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PMS Services: Are They Truly Democratizing Investments?
Team Xstocks
| Jul 27, 2023
Synopsis
Historically, investors had three main options: invest in mutual funds, manage stocks independently, or opt for fixed deposits (FDs). However, a new group of managers claims to be democratizing investments for the average investor. These are the PMS service providers who offer their services through Smallcases. Are they genuinely offering accessible opportunities or are they simply high beta, high-risk options masquerading as safe choices? Let's delve into this matter.
Introduction
Historically, investors had three main options: invest in mutual funds, manage stocks independently, or opt for fixed deposits (FDs). However, a new group of managers claims to be democratizing investments for the average investor. These are the PMS service providers who offer their services through Smallcases. Are they genuinely offering accessible opportunities or are they simply high beta, high-risk options masquerading as safe choices? Let's delve into this matter.
Cost Structure
Let's begin by examining the cost structure of these PMS services. Most of them charge an upfront fixed fee to investors and often have a relatively short 3-4 year track record. The fixed costs can range from Rs.7.5k for the more affordable options to as high as Rs.35k for the more exclusive services. Is it truly worthwhile to invest in these managers? From a cost perspective, if you only have Rs. 1 lakh to invest, would you be willing to spend Rs. 7k or, in the worst case, Rs. 34k on your PMS service provider? Don't forget to factor in GST and brokerage costs. The net amount left for your investment could be considerably reduced.
A sample set of PMS Managers
Basant Maheshwari Small Cap
36%
Capital Mind Momentum
14%
Niveshya Green Energy
10%
Omnbi Bharat Defence
12%
Wright Research Momentum
8%
On the other hand, the situation improves significantly for investors with Rs. 10 lakhs to invest:
Basant Maheshwari Small Cap
3.6%
Capital Mind Momentum
1.4%
Niveshya Green Energy
1.0%
Omnbi Bharat Defence
1.2%
Wright Research Momentum
0.8%
Performance vs. Timeframe
For the average investor, these PMS services can resemble the hedge funds of developed countries that seem invincible. However, what many fail to realize is that most of the gains are taken by the manager, leaving investors with limited benefits. Here's why:
- There is no concept of a high watermark.
- Once you pay, you are on your own, and there are no guarantees in investing.
- Most of these managers lack a long investing history and are riding the current market momentum.
- They primarily act as high beta long-only investors.
- Due to the lack of historical data, these managers may eventually revert to the mean, resulting in minimal performance difference between them and NIFTY 50.
- Many of them focus on highly concentrated bets on 10-20 stocks.
- Comparatively, an ETF will cost no more than 50 basis points (bps) in annual fees, while some of the most exotic PMS options charge almost 35-40%, and others at least 8-15%.
Conclusion
In conclusion, these PMS services are best suited for High Net Worth Individuals (HNIs), and at worst, they cater to their own interests. They do not truly cater to the common Indian investor with a portfolio of 1 to 2 lakhs. The next time one of these managers claims to democratize investments, it's essential to question why they are so expensive and whether anyone should pay such steep fees for leveraged beta exposure.
