Nitin Rao, CEO, InCred Wealth says PMS products may be better than mutual funds for high net-worth individuals (HNIs) but one must be very careful in choosing managers.
Nitin has over 30 years of experience in the banking and NBFC space, building flourishing private wealth businesses for premiere financial institutions in India.
In an interaction with Moneycontrol’s Nishant Kumar, he said investors should align equity weights in their portfolio to long-term weights with a strong bias to the mid-cap/small-cap sector as there would be a drift currently. Going forward, I feel we will see normalisation in markets where prices will follow earnings.
Portfolio Management Schemes or mutual funds - which is a better option for high net-worth individuals?
Mutual funds (MFs) by nature of their mandate, work in a very tight framework where they perform very closely to benchmark allocations and are constantly invested.
PMS by nature offers a more flexible framework, allows fund managers to be more active in their fund management and reflect their views more accurately in the portfolio they construct. Thus, the expectation would be that PMS fund managers would generate greater alpha over their mutual fund peers.
That said, the performance of PMS managers has not been consistent and few fund managers have been able to generate returns superior to their mutual fund peers.
Therefore, investors should only consider those fund managers, who have the ability to run structured strategies and investment models, which can outperform mutual funds.
All in all, conceptually PMS products are better than mutual funds for investors wishing to take greater than Rs 50 lakhs exposure in a scheme, but the managers have to be chosen carefully.
Are alternative assets the right choice for HNIs?
Alternative assets fall into two categories: 1. Debt risk-oriented like long/short funds, structured credit funds, and 2. Equity risk-oriented funds like real-estate funds, emerging concept funds, etc.
In either category - debt or equity, these alternative investments carry a higher risk than other traditional investment categories.
HNIs should view such investments vis-à-vis their high-risk investment needs like a unique real-estate concept-based investment or a business turnaround-based concept investment or a consumer early-stage investment, etc.
They may consider it as a diversification opportunity into business-based concepts for potentially high future returns with high risk.
Thus, for HNI investors, who understand business risk and want to improve returns through business-type of investments, some investments in this high-risk category should be considered.
What are your views on sovereign gold bonds (SGBs) and real estate investment trusts (REITs)?
Gold should have an allocation of 5 to 10 percent of the portfolio owing to its low correlation to traditional asset classes.
SGB is a great way to take gold participation because it is issued by the government of India, offers an additional 2.5 percent return and also lets investors participate in gold price appreciation in a hassle-free paper-less manner.
REIT is also an investment category where investors get to invest in real estate-based products for a mix of capital appreciation and steady returns.
For investors seeking to have a percentage of the portfolio allocated into quality real estate, REITs would give steady returns without actually getting into the hassle of actually managing a real estate project.
It is a product where predictions are easier since the asset is defined and cash flows are predictable vis-à-vis gold.
Note that both products will suffer when market volatility sets in and the best returns would be made in stable periods of the economy in these products.
What are the best investment options in 2021?
With the economy showing some green shoots in the past two to three quarters, we feel that India is on its way to normalisation.
This means that fixed-income investors should look to add some credit to enhance yield in their portfolio as sovereign and AAA corporate yields barely meet inflation.
Investors can also look at some specific issuers where they draw comfort and lend with an investment horizon of two to three years, with tax efficiency to be maximised through suitable product structures.
On the equity side, investors have seen a sharp rise in their portfolios from the bottom of last year.
Investors should align equity weights in their portfolio to long-term weights with a strong bias to the mid-cap/small-cap sector as there would be a drift currently.
Going forward, I feel we will see normalisation in markets where prices will follow earnings.
We see some pockets of opportunities in certain sectors like financials, healthcare, FMCG, etc. which may outperform broader markets and can be captured through specific products like mutual funds or PMS.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.