Tax tangle, operational challenges keep new investors away from PMS even as AUM doubled in five years

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The Portfolio Management Services (PMS) business may well have doubled in size in the last five years, however, there has not been a corresponding rise in the number of investors. The trend shows that unlike mutual funds, PMS has not been able to acquire new investors over the years.

The total Asset Under Management (AUM) of the PMS industry has surged from Rs 18 lakh crore in January 2020 to Rs 36 lakh crore by November 2024, as per data from the Association of Portfolio Managers of India (APMI) - the industry body of PMS players.

However, only 22,709 investors - a mere 12 percent of the existing pool - have joined the PMS bandwagon in the last five years. This implies that the existing pool of investors are pouring in more money, and PMS players have not been able to attract fresh capital.

Experts believe new investors may not be as excited about PMS because of the tax burden on portfolio churn, as well as operational hassles. Another reason could be disappointing performance of large, quality-focused PMS, which experts say, has lowered the confidence in PMS as an asset class.

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One big challenge for PMS investors is taxation, said Pramod Gubbi, head of sales at Marcellus Investment Managers.

"If a PMS fund manager frequently buys and sells stocks, investors end up paying a 20 percent short-term capital gains tax on profit made from these trades, which makes PMS investments more expensive compared to mutual funds," Gubbi said.

Akhil Chaturvedi, chief business officer at Motilal Oswal AMC said that a lot of new investors and existing PMS investors are moving to Alternative Investment Funds (AIFs) due to operational ease. He adds that PMS account opening requires opening a Trading and DEMAT account plus a lengthy form filling, which makes AIFs more convenient for investors.

AIFs are preferred by fund managers as managing funds at pool level are far more easier than managing a model portfolio, said Chaturvedi. Plus, he adds that AIFs offer access to alternative asset classes like unlisted investments, real estate, and high-yield debt funds & absolute return funds which PMS has limitations to offer.

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Concentrated Strategy

In a PMS, the fund manager can stay with a few outperforming stocks as there are no restrictions on specific weight that a stock can have in a portfolio, said Gubbi, adding that this strategy works well in a sideways or a bear market.

"In the last three-to-four years, we have seen a broad-based rally with a large number of stocks delivering returns. This environment has favoured diversified investing, which has led to more assets flowing towards mutual funds rather than PMS," Gubbi added.

Change in Ticket Size

In 2019, capital market regulator Sebi had doubled the minimum investment requirement for PMS from Rs 25 lakh to Rs 50 lakh. "This move significantly slowed the influx of new investors," said Pallav Rajan, founder of PMS Bazaar.

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