The Hindu Business Line : When to switch to a portfolio management scheme

I have been advised to shift from mutual funds to a portfolio management scheme. As it is very difficult to get information on the performance of such schemes, I am unable to make a rational decision. Please help.

Autar Dhesi

Both mutual funds and portfolio management schemes have their respective advantages. Here we list out what you may and may not get from a portfolio management scheme (PMS), when compared to a mutual fund. To know if you should switch to one, do evaluate these pros and cons.

What you get from a PMS:

A customised portfolio that is specifically suited to your requirements. If you have specific stock preferences or requirements, a portfolio manager will accommodate them while constructing your portfolio. But remember, to get of a truly customised product from a good manager, you will have to place a fairly large sum at the disposal of the portfolio manager — say, Rs 25 lakh and above. And the entire sum should be available for equity investments.

You will have greater access to the portfolio manager and can hold him accountable for poor performance. The variable fee structure offered by portfolio managers allows you to pay the manager only when he delivers performance. This is not the case with a mutual fund, where fees are deducted irrespective of performance.

You will get advice on the timing of your entry and exit from an investment. If you get this wrong with a mutual fund, you can lose a lot of money.

You can delegate the paperwork associated with administering and monitoring your investments to the portfolio manager. Tracking the portfolio on your own and churning it can be quite cumbersome.

What you may not get:

Comparative performance: While you will be intimated of your portfolio holdings and its performance quite frequently under a portfolio management scheme, you will not have publicly available information to compare the performance of your portfolio manager against the others offering similar services. Nor will you have ratings from independent agencies on the performance of the scheme. In this respect, PMS are less transparent than mutual funds.

Investment restrictions: Portfolio management schemes are less regulated than mutual funds, when it comes to their investment strategies. Because they pool public money, mutual funds adhere to a more stringent set of rules on where and how they invest investor money. Portfolio managers may assume higher risks by taking concentrated bets on stocks and sectors.

Help with asset allocation: Most portfolio management schemes are designed for informed investors who want to make equity investments. You may have to make a call on how much of your portfolio you want to invest in stocks, before you go to a portfolio manager.

Diversification across investment styles: When you hand over your entire savings to a single PMS, you may be exposing your entire investment to the fund management skills and investing style of one particular manager. This is riskier than owning a basket of funds where you get a mix of several investing styles and differing management skills.

Therefore, if you have a large investment surplus (Rs 25 lakh or more) to invest in equity, would like to delegate administrative work and have specific stock preferences, you could switch to a portfolio management scheme. Else, stay with mutual funds.

Queries may be sent to: mf@thehindu.co.in or by post to Q&A, Business Line, 859/860, Kasturi Buildings, Anna Salai, Chennai - 600 002.

Aarati Krishnan

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