Should PMS investors switch to focused funds after new tax changes?
Portfolio management services (PMS) are navigating new challenges after the Union Budget for 2024-25 increased tax on long-term capital gains (LTCG) and short-term capital gains (STCG).
As stocks are held in the investor's demat account in PMS, every buy and sell decision of the PMS manager has atax impact for the investor, unlike a mutual fund.
Mutual funds have a more tax-efficient structure than PMS, as investors are only taxed on the gains made on the fund's net asset value (NAV). The focused fund category has been created within the mutual fund categories to back high-conviction bets with bigger allocations, just like portfolio management services.
According to the scheme categorization rules by the Securities and Exchange Board of India (Sebi), focused funds cannot have more than 30 stocks in their portfolio at any given time.
However, when it comes to returns, PMS products running flexicap strategies have done better than focused funds in one-, three- and five-year periods.
For example, the average returns delivered by such PMS strategies was 26% annualized in a five-year period (returns as of 31 July, 2024), while it was 22% for focused funds (returns as of 16 August, 2024).
The decision between choosing a mutual fund or PMS product should not be driven by tax changes only. «Check whether your PMS has the potential to beat the mutual fund returns on post-tax and post-fee basis over a five-year period. If you find that to be case, then you can continue to stick with your PMS,» said Deepak Shenoy, founder and chief executive officer of Capitalmind.
There is a much wider range of returns when it comes to flexicap PMS products. Over a five-year period, the maximum return a flexicap PMS strategy delivered was 69.97%,
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