Selecting the right equity product is not an easy task. Investors usually consider the fund manager’s credentials, track – record and historical fund performance trend. However, is this enough for high performance investing? The answer is partially Yes, but, more important attributes that really differentiate good performance from the great performance are investors’ behavior & how long investment is held on, along with the quality of its underlying holdings.
There are primarily 2 products that are available for good equity market investments – PMS & MFs.
While MFs are Good, here we try and explain why PMS turns out to be Better for long term high performance investing.
Owing companies bring long term perspective towards the portfolio
Wealth Creation happens in long-term and so the product that makes investors hold on for longer periods brings in more potential for superior performance. Given the market volatility, & ones behavioral traps to greed & fear, it becomes practically difficult for investors to remain invested for the long term. This is specifically true for Mutual Fund investors & AMFI’s recent data (Dec 2018) is an evidence to it as per which 70% of the equity investments in mutual funds are held for less than 2 Years only. On the other hand, in case of a PMS,
Concentration and Focus brings high performance in the portfolio
High performance investing is all about Focus. MFs are quite diversified and so offer less volatile returns but at the cost of compromising the potential for high performance which a focused and concentrated strategy could bring. PMS does this, as its crafts and keeps a concentrated & focussed basket of 15 – 25 well-researched companies with low churn. Focused approach of PMS generates superior long term performance but comes at the cost of more volatility. That is why PMS is meant for informed investors who really want money to work harder, but clearly, have a long term horizon & are not bothered by short to medium term volatility. Since PMS works with a concentrated approach, there is no compulsion to churn a stock that is performing irrespective of its rising weight in the portfolio over the years. What matters to the PMS Manager is the expected corporate earnings and growth potential in the business. Unlike this, in mutual funds, beyond a point, at times fund manager may be forced to let go of a performing stock to cut its rising weight, as it leads to a high concentration which is not desired, and hence great companies may move out of the portfolio.
Avoiding trap to behavioral flows keeps the quality in the portfolio
Fund flows impact fund managers decisions, and with the rising participation of young & retail investors in mutual funds, pooled stock portfolio concept of makes them prone to vagaries of behavioral flows of retail investors as such fund flows rise is rising markets and peaks out at expensive valuations but falls with falling markets and bottoms out at attractive valuations. In PMS, min ticket size of 25 lacs becomes an entry barrier and hence retail flows do not impact PMS managers decisions, also, there is no pooled stock concept; in fact, each investor gets
PMS strategy gives access to direct shareholding in companies, making it a more direct & informative method of investing. So, it opens the door to not only potential for high performance in the long term through capital gains and dividends but also opens doors to investors’ own intellectual capital. In the long-term, both aspects drive Wealth Creation.
A famous saying sums it up, “Successful investing is about owning businesses and reaping the huge rewards provided by the dividends and corporate earnings” – John C Bogle
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