases stocks (direct equity) on your behalf in your newly opened demat and trading account (by the PMS company) and professionally manages those share purchases.
In both ways, an investor gets exposure to equity instruments. So why do some investors prefer mutual funds while some other PMS?
While a PMS gives you direct equity exposure as against mutual funds which issue units, a PMS comes with high costs. Generally, a PMS levies a management fee (which is between 2%-3%) and sometimes an additional percentage of fees depending upon the profit-sharing agreement between the investor and the PMS provider. PMS providers are permitted to charge an entry load and an exit load as well in addition to all the above charges. Add to this the transaction costs and other taxes!
On the other hand, a direct mutual fund scheme only has the expense ratio component which includes all the other transaction costs and taxes. When it comes to passive mutual funds, the expense ratio of most of the funds is below 0.7% and with other active mutual funds as well, the average expense ratio is 1%.
Therefore, unless you are an NRI staying in the U.S.A or Canada (where certain mutual fund investments were/are restricted), a PMS doesn’t add any value to your compounding journey. Instead, you are paying more to buy equity instruments.
On the taxation front – Generally, the portfolio turnover ratio is high in a PMS with the asset manager indulging in frequent rebalancing in pursuit of high short-term along with long-term returns. Sometimes it is more about tactical asset allocation than strategic asset allocation! Due to such frequent rebalancing, an investor is relatively levied high capital gain taxes in a PMS. In a mutual fund, the investor isn’t directly taxed for capital gains unless the units are sold by the investor.
An ideal way to go forward would be to politely ask the PMS company to transfer all the shares to your personal demat account. Once the transfer takes place, an investor can hire a SEBI Registered Investment Advisor who can provide a sound plan to construct a concentrated portfolio of stocks and mutual funds.
Majorly diverting the investments to mutual funds should be the end goal if the HNI does not have time to devote to portfolio construction.
Assuming an HNI or an Ultra HNI does not have enough time to construct his/her own portfolio, making a lumpsum investment in a money market or liquid fund should be the first step.
Once the lump sum amount is parked in a liquid/money market fund, the investor can then start a Systematic Transfer Plan (STP) in equity and debt funds (preferably passive funds) as per the goals and risk appetite. While all this sounds a bit difficult, everything can become easy and hassle-free if an investor hires a fee-only SEBI Registered Investment Advisor.
Meanwhile, if you find any solid reason for subscribing to the services of a PMS, do let us know at support@tavaga.com and we would be happy to discuss and learn from you.
Disclaimer: This write-up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.
𝗧𝗮𝘃𝗮𝗴𝗮 𝗶𝘀 𝗮 𝗦𝗘𝗕𝗜 𝗥𝗲𝗴𝗶𝘀𝘁𝗲𝗿𝗲𝗱 𝗜𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗔𝗱𝘃𝗶𝘀𝗲𝗿.
𝗧𝗮𝘃𝗮𝗴𝗮 𝗶𝘀 𝘁𝗵𝗲 𝗼𝗻𝗲-𝘀𝘁𝗼𝗽 𝘀𝗼𝗹𝘂𝘁𝗶𝗼𝗻 𝗳𝗼𝗿 𝗮𝗹𝗹 𝘆𝗼𝘂𝗿 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝘄𝗼𝗿𝗿𝗶𝗲𝘀!
𝗕𝗼𝗼𝗸 𝗮𝗻 𝗮𝗽𝗽𝗼𝗶𝗻𝘁𝗺𝗲𝗻𝘁 – 𝗵𝘁𝘁𝗽𝘀://𝗯𝗶𝘁.𝗹𝘆/𝗹𝗲𝗮𝗿𝗻𝗺𝗼𝗿𝗲𝗮𝗼𝘂𝘁𝘁𝗮𝘃𝗮𝗴𝗮 𝗼𝗿 𝗱𝗼𝘄𝗻𝗹𝗼𝗮𝗱 𝘁𝗵𝗲 𝗮𝗽𝗽 𝘁𝗼𝗱𝗮𝘆!
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