MF - Stock - PMS : Which one for you?

 Almost everyone of us start investing small and gradually scale up – as we gain confidence. But some may be wondering whether to stick to one investment option or to invest in multiple ones.

While this decision to spread your investments depends on individuals risk profile, usually when we start investing – it is convenient and affordable to invest through the mutual fund route. Since mutual funds are well regulated by SEBI and managed by professional fund managers – it is the easiest option for any investor. What ever may be your investment duration – be it short term (one month to one year) or medium term (One year to three years) or long term (three years plus) - you have an investment option in mutual funds. This versatility of product range makes it easy to invest.

But in India - direct stock investing preceded mutual fund. Though the MF concept was born in 1960’s – it gained popularity only in the last twenty five years. But stock investing has been in practice even in pre independence era. And many investors have created huge wealth by investing directly in stocks – gaining both by share price appreciation and dividend income. Almost all investors get into direct stock investing dreaming that they will be one such lucky investor and create huge wealth. But majority investors had burned their fingers by investing on shortcuts, tips and not following up with their investments.

As a result – investors started looking for an investment option which is relatively easier to invest – without much efforts. Many investors wanted to invest small amount. And some wanted to invest regularly – like monthly basis. All these expectations were met by Mutual funds. As a result - unlike in 1990’s, in last 10 years or so - majority of investors – including small investors - have made money by investing through mutual funds. While the returns could have varied, we need to appreciate - something is better than nothing.

Does that mean stock investing is not at all required and only mutual funds would do? And where does PMS fit in the picture.

If you know that a company will do well and you have the time and passion to keep track of the company – then direct stock investing can give best results. Kindly note – the size of investment does not matter here. Even with small capital – you can do direct stock investing provided you have the time and passion.

Most investors do not have the time to keep track of the companies they invest in. For them mutual funds are the ideal choice. You benefit from fund manager’s expertise, diversification, low cost of management etc. And again - size of investment does not matter. Even small capital would do. And you can even go for regular investments like SIP’s.

And even for those who are passionate about investing in stocks, how many companies can they keep track?. May be 5 or 10 or 20. Not beyond that. And the biggest challenge for most investors is not identifying and investing – but the exit part. Many of us just buy it and forget it. And when the investment portfolio value grows in size – the number of stocks we hold also goes up. At some point it becomes difficult to keep track of all the stocks. In such situation – Portfolio Management Services (PMS) can make sense. While a mutual fund is also managed by a fund manager – there are differences between both. We had published the similarities and differences in our MONTHLY MEMO way back in Aug 2023. Publishing the table for better clarity.

And we need to keep in mind – not all PMS fund managers do well. Some of them are lousy. We need to identify talent and invest in them. Some of them may have high churn ratio. But if they deliver results – investing in PMS can make sense. For instance – while the index return of last one year has been pathetic – some PMS have delivered a return close to 15%. That’s pretty good. Attached below is actual performance of one such PMS.

To conclude –

• If you can keep track of the stocks you invest – go for direct stock investing.
• If not – then mutual fund is a better option.
• If you have sizable portfolio (Rs.2 Crore Plus) – then you can slice a part of it and invest in PMS. But keep in mind your risk profile before investing. And the past returns are not guarantee of future returns.