There are many ways to invest in equities – direct investment in stocks, through Mutual Fund (MF), through Portfolio Management Service (PMS) etc. While direct investments call for expertise of the investors, investments through MF and PMS involve active fund management by professional fund managers.
Even as an investor has full control on his/her investments if invested directly in stocks, it also have highest risks unless the investor has ample knowledge, expertise, experience, interest and time to monitor the markets, study the performance of companies and economic situations to decide in which company to invest and when to sell the stocks.
Moreover, to reduce the risk through diversification, an investor needs to invest more money and allocate more time to select more stocks.
Among the guided investment avenues of MF and PMS, MF is more popular because very small amounts may be invested and there are a wide choice of funds. An investor may start investing as low as Rs 1,000 periodically (some funds even allow Rs 500) through systematic investment plan (SIP).
Moreover, due to availability of wide choice of fund, investors may choose funds as per their financial goals and risk appetite.
Apart from equity-oriented funds, Asset Management Companies (AMCs) also offer debt-oriented funds and hybrid funds having a mix of both equity and debt, which offer further diversification opportunities for the investors.
Portfolio Management Service
Compared to MF, PMSs offer investors higher control on choice of portfolio composition as the number of investors are less and it may be tailor made for big investors.
Tighter regulatory control on MF also makes it safer than the investments through PMS.
The minimum investment limit of Rs 50 lakh is also a deterrent for retail investors to invest in equities through PMS.
“Mutual Funds work in a bit rigid framework by the nature of their mandate. They perform very closely to their benchmark allocations and remain invested throughout the investment period. PMS or Portfolio Management Services, on the other hand, offer a more flexible regime to investors. The instrument allows the fund managers to be more active in their fund management and reflect their views more accurately in the portfolios they build. Therefore, PMS fund managers can potentially generate greater alpha as compared to their mutual fund peers,” said Nitin Rao, CEO, InCred Wealth.
“Nevertheless, it is observed that the performance of PMS Managers is not consistent. So, only a handful of them outperform their mutual fund counterparts. Hence, one must pick their funds and fund managers very wisely. Investors must identify the talent that can run structured strategies and investment models that beat mutual fund returns. In general, PMS products weigh above mutual funds conceptually for people who are able to allocate at least Rs 50 lakh in a scheme, which is the minimum. One has to carefully select the right PMS Manager(s),” he added.
So, for wealthy investors, investing through good PMS Managers may be a worthy choice, but for retail investors, MF is certainly a better choice.