How to select the right PMS fund for a horizon of 3-4 years?


My husband and I are planning to invest the bulk of our savvings in a Portfolio management service (PMS) fund. Both of us are in our early 30s and work in salaried jobs. Our investment horizon is 3-4 years. How do we select the right PMS fund?

—Name withheld on request

PMS is an investment product suitable for high-networth individuals who can take considerable investment risks and the minimum investment amount is 50 lakh. There are many PMS fund managers in India, each with multiple options differentiated by their asset allocation, theme, etc. One important difference between a PMS and a mutual fund is that the investment holdings in a PMS are held in the investor’s name (in a separate account) and hence, are liable for capital gains taxes whenever the PMS manager trades on the investor’s behalf.

The first issue to tackle would be to see if it is a wise choice to invest ‘bulk of’ your savings in PMS funds. A better approach would be to consider PMS as one part of your overall portfolio, and depending on the type of PMS product chosen, give it appropriate risk weighting. For example, you decide to have 80:20 equity to debt allocation in your portfolio, and in the 80% for equity, you choose to have 40% in large-caps and the remaining in mid and small caps. From this, you can choose which part would go to a passive mutual fund, which to an active mutual fund, and which to a PMS fund. In general, the more active the requirement is for a portfolio, the more suited a PMS fund would be. So, for example, you can invest the whole or part of the 40% mid and small cap allocation in a PMS fund (provided it meets the 50 lakh threshold).

Please do not get persuaded by perceptions of ‘market outlook’ to make such choices.

Coming more specifically to your situation, you should sit with a PMS fund manager and decide what kind of fund would be suited for a 3-4-year plan. Like with mutual funds, you need to look at consistency of past performance and the potential costs incurred for a PMS.

Srikanth Meenakshi is co-founder at PrimeInvestor.

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