At a time when investors are looking to book profits on gains made in equities amid heightened volatility in the stock market, a debt PMS, as against a debt mutual fund scheme, could be a better bet to look at for stable returns, said experts.
While a debt mutual fund could give a return of 6-9 percent as per data from Value Research, a debt PMS could give a higher return in the range of 9-13 percent annually, as per Sundaram Alternates.
The higher return is because a PMS can invest in listed debt securities which are below AAA rated as well, which is typically not the case with a debt mutual fund.
"People are sitting on humongous amounts of profits and at some point, they'll have to encash the profits. So, the flow of money will be from equity to debt instruments," said Amit Goel, co-founder of Pace 360, a PMS.
A debt PMS could potentially give around 2.5 percentage points higher post tax returns than an FD, and 2.73 percentage points higher than a debt mutual fund, said Vikaas M Sachdeva, Managing Director of Sundaram Alternates. The comparison has been done by factoring an aggressive plan of debt PMS vs SBI FD for a 3-year time horizon, he said.
"A debt PMS usually gives higher returns than a debt mutual fund because the former has a concentrated portfolio and no limit on weightage to one particular bond or commercial paper," said Pallav Rajan, founder at PMS Bazaar.
Additionally, a debt PMS offers a level of customisation that mutual funds do not. "A customer can request a tailored portfolio that invests in lower-rated or higher rated bonds, depending on his preference, unlike mutual funds, where investors must adhere to the fund's predefined strategies," said Goel. Lower-rated bonds typically offer higher yields compared to higher-rated bonds, thus increasing returns.
However, the taxation on both the avenues is the same. Profit from selling debt mutual funds bought on or after April 1, 2023, is taxed as short-term capital gains, with companies paying 25.17 percent or 29.12 percent, and individuals taxed at their maximum rate, regardless of how long they held the funds and the same rule applies to profits from debt PMS as well, said Dipesh Jain, partner at Economic Laws Partner.
Industry insiders suggest that debt PMS is particularly appealing in tier II cities, as it can be marketed as a product similar to fixed deposits with added benefits. It's worth noting that debt PMS is still an emerging strategy, with limited awareness and few providers in the market.
Currently, there are only 10 pure debt PMS strategies as per data by PMS Bazaar. The very old PMSes involved in debt strategies include Estee Advisors, Karvy Capital, Pace Financial, Scient Capital, and Alfaccurate Advisors.
As per Sebi, the Assets Under Management (AUM) of plain listed debt is around Rs 25 lakh crore as of June 30.
The Indian mutual fund industry has seen a significant shift due to stricter regulations on debt funds, leading to a decline in credit risk funds, with their AUM dropping from Rs 79,640 crore in April 2019 to Rs 21,789 crore in July 2024.
Interestingly, PMS players have capitalised on this, especially by offering credit strategies targeting weaker credit-rated companies for higher yields.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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