Should you sell your PMS portfolio if it underperforms the benchmark index?

Q: What should be done with underperforming PMS investments?

Taxation issues- You must know that your PMS is different from the mutual funds. With mutual funds, the taxation works as if you have entered the mutual fund once, and the trades done by the mutual fund are not individually taxed. But in PMS, as the fund manager is managing your portfolio on your behalf, the taxation is as per each and every stock bought and sold. Thus, you need to understand the taxation hit you will get if you immediately square off your portfolio. Concentrated bets- PMS funds usually have high concentration bets. These strategies outperform in the long term, and you might miss the return by exiting at a low price. It is possible that the underperformance is only in the short term and not the long term. Don’t compare with top performing PMS- You need to compare your returns over the long term with a benchmark, and do not make the mistake of comparing the returns with the top performing PMS as in the next cycle, it might change. Time-consuming- Exiting a PMS is time-consuming as you might need to close the Demat account linked to the PMS. This can take two to three weeks. Therefore, if your PMS is underperforming, you should check if you have conviction in the PMS. If you have conviction, you should definitely continue to hold the PMS irrespective of the short-term performance. If you have lost confidence in the PMS, you can exit the PMS but make sure you understand the exit costs and time.

Date : 09/09/2022
Read: 4 mins

Should you exit PMS investment if it is underperforming?

A PMS or Portfolio Management Service is a wealth management service for High-Net-Worth individuals. The fund manager manages the PMS for a fee. The fund manager can invest in equities and debt instruments as per his/her view of the markets. The difference from an actively managed mutual fund is that the client is in touch with the fund manager, and the portfolio is managed by the fund manager via a power of attorney.

A total of 250 portfolio management strategies are published on the website of PMS Bazaar. The returns range from -28% to 46% in the past year. This is in comparison to a return of 7% on the Nifty50. Thus, the PMS fund can underperform a lot and outperform a lot as well. As the funds are dependent on the fund manager’s discretion with complicated strategies, the returns vary a lot.

Why do PMS returns vary?

The PMS returns vary a lot because the strategies are complicated and might work in some scenarios but might not work in other scenarios. For example, the Renaissance Opportunities Portfolio, which is the top performing fund in the last year, does not feature in the three-year top PMS list. Also, Reliance Alpha is in the top five of last year's returns, but at the bottom are three-year returns.

Therefore, we can conclude that the PMS returns vary across the funds and the time period. Seeing the one-year returns, you might be tempted to exit the PMS fund. But this might not be a good strategy. Read below to understand what you should do with your underperforming PMS.

What should be done with underperforming PMS investments?

You should not exit the underperforming PMS investments immediately because of the 4 reasons below:-

Taxation issues- You must know that your PMS is different from the mutual funds. With mutual funds, the taxation works as if you have entered the mutual fund once, and the trades done by the mutual fund are not individually taxed. But in PMS, as the fund manager is managing your portfolio on your behalf, the taxation is as per each and every stock bought and sold. Thus, you need to understand the taxation hit you will get if you immediately square off your portfolio.
Concentrated bets- PMS funds usually have high concentration bets. These strategies outperform in the long term, and you might miss the return by exiting at a low price. It is possible that the underperformance is only in the short term and not the long term.
Don’t compare with top performing PMS- You need to compare your returns over the long term with a benchmark, and do not make the mistake of comparing the returns with the top performing PMS as in the next cycle, it might change.
Time-consuming- Exiting a PMS is time-consuming as you might need to close the Demat account linked to the PMS. This can take two to three weeks.

Therefore, if your PMS is underperforming, you should check if you have conviction in the PMS. If you have conviction, you should definitely continue to hold the PMS irrespective of the short-term performance. If you have lost confidence in the PMS, you can exit the PMS but make sure you understand the exit costs and time.

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Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.