Investments: Why mutual funds are superior to PMS

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Multiple fund manager/fund house: When you create a portfolio using four to five MFs, you are exposed to multiple fund managers/ fund houses; however in the case of PMS you stick with a single fund manager or fund house, increasing your fund manager risk considerably, especially while investing higher. Multiple fund managers also help you experience different styles of investment management. Taxation: In both MF & PMS the fund manager engages in buying and selling of securities depending on the market conditions.

However, in PMS, the investor is liable to pay yearly capital gain taxes. In the case of MFs, this is exempt, and the investor is liable to pay taxes only when they sell their holding. Second, when you receive dividends for the securities you invested in a PMS, it is taxable as per your tax slab, but in case of MFs the dividend goes to the fund houses’ account, and is reflected in your NAV; which is not part of your income and hence is not taxable.

Normally these cash outflows in the form of capital gain and tax on dividends are paid from the investors’ present income, hence when PMS firms declare their performance, these outflows are not considered and their performance looks better in paper. So, the actual investor returns differ with what you see in paper. Asset allocation convenience: Whenever markets are high you can decrease your equity position and increase your debt/gold allocation and vice versa using the switch option.

In the case of PMS, its only equities. So, your rebalancing strategies are complicated, Because of that, mostly you may skip doing it. It’s important to keep your money in debt funds which offer the highest safety so that you will be able to pump back to equity during a bear market.