Choosing the right investment vehicle: PMS, AIF or mutual funds - A seasoned wealth manager's perspective

This article is authored by Raghvendra Nath, Managing Director, Ladderup Wealth Management Pvt Ltd.

Introduction

In the dynamic world of finance, investors are faced with a myriad of choices when it comes to selecting the most suitable investment vehicles. For high-net-worth individuals seeking personalized and strategic investment solutions, the decision often boils down to three primary options: Portfolio Management Services (PMS), Alternative Investment Funds (AIF), and Mutual Funds. 

With over two decades of experience as a wealth manager, I have navigated through various market conditions and guided numerous clients in making informed investment decisions. In this article, I will shed light on the intricacies of PMS, AIF, and Mutual Funds, offering insights into their features, advantages, and considerations for investors. 

Mutual Funds

Mutual funds stand out as the simplest investment option among the three, appealing to both retail and HNI investors. This is also evident when looking at the industry’s massive Rs 51 lakh crore AUM and over Rs 1.5 lakh crore in SIPs. They are managed by professional fund managers and provide a convenient way for investors to access a diversified investment portfolio. 

Advantages 

Feature Rich - MFs provide flexible investment options with features such as SIPs, Systematic Withdrawal Plans (SWP), and Systematic Transfer Plans (STP). 

Heavily Regulated - Mutual fund activities in India are subject to rigorous regulation, which results in lower expense ratios (capped at 2.5 per cent), better compliance (through daily NAV and portfolio updates), and reduced market beta. 

Liquidity -  Mutual funds offer daily liquidity, which allows investors to buy or sell their units at the NAV on any business day. 

Returns

If we exclude thematic and sectoral funds, Mutual Funds are broadly categorised into Small-Cap, Mid-Cap, and Large-Cap funds. While small-cap and mid-cap funds carry higher risk; they promise higher returns compared to large-caps. 

Historical data shows that SIP in any of the top 10 small-cap mutual funds provided XIRR ranging between 17.52 per cent to 24.47 per cent over ten years, with mid-cap funds offering returns between 17.35 per cent to 20.51 per cent, and large-cap funds offering returns ranging from 12.59 per cent to 15.04 per cent. Even though these numbers give a fair idea of returns, future returns have no correlation to historical figures. 

So, depending on investors' risk appetite and future goals, capital allocation within these funds can be adjusted accordingly. For those who are uncertain about their diversification strategies, consulting a fund manager or advisor before making long-term investment decisions is highly advisable. 

Portfolio Management Services

PMS come in two types: Discretionary and Non-discretionary. Non-discretionary PMS is suitable for investors wanting control over their portfolio holdings and those who know market trends, conditions, and individual companies. For those preferring professionals to manage their capital entirely, discretionary PMS is the preferred option. 

Advantages

Flexible Investment - PMS are much more flexible than mutual funds, they can invest in any stock as per the market conditions, they can choose to hold AUM as pure cash during up-cycles, they can invest in derivatives, use certain hedging strategies and can diversify asset classes as per their choice. All of this makes them suitable for investors who are looking for high-risk returns. However, the higher minimum investment requirement of Rs 50 lakh limits PMS accessibility primarily to HNIs and UHNIs. 

Returns

Many investors question whether the extra risk and higher expense ratio in PMS justifies the returns when compared to mutual funds. A recent study by PMS Bazaar indicates that 75 per cent of PMS have outperformed Mutual Funds over ten years, except in thematic categories where 59 per cent of Mutual Funds have outperformed their PMS peers. 

So, for investors seeking higher returns and willing to accept additional risk, discretionary PMS may be preferable, while those satisfied with benchmark-aligned returns and lower risk may find Mutual Funds more suitable. 

Alternate Investment Funds

AIFs cater to individuals seeking to diversify their wealth beyond traditional equities and debt instruments, offering returns uncorrelated to market movements. With a minimum investment requirement of Rs 1 crore, AIFs typically attract HNIs and UHNIs looking for long-term investment opportunities with higher risk tolerance. 

These funds invest in unlisted equities, startup funding, structured debt products, distressed assets, hedging strategies, and other alternative assets, making them suitable for investors with surplus cash willing to accept high risks high returns. 

Conclusion

In conclusion, each of these investment products serves distinct purposes, and it is quite difficult to select a suitable option just by looking at an investor’s corpus, age and profession. A well-rounded option requires careful analysis of one's entire investment portfolio, financial goals, and risk tolerance. Seeking advice from wealth advisors before investing in such long-term, risk-bearing products is strongly recommended.

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.