Portfolio management schemes in listed equities and equity mutual fund schemes both invest in stocks from the same universe. However, the style of portfolio construction, management and implementation differ. While a PMS manager may have a collective strategy for clients, portfolios are created independently, whereas, in an equity mutual fund an investor simply gets a proportionate piece of an existing pie.
Thanks to this mutual fund schemes seem like a crowded buffet table, whereas, PMS looks like a customised made to order meal. Thanks to the starting limit of Rs 50 lakh on PMS, it automatically becomes accessible only after a certain size of investible surplus has been reached.
At that point should you shift your equity surplus entirely to PMS or can you mix and match with mutual funds (MFs)? If doing the latter, then how does one decide how much goes where?
Either or both?
While both PMS and mutual funds are means to invest in the same larger market, the treatment by investors and fund managers differs. PMS portfolios rarely have more than 20-30 stocks, mutual fund portfolios rarely have below 40-50 stocks.
The size of some mutual fund schemes can be 10 times larger than the PMS you are evaluating, making the risk-return profile of the portfolio also very different.
Both these options will give you plenty of choices in selecting where you want to invest in the context of the market capitalisation of the portfolio. There is also a wide choice of fund managers to pick from in both.
PMS loses out to MFs in terms of tax efficiency and also the flexibility and ease of transaction.
For the investor, both of these are fairly transparent means of investment as you can see what is bought and sold in the PMS portfolio and you have full access to information about your MF units.
Hence, you can very well invest in select strategies from both sides. For the basic large cap exposure, a mutual fund scheme might give you a simple option to pick. Whereas, when you want to invest in the choicest mid and small cap stocks, concentrated PMS strategies with focused portfolios might be your choice.
Ensure that your PMS and MF strategies are distinct with no overlap. This will help you gain from the expertise of both sides.
In what proportion?
Given that the minimum investment amount differs widely for PMS versus a MF scheme, you may have to put some thought into how you will divide this investment. For example, for a Rs 1 crore surplus, if you want to split it between PMS and MFs, you can do one PMS scheme and many mutual fund schemes.
Just because the choice allows you to invest in multiple MF schemes with a low value per scheme, doesn’t mean you should. Even in the MF space opt for 2-3 schemes and allocate high amounts per scheme. In this way, the risk of over-diversification can be avoided.
In PMS too, pick up investing only when you have enough surplus to allocate across at least 2-3 different fund managers. Do this to balance out the risk of active selection. Having just one PMS manager can result in high concentration and overreliance on one type of management style.
Both PMS and MF schemes serve a specific purpose in the portfolio and while you can invest in both simultaneously, take care to avoid duplication and also high concentration.